Government Financial Reporting: Ifac Public Sector Committee

May 2000
IFAC Study 11
Public
Sector
Committee
Government Financial
Reporting
Accounting Issues and Practices
Issued by the
International
Federation of
Accountants
International Federation of Accountants
535 Fifth Avenue
26th Floor
New York, New York 10017
United States of America
Copyright 2000 by the International Federation of Accountants.

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readers’ attention is drawn to the acknowledgement below.
Acknowledgment
International Accounting Standards, Exposure Drafts and other publications of the International Accounting
Standards Committee (IASC) are copyright of the IASC.
“IAS”, “IASC” and “International Accounting Standards” are Trade Marks of the IASC
and should not be used without the approval of the IASC.
Limited quotes and extracts from the International Accounting Standards are reproduced in
this publication of the Public Sector Committee of the International Federation of
Accountants with the permission of the IASC. The approved text of the International Accounting
Standards is that published by IASC in the English language, and copies
may be obtained directly from IASC, London, United Kingdom.
ISBN 1-887-464-43-3
Governmental Financial Reporting

CONTENTS
PREFACE .................................................................................................................................................. 3
PART I INTRODUCTION
CHAPTER 1 EXECUTIVE SUMMARY .................................................................................................... 5
CHAPTER 2 OBJECTIVES OF FINANCIAL REPORTING .................................................................. 9
PART II – CASH BASIS

CHAPTER 3 CASH BASIS – DESCRIPTION........................................................................................... 21
CHAPTER 4 CASH BASIS – BENEFITS AND LIMITATIONS ............................................................. 23
CHAPTER 5 CASH BASIS – CASH BALANCES..................................................................................... 27
CHAPTER 6 CASH BASIS – CASH RECEIPTS....................................................................................... 29
CHAPTER 7 CASH BASIS – CASH PAYMENTS .................................................................................... 37
CHAPTER 8 CASH BASIS – EXTERNAL REPORTING ....................................................................... 47
CHAPTER 9 MODIFICATIONS TO THE CASH BASIS ........................................................................ 51
PART III – ACCRUAL BASIS

CHAPTER 10 ACCRUAL BASIS – DESCRIPTION .................................................................................. 55
CHAPTER 11 ACCRUAL BASIS – BENEFITS AND LIMITATIONS .................................................... 59
CHAPTER 12 ACCRUAL BASIS – ASSETS............................................................................................... 71
CHAPTER 13 ACCRUAL BASIS – LIABILITIES ..................................................................................... 103
CHAPTER 14 ACCRUAL BASIS – REVENUES ........................................................................................ 127
CHAPTER 15 ACCRUAL BASIS – EXPENSES ......................................................................................... 149
CHAPTER 16 ACCRUAL BASIS – EXTERNAL REPORTING............................................................... 169
CHAPTER 17 MODIFICATIONS TO THE ACCRUAL BASIS .............................................................. 177
PART IV – MEASUREMENT BASES

CHAPTER 18 MEASUREMENT BASES .................................................................................................... 183
PART V – SYSTEM OF NATIONAL ACCOUNTS AND GOVERNMENT

FINANCE STATISTICS
CHAPTER 19 SYSTEM OF NATIONAL ACCOUNTS AND

GOVERNMENT FINANCE STATISTICS ........................................................................ 187
APPENDICES
APPENDIX 1 GLOSSARY............................................................................................................................ 199
APPENDIX 2 EXAMPLES OF FINANCIAL STATEMENTS.................................................................. 203
APPENDIX 3 WEB SITE REFERENCES................................................................................................... 281
BIBLIOGRAPHY ..................................................................................................................................................282

PREFACE
Introduction
1. This preface:
• provides some background information about the role of the Public Sector Committee (PSC),
and an overview of accounting and financial reporting by governments;
• outlines the purpose of this Study; and
• describes the PSC’s Standards Project, of which this Study is a key component.
Role of the PSC

2. International Federation of Accountants (IFAC) is a worldwide organization for the accountancy
profession. Its mission is the development and enhancement of the profession to enable it to provide
services of consistently high quality in the public interest. The PSC is a standing committee of the
Council of IFAC formed to address, on a co-ordinated worldwide basis, the needs of those involved in
public sector financial management, reporting, accounting and auditing. In this context, the term
“public sector” refers to national governments, regional (e.g., state, provincial, territorial)
governments, local (e.g., city, town) governments and their component government entities (e.g.,
agencies, boards, commissions and enterprises). The PSC has a role in identifying and addressing
specific public sector accounting and auditing issues and concerns.
3. The PSC has been given authority by the IFAC Council to issue standards, guidelines, studies and
occasional papers on financial reporting, accounting and auditing in the public sector. Over the period
1989 to 1996 the PSC published a range of Studies covering topics such as the definition and
recognition of assets, liabilities, revenues and expenses. These Studies were descriptive in nature.
They were intended to provide international comparisons of current practices and to highlight
conceptual issues underlying these topics. This Study provides an overview of the issues covered in
prior Studies and extends the discussion of these issues. It is a link between the previous work of the
PSC, and its development of accounting standards and guidance to assist entities making the transition
from cash to accrual accounting.
4. The Exposure Draft of this document was published in March 1998. At that time it was entitled
“Guideline for Governmental Financial Reporting” and identified issues associated with four bases of
accounting (cash, modified cash, modified accrual and accrual). Following comments from
respondents on the Guideline for Governmental Financial Reporting, the Exposure Drafts of
International Public Sector Accounting Standards and the Invitation to Comment: Which Bases of
Accounting, the Committee decided to establish accounting standards for the cash and accrual bases of
accounting only. This document therefore focuses on the cash and accrual bases of accounting and its
title has been changed to better reflect its status.
Purpose of the Study

5. The Study aims to assist governments at all levels in the identification of issues associated with
financial reporting. Although some parts of the Study may relate to national governments only, other
parts are applicable to all levels of government.
6. The Study contains a detailed description of both the accrual and cash bases of accounting and
provides examples of actual financial statements prepared under each basis. The document explains
common practice within each basis of accounting, and provides examples of the variations within
those bases. Governments wishing to change their basis of accounting or modify their accounting
policies will be able to use this document as a source of information about a basis of accounting,
including accounting policy issues associated with that basis and the format of financial statements
prepared under that basis. This may assist governments in changing their basis of accounting and
ultimately contribute to greater comparability within and between financial statements of
governments.
7. Other documents published by the PSC include standards, studies and occasional papers. Standards
contain individual requirements on financial reporting, accounting and auditing in the public sector.
Studies provide advice on financial reporting, accounting and auditing issues in the public sector,
Governmental Financial Reporting Preface 3

while occasional papers provide information that contributes to some segment of the body of public
sector financial reporting, accounting and auditing knowledge.
The Standards Project

8. The PSC has embarked on the Standards Project to encourage improvements in the quality of the
financial information typically provided by governments. The development of this Study is an initial
phase of this medium-term project.
9. The other focus of the project is the development of a core set of Standards on accounting and
financial reporting by governments — International Public Sector Accounting Standards (IPSASs).
10. The accrual standards will be developed by reviewing existing International Accounting Standards
(IASs) issued by the International Accounting Standards Committee (IASC), and adapting them as
appropriate for the public sector. The cash basis standard will incorporate any relevant aspects of the
accrual standards. The PSC decided to use IASs as the starting point for its public sector Standards in
an effort to be consistent, where possible, with existing international guidance, as well as avoiding the
need to “reinvent the wheel” for the public sector. Although the public sector context is different, the
overriding objective of financial reporting, which is to provide information which meets user needs, is
the same across both public and private sectors. Using IASs as the basis for the PSC Standards will
lead to a consistent approach to similar issues within public and private sector standards. There will,
of course, be other areas where issues specific to public sector entities and governments will not have
been addressed by the IASs.
11. Over time, the PSC intends to extend the scope of the Standards Project to address some of the gaps in
the initial set of standards and to provide further guidance on financial reporting issues within the
public sector.
Focus on Two Bases of Accounting

12. In its previous Studies the PSC described four specific bases of accounting used by governments,
being the cash basis, modified cash basis, modified accrual basis and accrual basis. The four bases of
accounting described in previous PSC Studies accorded with the bases of accounting used by the
Committee on Accounting Standards of the International Organization of Supreme Audit Institutions
in its Accounting Standards Framework and the associated Accounting Standards Framework
Implementation Guide – Departmental and Government-wide Financial Reporting. This Study
focuses on two bases of accounting, the cash basis and the accrual basis. It provides a detailed
explanation of the accounting practices and issues associated with the cash and accrual bases and a
brief description of the range of practices between these points. It incorporates discussion on other
practices adopted by governments as variations to either the cash or accrual bases.
13. There are multiple points along the spectrum between cash accounting and accrual accounting and
considerable diversity in the practices of governments. Given the difficulty of defining points with
universal significance, the PSC has found it more appropriate to focus on setting standards for the cash
and accrual bases. In recognition of the diversity that exists in practice, the PSC will develop and
promulgate additional guidance for governments to assist in the transition between these two points.
This additional guidance will recognize that there are a variety of different transition paths, depending
upon the circumstances of each individual jurisdiction.
4 Preface Governmental Financial Reporting

PART I - INTRODUCTION
CHAPTER 1
EXECUTIVE SUMMARY
Objectives of the Study

14. This Study provides a detailed description of the cash and accrual accounting bases and variations on
these bases, as used by governments. The Study also provides practical examples of financial
reporting under each basis. The objective of the Study is to provide information that will be a useful
reference source for governments which wish to change their basis of accounting or review their
accounting practices in relation to those of other governments.
15. The descriptions of the cash and accrual bases and modification to those bases are intended to:
• facilitate the choice and adoption of a particular basis of accounting by a government; and
• provide information to ensure that standard setters and preparers of financial statements have a
common understanding of the accounting policy issues associated with that basis.
Bases of Accounting
16. The public sector financial reporting environment is characterized by a spectrum of practice between
cash accounting and accrual accounting. Governments around the world adopt a variety of reporting
practices along the spectrum, and may indeed combine aspects from both ends of the spectrum. The
Study provides guidance on the application of the cash basis and the accrual bases of accounting, and
describes variations on these bases as used by governments.
17. The Study focuses on the cash basis and the accrual basis, and the PSC intends to develop
international public sector accounting standards that are structured around these two bases. However,
the PSC recognizes that governments may in practice adopt modified versions of these bases and that
they may follow different transition paths as they move along the spectrum from cash to accrual
accounting. The PSC intends to address this issue by way of transitional provisions within individual
accrual accounting standards and by developing guidance to assist entities in making the transition
from cash to accrual accounting.
Scope of the Study

18. The Study is intended to assist governments at all levels in the preparation of their financial reports.
Although some parts relate to national governments only, other parts are applicable to all levels of
government.
19. The PSC has previously advised that Government Business Enterprises should use accrual accounting
and follow International Accounting Standards (PSC Guideline 1, Financial Reporting by Government
Business Enterprises). However, Government Business Enterprises may still find the information
within this document useful.
20. This Study neither prescribes nor recommends particular accounting treatments. The main purpose of
the Study is to describe and illustrate the accounting practices of governments, and to identify the
accounting policy issues that arise in the context of governmental financial reporting.
21. This Study focuses on the issues that governments face in the preparation of general purpose financial
reports for external users (also referred to as governmental financial reports). They are reports which
are prepared for external users who are unable to require or to contract for the provision of special
reports to meet their specific information needs. External users include the electorate (and its elected
representatives) financial analysts/economists, lenders, suppliers and the media. These reports are
often the only source of information for external users.
22. Governmental financial reports may also be used by internal users such as government decision
makers (principally managers within individual government sub-entities), and government ministers
(or equivalent) at both the portfolio level and the whole of government level. However, internal users
are usually able to request specialized internal reports that are specifically designed to meet their
Governmental Financial Reporting Chapter 1: Executive Summary 5

needs. In practice both types of reports are usually prepared from the same accounting system,
although different classifications may be used, or a greater level of detail may be provided.
23. Special purpose financial reports are financial reports tailored to meet the specific information needs
of a particular user. Examples include reports prepared for major lenders and internal reports prepared
for the managers and governing body of a reporting entity. The level of disclosure and type of
information presented in these reports is determined by the specific user. Internal management reports
will usually contain very detailed information, particularly with respect to the items under
management’s control. Due to the specialized needs of internal users, the scope and content of reports
prepared for internal management purposes vary enormously. It is beyond the scope of this Study to
discuss the wide range of special purpose reports which may be produced.
Structure
24. The Study is in five parts:
• Part I Introduction
• Part II Cash Basis
• Part III Accrual Basis
• Part IV Measurement Bases
• Part V System of National Accounts and Government Finance Statistics
25. Parts II and III include a discussion of how well the information produced under each basis of
accounting meets the needs of users, a description of the financial elements recognized under each
basis of accounting, and some general recognition and measurement issues associated with these
elements. The descriptions also include possible classifications of financial elements and a discussion
of external financial reports produced under these bases.
Cash Accounting
26. Part II describes the elements recognized under cash accounting: cash balances, cash receipts and cash
payments. The Study defines each of these elements, describes types of cash receipts and payments,
and discusses the recognition, reporting, and classification issues associated with these elements. It
discusses the benefits associated with cash information, such as the links between cash-based financial
statements and traditional cash-based appropriations and the fact that preparers and users of cash-
based information do not require any detailed accounting knowledge. It discusses the limitations of
using cash accounting when more complex information is desired. It also describes the types of
financial reports which are commonly prepared under cash accounting and identifies additional
disclosures which may be made as part of the financial statements.
27. Many governments using the cash basis supplement the data available under this basis with additional
information, such as information on commitments or government debt. In addition, some
governments hold the books open for a specified period after the end of the reporting period. Refer to
Part II for a discussion of common modifications to the cash basis. Although many modifications to
the cash basis are observed in practice, this Study focuses on the “pure” cash basis in order to establish
a base for discussion of financial reporting issues and to establish a framework for preparers and
auditors as they consider the implications of various transition paths.
Accrual Accounting
28. Part III discusses the strengths and weaknesses of accrual accounting and provides an explanation of
the reasons given by various countries for adopting accrual accounting. It contains a description of the
elements recognized under accrual accounting: assets, liabilities, net assets/equity, revenue and
expenses. For each element, the Study discusses the definition and recognition criteria, describes the
types of items recognized within each element and discusses the application of the definition and
recognition criteria to those items. Where appropriate, reference is made to relevant discussion in
International Accounting Standards (IASs).
29. The Study discusses the types of financial statements commonly prepared under accrual accounting
and describes other information that may also be disclosed in the financial statements.
30. Some governments which have moved towards the adoption of accrual accounting have decided not to
6 Chapter 1: Executive Summary Governmental Financial Reporting

recognize particular categories of assets or liabilities. They may have made these variations from the
accrual basis as part of a planned progression to accrual accounting, or because they consider that the
variations represent appropriate arrangements for their jurisdiction. For example, a government may
not have recognized all its physical assets. This could be because complete records of asset holdings
were not available at the time, or because the government considered that certain categories of
physical assets did not satisfy the recognition criteria for assets. In addition, the accounting practices
of a jurisdiction may be prescribed by regulation or statute that are developed independently of the
government. Common modifications to the accrual basis are discussed within Part III.
Measurement Bases
31. The Study contains a description of various measurement bases. Although it does not recommend
particular measurement bases, it identifies which bases are commonly used in the measurement of
certain assets and liabilities.
System of National Accounts and Government Finance Statistics

32. Governments often prepare financial information for three purposes: the compilation of governmental
financial statements, national accounts in accordance with the United Nations System of National
Accounts (SNA) and the International Monetary Fund (IMF) Government Finance Statistics (GFS).
The Study explains the relationship between these three reporting systems and examines some of the
differences between them. One historic difference between these systems has been the different
measurement bases used. However, the measurement differences are already diminishing. The SNA
is already on an accrual basis (with assets and liabilities at market value). The GFS is considering the
adoption of the accrual basis and governmental financial reports are moving toward adopting accrual
accounting (although in some jurisdictions assets and liabilities are reported at historical cost).
Appendices
33. The appendices contain a glossary of terms used throughout the Study, and examples of financial
statements prepared by various governments. Readers should note that the financial statements in the
appendices are for illustrative purposes only. They represent current practice, but are not necessarily
representative of best practice. They are intended to facilitate understanding and to provide a context
for the examples used throughout the text of the Study.
Cost/Benefits
34. The choice of a particular basis of accounting will be made by each government on the basis of the
costs and benefits associated with that option. Different bases of accounting have different strengths
and some may be more appropriate than others in particular circumstances (refer to Chapters 4 and 11
for a discussion of the benefits of each basis of accounting). The most appropriate basis will depend
on the characteristics and nature of the entity, the type and purpose of the report and the value of the
information to users. The decision may also be influenced by whether whole of government financial
statements are to be prepared and, if so, the basis of accounting which will be used in such statements.
It will also depend on the costs of developing and maintaining the necessary financial information
systems.
35. A number of issues become more complex as entities move towards accrual accounting. These issues
include the range of elements and financial performance measures which may be reported, the
definition of elements and the establishment of measures for those elements. Consequently the
importance of judgments concerning the transactions and events reflected in the financial statements
increases with accrual accounting. Similarly, the cost of developing and maintaining accounting
systems may increase. The actual costs of adopting a particular basis will depend upon the existing
capacity of personnel in terms of experience and training, and the reliability and completeness of
existing systems. The costs and benefits may also be influenced by the degree of political
commitment and amount of resource devoted to a change in basis. A system change which has a high
degree of political commitment and is adequately resourced is more likely to provide short-term
benefits than a system change which occurs without such support.
36. Making such cost/benefit decisions is always difficult; the costs are borne by the reporting entity and
can be determined with some precision. However, the benefits are often enjoyed by third parties as
Governmental Financial Reporting Chapter 1: Executive Summary 7

well as the entity itself and can only be assessed subjectively. A comprehensive assessment would
consider the incremental benefits that are likely to flow from moving from one basis of accounting to
another and the improved decision making which is expected to result from the availability of more
comprehensive financial information. They should also include consideration of whether the
government has an obligation to be accountable for all the resources it controls and the result of that
control. A decision not to provide certain information should take into account the opportunity cost
associated with not having that information available for decision makers.
Transition between the Bases of Accounting

37. The PSC intends to explore issues associated with the transition between the bases of accounting by
way of occasional papers describing the transition process within individual jurisdictions (e.g.,
Perspectives on Accrual Accounting available at www.ifac.org) and specific guidance on the transition
from cash accounting to accrual accounting. This Study provides information on the definition and
recognition of elements under each accounting basis, and the disclosure of information in external
financial statements. It does not specifically address the process of transition from one accounting
basis to another. This is for the following reasons:
• The nature of the progression may differ between governments. Some governments may choose
a gradual progression along the continuum of accounting bases, while others may move directly
from, say, cash accounting to accrual accounting.
• The transitional steps will be unique to each government. The nature of the transition will
depend on the current accounting basis used, the quality and range of information already
available, the resources allocated to the transition and the time period allowed for transition.
8 Chapter 1: Executive Summary Governmental Financial Reporting

CHAPTER 2
OBJECTIVES OF FINANCIAL REPORTING
Introduction
38. A number of financial reporting issues are common to all bases of accounting. Regardless of the basis
of accounting adopted by a government, these issues are relevant. This Chapter provides a summary
of some of these issues.
39. This Chapter discusses the:
• need for objectives for governmental financial reporting and the governmental operating
environment;
• needs of users of governmental financial reports;
• objectives and qualitative characteristics of financial reporting;
• ability of alternative bases of accounting to meet the objectives of financial reporting;
• relationship of governmental financial reporting to other forms of reporting;
• determination of the reporting entity; and
• preparation of consolidated financial statements.
40. Much of the material in this Chapter is drawn from PSC Study 1 Financial Reporting by National
Governments and PSC Study 8 The Government Financial Reporting Entity. Readers are referred to
these Studies for more detailed discussion of these issues.
The Importance of Objectives for Financial Reporting

41. The determination of the objectives of financial reporting is the first step in the process of
governmental financial reporting. The objectives would then lead to the selection of a basis of
accounting and the determination of the accounting policies within that basis. In practice the use of a
basis of accounting by a government may have been the result of historical developments and
available resources rather than an explicit decision. However, consideration of the objectives of
financial reporting is an important step in deciding whether to retain a basis of accounting or to adopt
a different basis, and in determining the accounting policies to be applied within that basis.
42. The overriding objective of financial reporting is to provide information that meets user needs. This
Chapter therefore identifies the principal users of governmental financial reports and the types of
information that they require. First though, it is helpful to consider the environment within which
governmental financial reporting takes place and the purpose of governmental financial reports
compared to other forms of reporting.
Governmental Operating Environment

43. The following quote illustrates some of the objectives of financial reporting within the public sector.
The broad issues of corporate governance, performance reporting, and comparability of financial
and non-financial performance information are becoming increasingly important to users of general
purpose financial reports of government entities. In the Swiss public sector, for example, we believe
there is now an increasingly clear public expectation that governments and their component entities
should (a) be effective and (b) be seen to be effective and the legislator is progressively introducing
such logic into federal and cantonal laws. This evolution implies that financial reporting should be
sufficiently transparent to ensure that financially-based performance indicators are properly and
consistently reported to users of such information. (Swiss Institute of Chartered Accountants and
Tax Consultants, Submission on Exposure Draft Guideline for Governmental Financial Reporting)
Governmental Financial Reporting Chapter 2: Objectives of Financial Reporting 9

44. Some of the distinguishing features of the public sector’s operating environment which influence the
nature of the information reported are:
• Governments do not generally exist to make a profit. Instead, a government is generally
concerned with the welfare of its citizens, determining the best way of financing the goods and
services that it wishes to provide to its citizens and establishing the regulatory framework within
which business is conducted. Although the functions undertaken by governments vary across
jurisdictions and within differing levels of government, such functions often include the
provision of health, education and defense. The absence of a profit motive for most government
entities (apart from business enterprises) means that a variety of financial and non-financial
performance indicators may be required in order to assess performance.
• Governments as a whole tend to obtain most of their revenue from taxes and other non-reciprocal
transactions. Unlike the parties to a reciprocal transaction, taxpayers have no choice about
entering into the transaction and have no guarantee that they have received value for money.
Even where citizens enter into reciprocal transactions with individual government entities those
entities may have a monopoly on the provision of a service.
• Authorization to use public resources and the management of those resources are usually
conducted by different arms of government, the legislature and the executive. The legislature
has the right to hold the executive accountable for its management of financial affairs and the use
of financial resources entrusted to it. Public sector entities are usually required to demonstrate
that to the best of their ability and available resources, they have provided the goods and services
required by citizens, at least cost. In contrast, private sector entities are usually accountable to
shareholders for making a return on funds employed in a competitive environment, rather than
for the nature of the goods and services that they have provided.
45. These distinguishing characteristics of the public sector have led to the development of additional
forms of reporting that do not usually form part of the traditional model for private sector financial
reporting such as non-financial performance reporting and compliance reporting. One of the
challenges facing the public sector is the need to measure the consequences of government policy
decisions and the implementation of those decisions. Some of these additional forms of reporting
requirements are discussed later in this Chapter (see “Relationship Between Governmental Financial
Reporting and Other Forms of Reporting”).
46. The overriding objective of financial reporting is that information should meet users’ needs.
According to the IASC Framework for the Preparation and Presentation of Financial Statements,
The objective of financial statements is to provide information about the financial position,
performance, and changes in financial position of an enterprise that is useful to a wide range of
users in making economic decisions. (paragraph 12)
47. Although certain differences between the private and public sectors exist, there are also similarities
between the two sectors in terms of the information required to manage, or hold individuals to account
for their management of entities. To the extent that public sector entities want financial information
on cash flows, assets and liabilities, and changes in those assets and liabilities, the accounting models
and accounting standards developed by the private sector, such as International Accounting Standards
(IASs), contain much useful guidance. Although private sector standards do not address some of the
issues faced by governments such as the recognition of taxation revenues, they provide guidance on
many of the other issues faced by governmental accountants. Where appropriate, this Study refers to
pronouncements of the International Accounting Standards Committee that contain guidance on issues
discussed within this text. As part of its ongoing work program, IFAC PSC is developing a set of
public sector accounting standards. The initial set of standards are largely based upon IASs but over
time the PSC will also begin to address public sector financial reporting issues that are not covered by
IASs.
10 Chapter 2: Objectives of Financial Reporting Governmental Financial Reporting

Users
48. The principal users of governmental financial reports include:
• Legislative and other governing bodies: Legislative and other governing bodies grant authority to
governments and government entities to administer public financial affairs and resources. They
may use financial reports to assess the government’s stewardship of resources, compliance with
legislation and other authorities, and the government’s financial position and financial
performance.
• The public: The public includes taxpayers, electors, voters, special interest groups, and recipients
of goods, services and transfers provided or made by the government. Taxpayers are required to
provide resources to the government and are interested in information about how the government
has used the funds received in the current and previous years. They are also interested in
information on whether the government is managing to fund current goods and services out of
current taxes collected.
• Investors and creditors: Investors in government securities and other creditors are entitled to
information which allows them to assess whether the government is likely to be able to meet its
commitments as they fall due. This category of users may also have access to special purpose
reports.
• Rating agencies: Many governments obtain finance from the national and international capital
markets by issuing bonds or other financial instruments. Rating agencies provide assessments of
a government’s creditworthiness for the capital markets using standard categories such as A,
AA- etc. Rating agencies are primarily concerned with a government’s ability to service debt
and to repay that debt when it falls due. Rating agencies therefore consider the nature and extent
of a government’s other obligations, the asset backing of a government, the extent of its current
and projected spending and its ability to generate the same or increased levels of tax revenue.
• Other governments, international agencies and resource providers: These users have similar
information needs to investors and creditors. However, to the extent that the funding they
provide may be earmarked for specific projects they may also require information on compliance
with the terms of the agreement and specific performance measures in relation to that project.
International agencies are interested in the comparability of the financial statements of various
governments and the use of complete disclosure.
• Economic and financial analysts: Economic and financial analysts, including the media, review
and analyze information on behalf of other users.
• Senior management: Although senior management are internal users and have access to more
detailed internal reports, often the general external reports provide a useful overview of the
financial affairs of the entity for these users.
User Needs
49. Although the users described above have a range of information needs, and some groups may place a
higher or lower priority on certain types of information than other groups, the user groups also have
similar information needs. The PSC considers that, taken as a collective group, users expect that
governmental financial reports will help them to:
• assess the sources and types of revenues;
• assess the allocation of and use of resources;
• assess the extent to which revenues were sufficient to cover costs of operations;
• predict the timing and volume of cash flows and future cash and borrowing requirements;
• assess the government’s long term ability to meet financial obligations, both short and long term;
• assess the government’s or entity’s overall financial condition;
• provide the public with information concerning those assets held on behalf of taxpayers,
specifically information on ownership and control, composition, condition and maintenance;
• assess the financial performance of the government or entity in its use of resources;
• assess the economic impact of the government on the economy;
• evaluate government spending options and priorities;
• assess whether resources were used in accordance with legally mandated budgets and other
legislative and related authorities such as legal and contractual conditions and constraints; and
• assess the government’s or entity’s stewardship over the custody and maintenance of resources.

Relationship Between Governmental Financial Reporting and Other Forms of Reporting
50. This Study focuses on the financial information provided in governmental financial reports.
Governmental financial reports are reports which are prepared for a range of external users who are
unable to require or to contract for the provision of special reports to meet their specific information
needs. The reports are designed to meet the common needs of these external users. Most external
users have limited access to information and rely heavily, if not exclusively on governmental financial
reports. The disclosure of information in governmental financial reports may be governed by
legislation, regulations or accounting standards.
51. Governmental financial reports, in common with private sector financial reports, are not intended to
provide all the information needed by users. The scope of governmental financial reports is
constrained in the following ways:
• They are financial reports. Items which cannot be quantified are not included in the financial
statements totals, although they may be disclosed as additional information in the notes. Users
may seek other sources of information, including statistical data, demographic information,
narrative assessments, and reports on general economic conditions and the political environment
to meet their needs.
• They provide information in respect of the reporting entity which has prepared the reports. The
reporting entity may be an individual government department or it may be a collection of all
government agencies of a certain type. The reports therefore focus on the activities of a
government agency or a particular level of government. They do not usually combine
information on different levels of government or information on the government and the rest of
the economy. Financial information on the entire government sector and the national economy is
usually produced by way of Government Finance Statistics and the System of National Accounts
(or regional equivalents) respectively.
• They provide information on financial performance rather than service performance.
Performance reporting includes information on the nature, quality, quantity, cost etc of the goods
and services provided by governments. Although performance reporting, and in particular
information on the cost of goods and services, may be incorporated within governmental
financial reports, discussion of performance reporting is outside the scope of this Study.
• They are external reports rather than internal reports. Although senior management may use the
information in governmental financial reports, management typically has access to more detailed
information for decision making. For example, although the governmental financial reports may
measure assets at historical cost, management reports may contain both historic cost and current
market values for certain categories of assets.
• The basis of accounting underlying the governmental financial reports may differ from that used
in the preparation of the budget documents, and accordingly, certain accounting principles may
differ between the two. For example, budget documents may contain authorizations for
obligations or commitments. Unless obligations or commitments meet the definition of a
liability under the accrual basis of accounting, they are not recognized as an element under any
basis of accounting described in this Study.
• They generally portray the effects of past events. Financial reports prepared at year-end contain
information on the impact of transactions and events during the reporting period on the financial
performance and position of the entity. Although governments may choose to provide
prospective financial information such as forecasts of future events and transactions in their
financial reports such information is traditionally found in budget reports only.
• Compliance reporting may be incorporated in the governmental financial reports. Although
reporting on compliance with budgets and appropriations is an important form of reporting for
many government entities, this reporting may be included within a governmental financial
report, the budget documents for the next year, or published as a separate report. Compliance
reporting is discussed later in this Chapter.

52. Information on service performance may be incorporated as part of governmental financial reports or
may be prepared as a separate report. Performance measures and indicators, both planned and actual,
can be set out in the budget or plan. Actual results are measured using those measures and indicators.
Such information can include comparisons of budgeted and actual output quantity and quality. It may
also include a discussion of the relationship between outputs and outcomes. Some governments also
report on general economic statistics such as unemployment, Gross Domestic Product, inflation,
interest rates, balance of trade etc.
53. For example, the performance information produced by United Kingdom government departments as
part of their financial reporting using the accrual basis (referred to as resource accounting) will include
the costs incurred by each department in pursuit of each of its main aims and objectives; the outputs
from each departmental program, and performance against objectives (Better Accounting for the
Taxpayer’s Money - the Governments Proposals, July 1995, paragraph 1.26).
Objectives of Governmental Financial Reporting

54. A number of standard-setting bodies in various jurisdictions have considered the objectives of
financial reporting. Examples of such jurisdictions and/or bodies include the IASC, various
accounting standard setting bodies within the United States of America, Australia, Canada and New
Zealand. The IASC Framework identifies objectives of financial reporting for private sector entities.
IFAC PSC Study 1 Financial Reporting By National Governments identified the following objectives
of governmental financial reporting:
Financial reporting should demonstrate the accountability of the government or unit for the
financial affairs and resources entrusted to it, and provide information useful for decision making
by:
a. Indicating whether resources were obtained and used in accordance with the legally adopted
budget.
b. Indicating whether resources were obtained and utilized in accordance with legal and
contractual requirements, including financial limits established by appropriate legislative
authorities.
c. Providing information about the sources, allocation, and uses of financial resources.
d. Providing information about how the government or unit financed its activities and met its
cash requirements.
e. Providing information that is useful in evaluating the government’s or unit’s ability to
finance its activities and to meet its liabilities and commitments.
f. Providing information about the financial condition of the government or unit and changes in
it.
g. Providing aggregate information useful in evaluating the government’s or unit’s
performance in terms of service costs, efficiency and accomplishments. (IFAC PSC Study 1
paragraph 63)
55. In defining the objectives of financial reporting an analysis of the costs and benefits associated with
preparing financial information that meets those objectives is relevant. In principle, the benefits to
users of the financial statements should exceed the costs of recording, summarizing, reporting and
auditing the information. The benefits and costs also need to be considered over a reasonable time
frame in order to balance the short-term costs of shifting from one basis to another. One difficulty of
conducting a cost benefit analysis is that although it is usually possible to measure certain aspects of
costs, benefits may be more difficult to quantify.

Qualitative Characteristics of Financial Reporting
56. The quality of the information provided in financial reports determines the usefulness of those reports
to users. The qualitative characteristics of financial information discussed in the IASC Framework
are:
• understandability;
• relevance;
• materiality;
• reliability;
• faithful representation;
• substance over form;
• neutrality;
• prudence;
• completeness; and
• comparability.
57. In addition, the IASC also notes that other characteristics such as timeliness, are important. A
balancing, or trade off, between characteristics may be necessary. Different accounting bases may
also score more highly on one characteristic than another. Deciding the relative importance of the
characteristics in different cases is a matter of judgment. A brief description of some of these
characteristics follows. Readers interested in a fuller discussion of these characteristics are referred to
the IASC Framework and PSC Study 1 Financial Reporting by National Governments.
58. Understandability means that information is understandable, clear and precise. Information provided
in financial reports should be presented simply and clearly, and should be comprehensible to users of
the reports.
59. Relevance means that information must assist users in making their decisions — there must be a
logical relationship between the information provided and user needs. In order to be relevant,
information must also be timely and reliable.
60. Materiality is a term used to describe the significance of financial statement information to users.
Materiality is a matter of judgment in the particular circumstances. It can be judged in relation to the
reasonable prospect of an item’s significance in users’ assessments and judgments. An item may be
relevant because of its nature alone, in other cases both nature and materiality are important. A
material item would be expected to affect assessments of, and judgments on, government financial
operations and management. In general, users are interested in financial information that has direct
bearing on their assessments and decisions. Reporting immaterial items could simply impair the
clarity and understandability of the financial report.
61. Reliable information faithfully represents what it purports to represent, is complete, reasonably free
from bias (neutral) and verifiable. Reliability does not preclude the use of estimates within financial
reports but the methods used to estimate figures must be reliable.
62. It is desirable that information be both consistent over time and comparable between government
financial reports. Comparability is limited to comparisons between entities using the same basis of
accounting. Accounting standards generally require changes in the basis of accounting or policies
within that basis to be fully disclosed.
Relationship Between Alternative Bases and Financial Reporting Objectives

63. All bases of accounting provide information which meets some of the objectives of financial
reporting, some more so than others. To the extent that the accrual basis incorporates information that
is recorded under the other bases of accounting, it arguably meets more user needs than the other
bases. However, objectives differ between the bases. Different bases may be more appropriate than
others depending upon which objectives the reporting entity considers to be the most important. The
following table summarizes how well financial reports prepared under different bases provide
information (excluding supplementary information) which meets the objectives of financial reporting.

ALTERNATIVE BASES OF ACCOUNTING INCLUDING MODIFICATIONS TO THOSE BASES —
1
ABILITY TO MEET OBJECTIVES
CASH ACCRUAL
CASH BASIS MODIFICATIONS MODIFICATIONS ACCRUAL

TO THE CASH TO THE ACCRUAL BASIS
BASIS BASIS
OBJECTIVES
Compliance with Yes Yes Yes Yes
legally adopted
budgets2.
Compliance with Relating to cash Cash and near cash Cash and financial Cash and
legal and requirements requirements and resources economic
contractual and limits limits requirements and resources
requirements, limits requirements
including and limits
spending limits.
Sources, Cash resources Cash and near cash Cash and financial Cash and
allocation and resources resources financial
uses of financial resources
resources.
Financing and Cash resources Cash and near cash Cash and other Cash and other
cash resources financial financial
requirements. requirements requirements
Ability to finance From cash From cash and near From financial From economic
activities and to cash resources resources
meet liabilities
and
commitments.
Financial Cash position Cash and near cash Financial resources Financial and
condition and position economic
changes therein. resources
Financial Information not Information not Limited information Provides
performance in reported reported reported information
terms of service necessary to
costs. assess
performance
Reporting Entities in the Public Sector
64. A reporting entity is an entity in respect of which it is reasonable to expect the existence of users
dependent upon financial reports for information which will be useful to them for accountability and
decision making purposes. The term may refer to departments or ministries of government, other
entities that are part of government, as well as the whole of government. Determining the boundaries
of the government reporting entity determines which entities, transactions and activities will be
encompassed by a government’s financial report.
1
The comments in each of the four columns on how well information prepared under each basis, or certain
modifications to that basis, meets the objectives of financial reporting assume that the information reported is limited to
that generated under that basis. However, in all cases, governments may report supplementary information which
allows them to more fully meet the objectives of financial reporting.
2
The ability of a financial report to demonstrate compliance with legally adopted budgets depends upon the basis of
accounting used in each instance. Even where the basis of accounting differs between the two, reconciliations are
possible.

65. There are a number of concepts or approaches which may be used to determine the boundaries of the
financial reporting entity. These include the:
• authorized allocation of funds approach;
• legal entity approach;
• political accountability concept; and
• concept of control.
66. The four concepts listed are not mutually exclusive. For example, the legal entity concept may be
used in conjunction with the concept of control. In addition, application of different concepts may
produce similar reporting entities, particularly at lower levels. However, as a government moves
towards whole of government reporting, the application of the different concepts is more likely to lead
to different results. For example, legal requirements for compliance reporting may mean that a
government prepares additional reports based on the authorized allocation of funds concept in addition
to its financial reports. Each of the concepts listed is discussed more fully below.
67. Under the authorized allocation of funds approach it is argued that accountability and the provision of
information for decision making can be met by demonstrating compliance with the authorized
allocation of funds or spending mandate, for example, demonstrating compliance with expenditures
authorized to be made from “consolidated revenue” or “public funds”. Using this approach, the
reporting entity would comprise those entities that are funded wholly or predominantly by authorized
allocations of government funds. The reporting entity would therefore be consistent with the budget
reporting entity. Fund accounting is one manifestation of this concept.
68. Fund accounting is based on one concept of the reporting entity. Traditionally the focus of financial
reporting by government has been on identifying the purposes for which expenditure has been
authorized and demonstrating that those authorizations have been complied with. The government
financial reporting entity has been determined by reference to the individual funds, which may be
subject to parliamentary appropriation. Fund accounting is an accounting system structured to treat
restricted cash balances as a separate accounting and, in many cases, a separate financial reporting
entity. On this basis, funds represent a pool of resources set aside for the carrying on of specific
activities or the attainment of certain objectives in accordance with legislative or other regulatory
restrictions placed on the use of those resources. By accounting for those resources on a separate or
fund by fund basis, the extent to which resource usage has complied with those restrictions can be
demonstrated (PSC Study 8 The Government Financial Reporting Entity available at www.ifac.org).
While funds may meet the definition of reporting entities as outlined in PSC Study 8, funds will
usually be components of a larger government entity which is itself a reporting entity. This will
require the preparation of consolidated or summary financial statements for the primary government.
69. Arguments which support the authorized allocation of funds approach include the following:
• users wish to evaluate the use of government funds compared to the allocation of public funds;
• reports which focus on the budget sector are more relevant because the two sectors are different
in nature and also because users can obtain separate reports from entities outside the budget
sector; and
• different bases of accounting may be used by the budget sector and other sectors. Where this
occurs consolidation of the budget and non-budget sectors is more difficult.
70. However, these arguments need to be considered against the fact that the authorized allocation of
funds approach results in a fairly narrow boundary for the reporting entity and does not provide a
complete view of the resources and activities for which the government is accountable. For example,
a municipality may provide all its public services directly to the public, or it may establish separate
corporations to carry out activities such as water supply and roading. Citizens are paying for these
services regardless of how the municipality chooses to deliver the services, but the authorized
allocation of funds results would provide the taxpayer with two different types of reports under the
two scenarios.

71. The second approach is that of the legal entity (Christiaens 1997). This approach supports the use of
legislation to determine a list of entities or type of entities which must be included within the
government’s consolidated financial reports. This approach is often observed in practice in
conjunction with other approaches. This situation arises because even where a government adopts the
legal entity approach, it still needs a conceptual basis to determine which entities are included within a
legislative list.
72. The third concept is the political accountability concept (CICA 1985, page 35). Political
accountability suggests that an entity would report all activities and entities over which it is
accountable, irrespective of the legal or organizational structures under which the activities are carried
on, including activities conducted in partnership between a government and private entities or other
governments.
73. The fourth concept is that of control. Under this approach the government financial reporting entity
includes all those entities and transactions which the government controls. The concept of control is
often used in the private sector and has increasingly been adopted by governments as well. In the
public sector the concept is often referred to as control through ownership mechanisms. This
precludes other concepts of control such as control associated with the power to regulate or the power
arising from the government’s position as a major funder or purchaser of goods and services. Under
the control concept, the reporting entity includes all resources controlled by and all obligations of the
reporting entity, regardless of the administrative or legal entities which have been created to manage
those resources and obligations.
74. When a government uses the concept of control as the determinant of the boundaries of the reporting
entity the following observations may be made regarding the financial statements:
• the government demonstrates accountability for all that it controls (in addition to any compliance
reporting in relation to budgetary authority or spending mandates);
• all resources and obligations controlled by the government are included within one set of
financial statements; and
• entities which the government does not control are not included in the government’s financial
statements.
75. Difficulties associated with the use of control as the determinant of the reporting entity include the fact
that governments have a wide potential range of control. The concept therefore needs to be restricted
to certain types of control and the application of the concept may require some judgment. For this
reason, governments usually develop more detailed guidance to be used in the application of the
concept. Examples of factors which may be used to indicate the existence of control by a government
of another entity include:
• the existence of an executive power which enables the government to give directions to the
governing body of that entity on its financial and operating policies;
• the government has broad discretion, under existing legislation, to remove a majority of
members of the governing body of that entity; or
• the government has a majority of the votes that are likely to be cast at a general meeting of that
entity.
76. If control is adopted as the criterion for establishing the boundaries of the government financial
reporting entity, the following issues need to be resolved:
• the determination of the definition/characteristics of control;
• the identification of the entities which are controlled by governments; and
• the mechanism for combining all transactions.

Combination Issues
77. When governments prepare financial reports for a reporting entity which includes a number of
controlled entities, it will be necessary to address the issue of how to combine the information within
those reports. Options include:
• separate financial statements for each entity;
• separate financial statements for various sectors of government activity;
• consolidated financial statements with all entities fully consolidated;
• consolidated financial statements with some entities consolidated and others equity accounted;
and
• combined statements with no consolidation adjustments.
78. The use of full consolidation has the advantage that it allows the overall financial position of an entity
and its sub-entities to be viewed as one entity. When full consolidation is used, consolidation
procedures include:
• ensuring that consistent accounting policies are used by all entities, or if they are not consistent,
making appropriate adjustments to the reported figures;
• ensuring that the reporting period for all entities is comparable; and
• eliminating any inter-entity transactions and balances e.g., eliminating any loans from one entity
to another and eliminating inter-entity sales of goods and services.
79. However, when the reporting entity is a government, the use of different bases by different levels of
government or different types of entities creates a further consolidation issue. In some countries it is
not uncommon for certain government agencies to use accrual accounting, but for higher levels of
government to use the cash basis, although possibly with modifications.
80. Some of the options available to a government wishing to prepare consolidated financial statements
when one or more entities use different basis of accounting are as follows:
• require all entities to adopt the same basis of accounting;
• allow the use of different bases and make adjustments at the time of consolidation to bring all the
financial statements onto the same basis. This could result in the financial statements being
prepared on a higher or lower basis depending upon the type of information available. For
example, if most entities used a modified version of the accrual basis and a small group of
entities used a modified version of the cash basis, it might be possible to make an adjustment for
financial assets and liabilities of the latter group. The degree of precision required when making
such adjustments would depend upon the materiality of the figures;
• prepare consolidated financial statements on a lower basis but provide note disclosure of the
additional information which is available;
• prepare a group report which presents financial information for all entities within the reporting
entity, but do not combine the financial statements; and
• prepare a group report which adds together the financial statements of different entities although
they are prepared on a different bases. This option presents a number of difficulties both for
preparers and readers. For example, if information prepared on a cash basis is combined with
information prepared on an accrual basis, identical transactions will have been accounted for in
different ways.
81. Where a government prepares whole of government financial statements, the reporting entity may be
broader than the general government sector used in the compilation of GFS and SNA reports. A clear
description of the reporting entity and whether this differs from the entity used for GFS purposes is
helpful to readers using both GFS and governmental financial reports.

Compliance Reporting
82. Compliance reporting is the act of reporting actual results against budgeted or planned results. Many
government reporting entities e.g., government departments, are subject to legislative controls such as
appropriations over the nature and amount of their spending. These reporting entities are usually
required to demonstrate compliance with appropriations both to the government entity which granted
the appropriations and/or to the electorate from whom the funds were initially obtained. They may
also be required to demonstrate compliance with regulations, laws or contracts relating to individual
loans or grants. The discussion in this Chapter focuses on reports which demonstrate compliance with
appropriations or budget authorities, particularly those compliance reports which are presented as part
of the governmental financial reports. As discussed earlier, compliance reporting may take place
within the governmental financial reports, the budget for the next year or a separate compliance report.
83. Compliance information may be presented in a number of ways. Options include:
• a statement with separate columns for budgeted amounts, actual amounts and amounts in excess
of appropriations; or
• a statement by the management of the entity asserting that all appropriations and/or other legal
authorities have been complied with. If any appropriations or authorities have been exceeded, or
expenses incurred or payments made without appropriation, then such details may be disclosed
by way of footnote to the relevant item within the governmental financial report.
84. When there are several additional appropriations through the year, an issue may arise as to which set
of budgeted estimates to use. Best practice suggests that both the originating budget for which
authorization was sought and any additional appropriations sought during the year be clearly shown.
85. For compliance and control purposes it is important that planned and actual results are reported on the
same basis of accounting, and for the same reporting entity. If compliance reports are to meet their
objective of providing users with a valid comparison of amounts appropriated and amounts used, then
it is essential that the reports use both the same basis of accounting and cover the same budget entity
as the budget statements.
86. Currently a range of practice exists both across and within jurisdictions. Some of the combinations
which exist are as follows:
• appropriations are cash-based and governmental financial reports are cash-based;
• appropriations are cash-based but include certain obligations and governmental financial reports
are modified accrual-based;
• appropriations are cash-based and governmental financial reports are accrual-based; and
• appropriations are accrual-based and governmental financial reports are accrual-based.
87. Some jurisdictions which have moved from the cash basis to the accrual basis for governmental
financial reporting retained the use of cash-based appropriations for a number of periods following the
transition. In such an environment, the accrual information is perceived as an external reporting
requirement, rather than a key input to managerial decision making. Although it is possible to have
cash-based appropriations and accrual governmental financial reports, the powerful incentives flowing
from the appropriation process means that managers often continue to focus on the cash basis
information. Using different bases of accounting for governmental financial reporting and budgeting
increases the complexity of reporting and creates incentive problems for management.
88. Despite the desirability of having the budget and actual results measured using the same basis of
accounting, where the bases differ, a reconciliation of the amounts provided is extremely useful to
users. This may be done in a number of ways, but as a minimum approach, budget surpluses/deficits
may be reconciled to the net changes in financial position reported in the financial statements.
89. The reporting entity may also vary between the budget statements and the governmental financial
reports. Budgets often include only figures in relation to government entities which require cash
inflows from the government during the year. Entities which are self supporting, for example, GBEs,
may be outside the budget system. However, when a government prepares consolidated financial
statements it will usually apply the concept of control to determine which entities form part of the
external reporting entity. If the concept of control is used, and GBEs satisfy the control criteria, they

are included in consolidated financial reports. Where there are entities included in the governmental
financial reports which are “off budget”, a reconciliation between budgeted and actual results,
showing the impact of such “off budget” entities on the reported results, is desirable.
90. The following example provides an illustration of compliance reporting.
SUB HEAD DESCRIPTION ORIGINAL SUPPLEMENTARY APPROVED ACTUAL MORE THAN LESS THAN
ESTIMATE APPROVALS & ESTIMATE EXPENDITURE ESTIMATE ESTIMATE
VIREMENTS
CI$ CI$ CI$ CI$ CI$ CI$
01 Personal Emoluments 98,994,848 1,992,918 100,987,766 96,720,816 272,541 4,539,491
02 Travelling & Subsistence 2,646,113 124,858 2,770,971 2,526,855 89,419 333,535
03 Supplies & Materials 8,113,908 1,130,988 9,244,896 8,116,202 - 1,128,694
04 Rent of Property 3,155,940 -9,250 3,146,690 1,891,495 112 1,255,307
06 Utilities 5,833,393 548,385 6,381,778 5,771,544 1,621 611,855
07 Other Operating & 34,866,019 630,469 35,496,488 31,648,364 - 3,848,124
Maintenance Services
08 Grants, Contributions & 27,180,749 3,165,169 30,345,918 27,692,376 420,347 3,073,889
Subsidies
10 Awards and Indemnities 75,000 42,000 117,000 114,971 8,252 10,281
11 Retiring Benefits – Non- 1,339,769 23,500 1,363,269 1,284,555 - 78,714
Statutory
12 Inter-departmental 2,083,304 104,122 2,187,426 1,707,759 - 479,667
Purchases & Services
13 Interest payments – Non- 35,000 -25,897 9,103 8,826 - 277
Statutory
14 Reference Materials and 455,080 -2,983 452,097 296,034 - 156,063
Others
17 Repayments & Reserve 2,375,125 10,000 2,385,125 1,806,632 - 578,493
19 Loans 952,307 0 952,307 455,449 - 496,858
21 Insurance 3,004,094 -493,356 2,510,738 1,591,563 - 919,175
TOTAL RECURRENT 191,110,649 7,240,923 198,351,572 181,633,441 792,292 17,510,423
EXPENDITURE
Example 2.1
Cayman Islands Government Accounts for the year ended 31st December 1997
Appendix IV, page 40 (CI$)
91. The following example provides an illustration of reconciliation of a reported deficit under the accrual
basis with the budget surplus on a cash basis.
Reconciliation of the Excess of Net Cost over Revenue to the Unified
Budget Surplus for the Year Ended September 30 (Unaudited)
(In billions of dollars)
Unified budget surplus . ... ... ... ... ... ... ... ... .… ….. ... ... 69.2
Veterans’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109.4)
Military and Federal employees .. . . . . . . . . . . . . . . … . . . . . . (39.8)
Environmental liabilities . . . . . . . . . . . . . . . . . . . . . . … … . . . . . . (12.8)
District of Columbia pension fund .. . . . . . . . . . . . . . . . . . . . . (5.5)
Net amount of all other differences ... . … . . . . . . . . . . . . . . (35.5)
Financial Report’s excess of net cost over revenue ..... ( 1 33.8)
Example 2.2
Financial Report of the United States Government – 1998
Supplemental Table (Unaudited), page 89 (USD)

PART II – CASH BASIS
CHAPTER 3
CASH BASIS – DESCRIPTION
Introduction
92. This Part describes the cash basis of accounting and explores some of the areas where entities using
cash accounting need to develop specific accounting policies. It is not prescriptive. The PSC is also
developing an International Public Sector Accounting Standard (IPSAS) which will set out appropriate
accounting treatments and disclosures under the cash basis of accounting.
93. The cash basis of accounting recognizes transactions and events when cash is received or paid. It
measures the overall financial result for a period as the difference between cash received and cash
paid. It provides readers with information about the sources of cash raised during the period, the uses
to which those funds were applied and the cash balance at the reporting date. The measurement focus
is cash balances and changes therein (PSC Study 2 Elements of the Financial Statements of National
Governments). The following example illustrates the disclosure of an accounting policy for the cash
basis of accounting.
Accounting Policies
(i) The accounts of the Government are prepared on a cash basis. Transactions are
recorded only when moneys are received and paid within the given period, whether or
not the receipts and payments are in respect of goods supplied or services rendered
during that period and whether they relate to recurrent or capital expenditure or
revenue. The Statement of Assets and Liabilities does not include fixed assets, loans,
investments other than those made under Section 3(4)(a), 8(2)(b), 9(3)(a) and 10(4)(b)
of the Finance and Audit Act.
Example 3.1
Annual Statements of the Republic of Mauritius for the year ended 30 June 1998
Notes to the Accounts, page 2
Cash Balances
94. The cash basis of accounting recognizes cash and near-cash balances (PSC Study 5 Definition and
Recognition of Assets). Cash includes cash in hand, cash in transit and cash on deposit. Near-cash
balances consist of temporary investments in marketable securities and bullion. All other assets are
mentioned only in relation to the cash effects of their acquisition or disposal. Assets other than cash
which are held but not recognized may be described by way of additional statements or notes.
Cash Receipts
95. Under the cash basis of accounting all cash receipts, regardless of type, are recognized when cash is
received (PSC Study 9 Definition and Recognition of Revenues). Cash receipts include:
• receipts from reciprocal (exchange) transactions
• sale of goods and services
• cash proceeds from sale of assets or investments;
• receipts from non-reciprocal transactions
• taxation receipts
• issue of currency
• grants, contributions and donations (including transfers from another entity);
• financing inflows
• interest receipts
• borrowings;
• capital contributions by the controlling entity or owners; and
• custodial receipts.
Governmental Financial Reporting Chapter 3: Cash Basis – Description 21

96. Cash receipts may be classified by source or type. Cash receipts are discussed further in Chapter 6.
Cash Payments
97. Under the cash basis of accounting all cash outflows, regardless of type, are recognized when cash is
paid (PSC Study 10 Definition and Recognition of Expenses/Expenditures). Cash payments include:
• payments relating to reciprocal (exchange) transactions
• purchase of goods and services
• acquisition or construction of assets
• investments in other entities (both loans and capital injections);
• payments relating to non-reciprocal transactions
• government transfers
• grants, contributions and donations;
• financing outflows
• interest payments
• repayment of debt; and
• custodial payments.
98. Cash payments may be classified as “current” or “capital”. Payments for the acquisition of assets may
be categorized as “capital” if the asset is expected to have a useful life in excess of a year. Within the
class of capital expenditure, annual asset expenditures may be reported by type (land, buildings etc.)
and/or function (health, defense etc.). Although this description conveys the economic reality that
benefits will be received in later periods, no recognition of these benefits is included in the financial
statements. Types of cash payments, including methods of classification, are discussed further in
Chapter 7.
Transactions and Events not Recognized

99. By definition, cash accounting recognizes cash transactions only. Other transactions or events are not
generally recognized. Non-cash transactions or events include:
• unrealized gains or losses (e.g., increases or decreases in the value of assets due to interest rate
movements);
• the purchase of goods and services or long-term assets on credit or where the method of payment
includes a non-cash exchange;
• the consumption of goods or services which have been paid for in previous accounting periods;
• the consumption of service potential of long-term assets; and
• the incurrence of liabilities (e.g., increases in superannuation/pension obligations).
100. Although unrealized gains and losses on cash balances held in foreign currencies are non-cash
transactions, they affect the closing cash balances. They are therefore necessary to reconcile opening
and closing cash balances. Refer to Chapter 5 for further discussion of this item.
Reporting Model
101. The financial statement reporting model associated with the cash basis of accounting is a Statement of
Receipts and Payments or Cash Flow Statement which reconciles opening and closing cash balances.
Cash balances, cash receipts and cash payments are discussed more fully in Chapters 5, 6 and 7.
22 Chapter 3: Cash Basis – Description Governmental Financial Reporting

CHAPTER 4
CASH BASIS – BENEFITS AND LIMITATIONS
Introduction
102. This section examines the ability of governmental financial reports prepared under cash accounting to
meet the needs of users.
Financial Statements
103. Under cash accounting one main financial report is typically prepared. This shows the cash financial
position as at balance date and details of cash receipts and payments for the entity during the period.
Where the reporting entity consists of a number of individual reporting entities, such as funds, each
reporting entity, or fund, would prepare a separate report. The wider reporting entity, e.g., the whole
of government entity, would also usually prepare a consolidated report.
104. Cash-based financial reports show the sources, allocation and use of cash resources. They show the
cash required to finance the activities of government, the cash raised to meet those requirements,
including the level of taxes extracted during a period, and the cash position of the government. This
information is useful to a range of internal and external users as follows:
• internal users:
• legislative bodies such as Parliament in assessing compliance with amounts appropriated;
• Ministers and senior government managers reviewing the total amount and nature of
government spending;
• external users:
• potential lenders and suppliers evaluating the government’s management of cash balances;
and
• financial analysts/economists assessing the impact of the government’s fiscal requirements
on the economy.
Historical Perspective
105. Traditionally, government budgets and appropriations have been cash based. This was one of the
factors which led to the predominance of the cash basis in government accounting. The popularity of
the cash basis in government accounting arose from the need for Parliament, or other representatives
of the electorate, to monitor the collection of taxation receipts and the subsequent spending of those
receipts by the government each year. The cash basis focuses on the flow of cash within an
accounting period and thereby provides a basis for comparison with appropriations, as discussed
below.
Compliance with Appropriations

106. To the extent that budgets and other requirements are themselves cash based, cash-based financial
reports are able to demonstrate compliance with legally adopted budgets and with legal and
contractual requirements. Governments reporting on a cash basis typically budget on a cash basis.
The inclusion of a budget column in the financial statements allows a direct comparison to be made
between budgeted and actual amounts. This information is useful to the legislature and external users
interested in holding a government accountable, and internal users monitoring actual spending against
appropriations.
Qualitative Characteristics
107. The principles underlying the cash basis are easy to understand and easy to explain.
108. In principle, information provided under the cash basis of accounting scores highly on the qualitative
characteristic of understandability. To the extent that cash flows are uniform over time, it may also
have high levels of reliability and comparability. Because it is relatively easy to compile cash-based
information, reports may be more timely than under other bases of accounting. However, the method
Governmental Financial Reporting Chapter 4: Cash Basis – Benefits and Limitations 23

of presentation of cash based information, such as the publication of detailed lists of receipts and
payments, can affect the understandability of such information.
Costs
109. It is possible to operate a cash-based accounting system and to prepare cash-based financial statements
with fewer trained staff than under other bases. However, governments using cash-based systems
have often used large numbers of clerical staff to approve, process and check cash payments, usually
via a central accounting and control system. In addition, some jurisdictions argue that extensive
accounting and financial management skills are required to operate some types of cash-based budget
systems. Generally, the cost of providing cash information is thought to be lower than under
alternative bases.
110. The fact that cash accounting does not require any detailed accounting knowledge has made it easy for
a wide range of users to access and understand information prepared on this basis. In comparison to
other bases of accounting, politicians and other general users require less assistance or training to
understand cash-based information.
Limitations of Cash Accounting

111. As discussed above, cash accounting provides information on cash flows and allows both the
legislature and the government to monitor spending against cash-based appropriations. Many
governments have found that information on cash collected, and cash spent, meets their needs for both
internal management and for external accountability. However the demands of governments and
external financial statement users for more complex information have grown. Increasingly, users of
governmental financial statements expect governments to provide information on assets and liabilities,
and the impact of current consumption on the stock of net assets held by a government. Cash
accounting is not designed to meet these information needs. Its objectives are clear: to report cash
inflows, cash outflows and changes in the cash balances held. Those who have more extensive
information requirements need to either maintain supplementary records, or consider moving to a
different basis of accounting.
112. Cash accounting focuses solely on cash flows within the current reporting period. It ignores other
resource flows which may also impact upon the ability of a government to provide goods and services
now, and in the future (e.g., although some jurisdictions may keep additional records, the cash basis
does not account for accumulated borrowings and other liabilities). Nor does it record the benefits
obtained from assets over a number of accounting periods. For these reasons cash-based information
may be less relevant for decision makers. Some jurisdictions supplement cash-based financial
statements with published cash forecasts which provide an indication of whether future cash receipts
will be sufficient to cover expected cash outflows.
113. The United Kingdom Green Paper on Resource Accounting noted that one of the main limitations of
cash accounting is the lack of information it provides on capital (assets).
While the present cash accounting system has served government well over many years, there are
limitations to the information which it provides on capital. With cash accounting, spending on what
is used over many years is recorded only when money is spent. No subsequent account is therefore
taken of whether the asset is still in use, has reached the end of its useful life, or has been sold.
(Better Accounting for the Taxpayer’s Money: Resource Accounting and Budgeting in Government,
A Consultation Paper, July 1994, paragraph 1.16)
114. Cash accounting limits the ability of the electorate to hold the government accountable for its use of
resources. The provision of information only on cash flows means that governments can be held
accountable for their use of cash, but there is no corresponding information available with which to
hold the government accountable for its management of assets and liabilities.
115. Where a government prepares its financial statements on a cash basis it may collect and report
supplementary information such as information on its assets. Such information may be collected as a
preliminary step on a transitional path to the adoption of a different basis of accounting. This
information may be disclosed in the published financial statements or it may be used solely for
24 Chapter 4: Cash Basis – Benefits and Limitations Governmental Financial Reporting

internal management purposes. The full benefits of collecting such information are able to be realized
when the information is made available for legislative or public scrutiny.
116. One of the advantages of cash accounting over other bases of accounting is that there is no need for
preparers to exercise any judgment when determining the amount of cash flows for the period. To that
extent it is less subjective than other bases of accounting. However, preparers still have the ability to
manage the timing of cash flows by delaying receipts or payments until the next reporting period.
117. Despite the apparent simplicity of cash accounting, in practice, financial statements prepared under
cash accounting may not be easy for users to understand. This is largely due to the practice of
reporting receipts and payments in great detail.
Governmental Financial Reporting Chapter 4: Cash Basis – Benefits and Limitations 25

26 Chapter 4: Cash Basis – Benefits and Limitations Governmental Financial Reporting
CHAPTER 5
CASH BASIS – CASH BALANCES
Definition and Recognition of Cash Balances

118. The cash basis of accounting recognizes cash and near-cash balances such as temporary investments in
marketable securities and bullion. All other assets are mentioned only in relation to the cash effects of
their acquisition or disposal.
119. IAS 7, Cash Flow Statements provides the following definitions:
Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value. (paragraph 6)
120. IAS 7 (paragraph 7) goes on to explain that short-term highly liquid investments are held for the
purpose of meeting cash commitments rather than for investment. They normally include only those
investments with maturities of, say, three months or less at the date of acquisition. They exclude
equity investments but could include preferred shares that are acquired within three months of the
redemption date.
121. An alternative definition of cash comes from the United States of America Federal Accounting
Standards Advisory Board (FASAB):
Cash consists of:

(a) coins, paper currency and readily negotiable instruments, such as money orders, checks, and
bank drafts on hand or in transit for deposit;
(b) amounts on demand deposit with banks or other financial institutions; and
(c) foreign currencies, which, for accounting purposes, should be translated into U.S. dollars at
the exchange rate on the financial statement date. (SFFAS No. 1)
Reporting of Cash Balances
122. Closing cash balances are determined by taking opening cash balances, then adding cash receipts and
subtracting cash payments during the reporting period. Changes in cash balances due to movements in
foreign currencies, being unrecognized gains/losses, should be separately disclosed. The following
example illustrates the disclosure of cash balances.
3. CASH AND BANK BALANCES
These balances refer to cash in hand, in transit and balances with banks and agents, both local and
overseas.
5V
%DODQFHV KHOG ORFDOO\
%DODQFHV KHOG RYHUVHDV

Example 5.1
Notes to the Accounts, page 2 (Rs)
Governmental Financial Reporting Chapter 5: Cash Basis – Cash Balances 27

123. Cash balances may be held in domestic and foreign currencies and it is usual to disclose these
separately. Cash balances held in foreign currencies are reported at the closing rate. It is also best
practice to disclose the terms, conditions and method of valuation for cash equivalents such as short
term securities or bullion.
124. Cash receipts may be restricted in purpose. Restrictions may be imposed by an outside agency which
has donated cash for a particular purpose, or more commonly restrictions may operate when an entity
has constructed separate funds for the carrying on of specific activities or attaining certain objectives
in accordance with legislative or other regulatory restrictions. An entity may be required, by contract
or legislation, or may have chosen to make disclosures of these restricted cash flows. Such disclosures
would also include disclosure of the portion of these funds remaining in closing cash balances.
Classification of Cash Balances

125. Possible classifications of cash include:
• cash on hand;
• cash in transit; and
• demand deposits.
126. Near-cash balances may be grouped according to the type of asset, with bullion being separately
disclosed. Amounts denominated in domestic currency and foreign currencies are generally separately
disclosed.
28 Chapter 5: Cash Basis – Cash Balances Governmental Financial Reporting

CHAPTER 6
CASH BASIS – CASH RECEIPTS
Definition of Cash Receipts

127. A cash receipt is an inflow of cash to the reporting entity.
Recognition of Cash Receipts

128. Under the cash basis of accounting all cash receipts, regardless of type, are recognized when cash is
received. Entities using cash accounting recognize all receipts, regardless of type, although there may
be separate disclosure of different types of receipts. Where an entity operates a system of holding
accounts where receipts are deposited prior to being coded, there may be a slight time delay between
the time of receipt and the coding of receipts to the relevant account code. In such cases, receipts are
recognized when coded.
Types of Cash Receipts

129. Receipts include:
• receipts from reciprocal (exchange) transactions
• sale of goods and services
• dividend and interest receipts
• cash proceeds from sale of assets;
• receipts from non-reciprocal transactions
• taxation receipts
• fees, fines, licenses etc.
• issue of currency
• financing inflows
• borrowings;
• capital contributions by the controlling entity or owners; and
• custodial receipts.
130. The following examples illustrate the disclosure of revenue classifications.
Abstract Account of Revenue and Expenditure of the Consolidated Fund for Financial Year 1997-98
RECURRENT REVENUE Estimated Actual

Analysis of total recurrent revenue by Heads: Rs Rs
Heads
41 Direct Taxes 3,662,000,000 3,623,289,187.57
42 Indirect Taxes 12,453,400,000 12,082,202,926.98
43 Receipts from Public Utilities 276,700,000 738,402,273.66
44 Receipts from Public Services 516,842,000 548,591,832.81
45 Rental of Government Property 43,710,000 48,568,434.99
46 Interest and Royalties 1,248,727,000 1,282,782,864.60
47 Reimbursements 173,621,000 147,188,882.46
TOTAL - RECURRENT REVENUE 18,375,000,000 18,471,026,403.07
Example 6.1
Statement B, page 6 (Rs)
Governmental Financial Reporting Chapter 6: Cash Basis – Cash Receipts 29

Abstract Account of Revenue and Expenditure of the Capital Fund for Financial Year 1997-98
CAPITAL REVENUE Estimated Actual
Analysis of total capital revenue by Heads: Rs Rs

Heads
51 Grants 110,000,000 216,498,179.29

52 Loans: -
A. Local Sources 1,500,000,000 2,755,397,660.00
B. External Sources 637,000,000 530,689,772.89
53 Dividends from Investments 390,000,000 440,639,758.86
54 Miscellaneous 2,000,000 1,224,510.49
TOTAL - CAPITAL REVENUE 2,639,000,000 3,944,449,881.53
Excess of Revenue over Expenditure 524,118,038.10
Example 6.2
Statement C, page 8 (Rs)
131. Types of receipts, including the treatment of receipts authorized by way of appropriation, are
discussed below.
Appropriations
132. For the government as a whole, appropriations are an authorization to expend funds. However, for
individual entities within government, any funds paid to the entity within the reporting period which
are subject to appropriations are accounted for as cash receipts. In some jurisdictions, a government
department supplying goods and services to the government or to the community on the government’s
behalf may regard the receipt of cash authorized by an appropriation as an exchange transaction. In
other jurisdictions such receipts are regarded as non-reciprocal transfers. Both types of receipts are
discussed below. This discussion assumes that an entity is required to account for cash receipts from a
higher level of government. Under some centralized accounting and banking systems, all cash may be
held centrally and individual entities may not receive any cash from its controlling entity. In that case,
entities are only required to account for cash which they have received from other sources.
Receipts from Reciprocal (Exchange) Transactions

133. These transactions include the sale of goods and services, the receipt of dividends and interest and the
total proceeds of asset sales. The cash flows associated with the disposal of assets are recognized as
receipts when the cash is received. Receipts from the disposal of assets are generally reported
separately to highlight their non-recurring nature (e.g., as capital receipts), and their effect on the
reported cash surplus or deficit for the period.
Receipts from Non-reciprocal Transactions

134. A non-reciprocal transaction is one in which the entity receives assets (including cash) or has
liabilities extinguished without directly giving approximately equal value in exchange to the other
party or parties to the transfer. Taxation is the major source of such inflows or economic benefits.
Some jurisdictions use the term “non-exchange” transfer to refer to non-reciprocal transfers. In
addition to taxation receipts, governments may also receive grants, contributions and donations from
other parties. For example, national governments may receive aid or grants from other sovereign
governments or from supranational authorities. Component entities of a national government may
30 Chapter 6: Cash Basis – Cash Receipts Governmental Financial Reporting

receive transfers from the controlling government entity which, under some circumstances may be
viewed as an exchange relationship with the controlling government entity, but under other
circumstances may be viewed as non-reciprocal transfers.
135. Under cash accounting only those transfers which result in the receipt or payment of cash are
recognized.
Receipts Derived from use of the Powers of Government

136. Governments receive involuntary transfers through the use of their powers. The types of such transfers
are wide-ranging, have a variety of alternative names, and vary from one jurisdiction to another. They
may include:
• income tax;
• fringe benefit tax;
• sales tax;
• value-added tax;
• payroll tax;
• property tax;
• capital gains tax;
• stamp, check, credit and debit duties;
• custom and excise duties;
• license tax;
• road-user charges and motor vehicle fees;
• levies; and
• fines.
137. Taxation receipts frequently make up the majority of a national government’s receipts and are
generally viewed as an important component in measuring the government’s financial results during
the period. The mix of taxation receipts and borrowing is also important when assessing inter-
generational equity.
138. Although other levels of government may also have the right to tax or levy, taxation will not
necessarily constitute the majority of their receipts.
139. Taxation receipts may be collected by government departments or statutory bodies. The
circumstances surrounding the collection of taxation receipts by departments may vary. In some cases
the department or statutory body may have the right to retain the receipts for its own use. In other
cases the receipts are instead collected on behalf of the government or a higher level of government, in
which case the entity collecting the taxation has no right to spend the receipts without further
authorization. Where a department is entitled to retain receipts, the gross inflows and outflows are
normally reported within the cash flows of the department. Custodial receipts are discussed separately
later in this Chapter.
140. The classification of user charges as reciprocal or non-reciprocal may vary between jurisdictions.
Where the user charge represents a service provided by the government and the price is set at the cost
of the service, or after allowing for a reasonable rate of return on costs, then the charge may be
classified as reciprocal. However, where there is an element of taxation in that the price exceeds costs
(and any allowance for a reasonable return) the charge, or part of the charge, may be regarded as non-
reciprocal.
141. The following examples illustrate the disclosure of various types of non-reciprocal receipts which
relate to the use of the powers of government.

Original
Heads and Items Estimate of Actual Over Under
Revenue Revenue the Estimate the Estimate
41 – DIRECT TAXES Rs Rs Rs Rs
101 – TAXES ON INCOME

.001 Income Tax, Companies & Bodies Corporate 1,175,000,000 1,170,921,843.21 4,078,156.79
.002 Income Tax, Others 1,350,000,000 1,237,687,238.59 112,312,761.41
201 – TAXES ON CAPITAL

.001 Succession Duties 0 34,073.65 34,073.65
301 – CONTRIBUTIONS TO
SOCIAL SECURITY
.001 Retiring Allowance Scheme for Members of
the National Assembly 800,000 779,732.56 20,267.44
.002 Contributions to the Civil Service Family
Protection Scheme 95,000,000 100,252,477.56 5,252,477.56
401 –TAXES ON FINANCIAL

TRANSACTIONS
.001 Mortgages, Inscriptions and Transcriptions 10,000,000 1,399,005.66 8,600,994.34
.002 Registration Fees 775,000,000 908,093,203.33 133,093,203.33
.003 Stamp Duties 12,000,000 12,132,492.24 132,492.24
.004 Incorporation and Lodging Fees, Search,
Duty, etc 9,200,000 9,745,569.000 545.569.00
501 – TAX ON PROPERTIES

.001 Tax on Properties 235,000,000 182,243,551.77 52,756,448.23
TOTAL – DIRECT TAXES 3,662,000,000 3,623,289,187.57 139,057,815.78 177,768,628.21
Net amount under the Estimates 38,710,812.43
Example 6.3
Statement D, pages 9 and 10 (Rs)

Original
Heads and Items Estimate of Actual Over Under
Revenue Revenue the Estimate the Estimate
42 – INDIRECT TAXES Rs Rs Rs Rs
101 – CUSTOMS DUTIES
.001 Import Duties and Excise Duties on Imports 6,350,000,000 6,205,452,911.19 144,547.088.81
.003 Stamp Duty on Imports 0 1,439,351.00 1,439,351.00
.004 Sales Tax/Value-Added Tax 2,975,000,000 2,724,596,253.07 250,403.746.93
201 – TAXES ON COMMERCE

AND INDUSTRY
(1) Excise Duties
.101 Spirits, Liquors and Alcoholic Beverages 690,000,000 681,457,054.00 8,542,946.00

.102 Tobacco and Cigarettes 775,000,000 832,085,864.00 57,085,864.00
.199 Miscellaneous 16,000,000 15,815,525.00 184,475.00
(2) Licences
.201 Liquor 11,000,000 10,117,259.00 882,741.00

.202 Trading and Professional 0 535,129.75 535,129.75
.203 Company and Commercial Partnership 44,000,000 45,494,763.18 1,494,763.18
.299 Miscellaneous 57,000,000 79,262,025.10 22,262,025.17
Carried forward 10,918,000,000 10,596,256,135.36 82,817,133.10 404,560,997.74
(9) Miscellaneous
.901 Sugar Brokerage Tax 400,000 480,947.05 80,947.05
301 – TAXES ON
TRANSPORTATION
.001 Road Motor Vehicle Licences 280,000,000 292,128,664.50 12,128,664.50

.999 Miscellaneous 17,000,000 15,039,432.10 1,960,567.90
401 – TAXES ON GAMBLING
.001 Tax on Lotteries 28,000,000 28,624,319.78 624,319.78

.002 Tax on Betting 275,000,000 161,358,901.17 113,641,098.83
.003 Tax on Gaming 345,000,000 368,005,445.30 23,005,445.30
501 – TAXES ON HOTEL,

RESTAURANT AND
INTERNATIONAL TRAVEL
.001 Tax on Hotel & Restaurant Bills 590,000,000 620,309,081.72 30,309,081.72

TOTAL – INDIRECT TAXES 12,453,400,000 12,082,202,926.98 148,965,591.45 520,162,664.47
Net amount under the Estimates 371,197,073.02
Example 6.4
Statement D, page 10 (Rs)
Receipts Derived from the Issue of Currency
142. Currency in the form of notes and coins is usually created and issued by a central bank, sometimes
referred to as the reserve bank or federal bank. The cost of creating notes and coins is a cash payment
of the central bank. When the currency is issued, the central bank receives cash equal to the face
value of the currency. Although these cash receipts and cash payments are cash flows of the central
bank, if that bank forms part of the government reporting entity, the cash receipts and cash payments
would also be cash flows of the government as a whole and would be included in any whole of
government financial statements. The following example illustrates the disclosure of cash receipts
from the issue of currency.

STATEMENT 1 – CONSOLIDATED FUND OF INDIA – REVENUE ACCOUNT–RECEIPTS
Accounts Budget Revised Budget
Major 1997-98 1998-99 1998-99 1999-2000
Head
B. NON-TAX REVENUE
(a) Fiscal Services 873.57 1109.94 1046.67 1265.36
Currency, Coinage & Mint 0046 607.99 823.68 776.58 1014.51
Other Fiscal Services 0047 265.58 286.26 270.09 250.85
: : : : : : : : : : : :
: : : : : : : : : : : :
Example 6.5
Annual Financial Statement of the Government of India for the financial year 1997-98
Statement I – Consolidated Fund of India – Revenue Account – Receipts, page 1 (Rs. Crore)
Grants, Contributions and Donations
143. National governments may receive both non-reciprocal transfers from other governments or
supranational authorities and grants, contributions or donations from the private sector. Other levels
of government, including government sub-entities may receive both non-reciprocal transfers from
higher levels of government and grants, contributions or donations from the private sector. This
section looks at the accounting treatment of non-reciprocal transfers received by national
governments. The treatment of non-reciprocal transfers made by national governments to other levels
of government is discussed in Chapter 7.
144. In some countries the term “grant” is associated with a certain type of discretionary receipt and the
term “transfers” is therefore used to refer to the broad range of non-reciprocal transfers including
grants, shared cost agreements and entitlements. In other countries the terms may be used
interchangeably. These transfers may take the form of cash, services, transfer of an asset or the
reduction of an existing liability. Where these transfers take the form of cash, they will be recognized
by the recipient government.
145. Restrictive conditions may or may not attach to the transfer. Both restricted and unrestricted grants,
contributions and donations meet recognition criteria for the cash basis of accounting as soon as they
are received. Disclosure of the different types of grants, contributions and donations, and any
restrictions (e.g., grants may be specifically tagged for the purchase of assets) on cash balances
remaining at the end of the reporting period may be appropriate.
146. Further discussion of non-reciprocal transfers is found in PSC Study 9 Definition and Recognition of
Revenues.
Financing Inflows and Capital Contributions from the Controlling Entity or Owners
147. Financing inflows include all receipts from borrowings. They would also include any cash raised by
discounting future expected receipts.
148. Under cash accounting, there is usually no distinction made between cash provided by a controlling
government entity for operating costs, and amounts which represent the acquiring of, or an increase in,
a financial interest in the entity. They are both recognized as cash receipts. Where a distinction is
made, there may be separate disclosure of such receipts.
Custodial Receipts
149. Custodial receipts include taxes collected as agent for another government, contributions towards
pension and welfare funds, and other receipts collected as agent for another entity. In practice
custodial receipts may or may not be included as a cash receipt of the reporting entity. Custodial
receipts may be separately disclosed to indicate their special nature.
Classification
150. Classification should depend on users’ needs and on how they can best be met. The following

constraints are also important:
• level of detail of the information required;
• the ability to classify the information and the reliability of the resulting numbers; and
• benefit versus cost.
151. Receipts may be classified by source or type. Alternative classification systems for receipts include:
• operating, investing, and financing, in accordance with the categories used in IAS 7, Cash Flow
Statements;
• capital and current (also referred to as capital and recurrent);
• by activity and/or organization to which the receipt relates;
• reciprocal and non-reciprocal; and
• by function in accordance with the classifications used by the System of National Accounts
(SNA) and the International Monetary Fund’s Government Finance Statistics (GFS). Refer to
Chapter 19 for a fuller description of these systems.
152. These classifications are not mutually exclusive. More than one type of classification may be used at
the same time. An illustration of a classification system for receipts is shown below. Note that some
user charges may be classified as reciprocal or non-reciprocal depending upon the nature and amount
of the charge.
Receipts from Reciprocal (Exchange) Transactions

Current
Sales
Dividends (from entities other than state-owned monopolies)
Interest
Royalties
Capital
Proceeds from asset sales
Non-reciprocal Transfers – Receipts from the use of the Powers of Government
(depending on the particular jurisdiction)
Taxes on income, profits and capital gains
Sales taxes
Property taxes
Payroll taxes
Poll taxes
Social security contributions
Taxes on specific services
Excises
Customs and import duties
License, registration and permit fees
Fines
Non-reciprocal Transfers – Receipts from Issue of Currency
Non-reciprocal Transfers – Grants, Contributions and Donations
(with separate disclosure of any restrictions on use)
From other levels of government
From other governments
From supranational authorities
From the private sector
Financing Inflows
Contributions from Controlling Entities (in the case of controlled entities)
Custodial Receipts

CHAPTER 7
CASH BASIS – CASH PAYMENTS
Definition of Cash Payments

153. A cash payment is a cash outflow resulting from the payment of cash by the reporting entity to a party
outside the reporting entity.
Recognition of Cash Payments

154. There are a range of points at which transactions which will lead to a cash payment may be recorded
within an accounting system. These points include:
• approval of a budget which includes the specific item or an amount for that class of transactions;
• approval of the request to purchase within the entity;
• the placing of an order (recognition of a commitment to spend);
• receipt of the item;
• receipt of an invoice;
• approval of a payment order; and
• payment of the invoice.
155. Under commitment accounting transactions are recorded when there is a commitment to purchase an
item. This allows an entity to manage its projected spending against amounts available under a
budget. Commitment accounting is often used in conjunction with cash accounting as it provides
additional management information. However, under the cash basis of accounting, the actual
recognition of payments occurs at the time of payment.
156. Payment systems may include the use of prepayments. Prepayments may occur when a government
forwards a sum of cash to one of its departments or agencies to be used as a source of ready cash, or
alternatively when the government is prepaying an agency to handle transactions on behalf of the
government e.g., to make social security payments. The bank accounts held for such purposes are
sometimes referred to as imprest accounts. If the recipient agencies, and therefore their bank
accounts, form part of the government reporting entity, the initial transfer of funds to the agency is
generally not recognized as a payment in the whole of government financial statements because the
funds in these bank accounts form part of the Government’s opening and closing cash balances. In
both cases the payments are not recognized until payment has been made and the details of the
payment are recorded in the accounting system. However, where a payment system results in a series
of checks being issued to social security recipients, payment would be recognized at the time that the
checks are issued.
157. An alternative method of dealing with imprest accounts is to record the transfer of funds to the
account as a payment, and at the end of the reporting period to transfer the funds in the bank account
back to the government’s bank account. It is suggested that this method is more appropriate where the
imprest accounts do not form part of the government reporting entity, or where legislation requires the
recording and disclosure of all payments from particular government bank accounts.
Types of Cash Payments

158. Cash payments include:
• payments relating to reciprocal (exchange) transaction;
• purchase of goods and services
• acquisition or construction of assets
• investments in other entities (both loans and capital injections);
• payments relating to non-reciprocal transactions
• government transfers
Governmental Financial Reporting Chapter 7: Cash Basis – Cash Payments 37

• financing outflows
• interest payments
• repayment of debt; and
• custodial payments.
159. Although some transactions such as borrowing and the payment of interest may be restricted to the
whole of government level, most of the above payments are made by government sub-entities.
160. These categories are not mutually exclusive: more than one classification may be applicable to a given
payment (e.g., a grant to a government sub-entity may be tagged for the purchase of assets). Refer to
the discussion of classification of payments later in this Chapter.
161. The types of payments made by government entities will depend upon the type of activities conducted
by the entity. Entities providing mainly policy advice will spend a high proportion of their budget on
personnel. Entities providing operational services to government (e.g., operating penal institutions)
will have a wider range of payments including those relating to personnel, food, utilities, vehicles and
buildings.
Payments made under Appropriation

162. For entities such as government departments, payments will usually be subject to some type of
legislative authority or appropriation. The nature of appropriations differs between jurisdictions.
Appropriations may authorize the spending of money on types of cash payments (e.g., wages and
salaries) and/or for particular purposes such as programs, activities or outputs.
Purchase of Goods and Services

163. Purchases of goods and services could include payments for stationery, rent, maintenance, power,
rates or taxes on land, vehicle expenses etc.
Payments for Personnel

164. Payments for personnel could include wages and salaries, payments for holiday leave, and other
benefits paid to employees, or paid by the employer with respect to the employee.
Government Transfers
165. One definition of government transfers comes from IAS 20, Accounting for Government Grants and
Disclosure of Government Assistance. This definition focuses on transfers of resources from the
government to enterprises.
Government grants are assistance by government in the form of transfers of resources to an

enterprise in return for past or future compliance with certain conditions relating to the operating
activities of the enterprise. (paragraph 3)
166. An alternative definition, which also encompasses transfers to individuals and intergovernmental
transfers, comes from Public Sector Accounting Recommendation PSAR Section PS 3410,
Government Transfers of the Canadian Institute of Chartered Accountants (CICA). Although the
discussion in this publication is designed to provide guidance for governments using the accrual basis
of accounting, some of the discussion is also relevant for governments using the cash basis of
accounting.
Government Transfers are transfers of money from a government to an individual, an organization
or another government for which the government making the transfer does not:
(a) receive any goods or services directly in return, as would occur in a purchase/sale transaction;
(b) expect to be repaid in the future, as would be expected in a loan; or
(c) expect a financial return, as would be expected in an investment. (PSAR Section PS 3410,
paragraph .03)
167. The PSAR identifies three major types of transfers: entitlements, transfers under shared cost
agreements and grants. These categories are based on a concept of a spectrum in the degree of
38 Chapter 7: Cash Basis – Cash Payments Governmental Financial Reporting

discretion the government has in making a transfer. Further discussion of each of these transfers is
given in Chapter 15. However, not all countries make this distinction between types of transfers.
168. The payment of welfare benefits and other transfer payments (including unemployment and sickness
benefits) are payments at the whole of government level. When these benefits and transfers are made
by a sub-entity, they will usually be an agency or custodial payment made on behalf of the
government.

169. Grants, contributions and donations are a further class of non-reciprocal transfers. They may or may
not have restrictive conditions applying. Under cash accounting all grants, contributions and
donations, including loans, or contributions of capital from a higher level of government or controlling
entity are recorded as cash payments. However, separate disclosure of loans and capital contributions
highlights the non-recurring nature of these grants.
Acquisition or Construction of Assets

170. The annual costs of acquiring or constructing assets are shown as cash payments in the financial
reports of entities using the cash basis. Such acquisitions are usually categorized as “capital” if they
are expected to have a useful life in excess of a year. This distinguishes recurring operating payments
required to provide ongoing services from non-recurring payments. These capital payments may also
be reported by type (land, buildings, etc.) and/or function (health, defense, etc.). Assets other than
cash which are held, but not recognized, may be described by note. Refer to Chapter 8: Cash Basis –
External Reporting for a discussion of additional disclosures under cash accounting.
171. IAS 16, Property, Plant and Equipment contains a number of suggested disclosures in relation to the
acquisition or construction of assets. Although this standard assumes the use of the accrual basis of
accounting, many of the disclosures would also provide useful information for readers of cash-based
financial statements.
172. The following example illustrates the disclosure of payments made which relate to the acquisition of
capital assets. This type of expenditure is often disclosed separately as capital expenditure under the
cash basis of accounting.
Total of voted
Votes and Items provision Actual Over the Under the
rendered Expenditure Provisions Provisions
available for
the year
022 – Police
.001 Quarters and Barracks 1,300,000.00 1,201,179.25 98,820.75
.002 Construction/Improvement of Police Stations 5,650,000.00 5,649,041.54 958.46
.003 Improvements Renewal, and Minor Projects 4,639,000.00 4,638,087.23 912.77
.004 Vehicles, Launch, Plant, Equipment and
Furniture 22,308,000.00 22,307,475.28 524.72
.005 Road Safety and Traffic Improvement 2,764,000.00 2,763,494.36 505.64
TOTAL - POLICE 36,661,000.00 36,559,277.66 101,722.34
Example 7.1
Statement E1, page 100 (Rs)

Loans made to other Entities
173. Loans which result in a cash payment may be separately disclosed. The transfer of assets other than
cash is not recognized as a payment, although the transfer may be disclosed in the Notes to the
Financial Statements.
174. The following example illustrates the disclosure of cash payments associated with loans and advances.
Total of voted
Votes and Items provision Actual Over the Under the
rendered Expenditure Provisions Provisions
available for
the year
SERVICES UNDER THE CONTROL OF
THE MINISTER OF LOCAL
GOVERNMENT AND PUBLIC UTILITIES
224 – Central Water Authority

.001 Loan to CWA for Development Programme 5,000,000.00 5,000,000.00
.002 Loan to CWA for Port Louis Water Supplies 5,000,000.00 3,729,149.80 1,270,850.20
.003 Loan to CWA for District Water Supplies 88,406,000.00 88,405,637.60 362.40
.004 Loan to CWA for Mare aux Vacoas Water
Supplies 53,181,000.00 53,180,248.76 751.24
TOTAL – CENTRAL WATER AUTHORITY 151,587,000.00 150,315,036.16 1,271,963.84
Example 7.2
Statement E1, page 99 (Rs)
Capital Injections to Government Owned Entities
175. Capital injections by central government to government departments or agencies which involve a cash
payment are shown as a cash payment in the financial reports of the parent entity, if such reports are
prepared. If the capital contribution is specifically tagged for the purchase of assets it may be
separately disclosed as a “capital” payment.
Financing Outflows
176. Interest payments are recognized as cash payments at the time of payment. Repayments of
borrowings which involve cash flows are also recognized as cash payments.

177. The following example illustrates the disclosure of the payment of interest by the whole of
government.
Original Approved Actual More than Less than

Estimate Estimate 1997 Estimate Estimate
CI$ CI$ CI$ CI$ CI$
Statutory Expenditure:
Public Debt Charges – Interest 4,774,181 4,774,181 4,455,569 - 318,612

Public Debt Charges – Repayments 7,944,326 7,944,326 8,710,244 765,918 -
Other Statutory Expenditure 7,551,631 7,551,631 5,307,813 - 2,243,818
Total Statutory Expenditure 20,270,138 20,270,138 18,473,626 765,918 2,562,430
Total Expenditure 255,473,399 276,969,077 246,625,711 949,385 31,292,750
Surplus/ Deficit (-) for the Year -7,748,675 -29,244,353 -3,425,907 - 25,818,446
Example 7.3
Cayman Islands Government
Accounts for the year ended 31st December 1997
Statements of Receipts and Payments for the year ended 31st December 1997, page 3 (CI$)
Custodial Payments
178. Custodial payments include the payment of welfare benefits and transfer payments by government
departments or agencies on behalf of the government, and the payment of amounts collected as agent
of another entity (e.g., the transfer of employee contributions towards pension and welfare funds to
those funds). In practice, the treatment of custodial payments varies between jurisdictions and they
may or may not be recognized as a cash payment of the reporting entity depending upon the
jurisdiction. Where custodial payments are disclosed, receipts and payments are disclosed separately.
179. The following example illustrates the deployment of cash resources to aid in the provision of training
services and unemployment payments for the benefit of the unemployed. These payments are made
by a government agency on behalf of the government as a whole.
Interdepartmental Transactions
180. In some jurisdictions, usually those which use a centralized accounting system for government
departments, some interdepartmental transactions may be recorded as cash receipts and cash
payments, although the transactions have been effected by a book entry only. These are transactions
which would have been recorded as payments and receipts by the individual sub-entities if they had
had their own accounting systems.
Classification
181. Classification depends upon users’ needs and on how they can best be met. The constraints identified
in the discussion of classification of receipts in Chapter 6 apply here also.
182. Cash payments may be classified in a number of ways, and it is common for most payments to be
classified in more than one way. Under a well designed system multiple classifications can be
accommodated within the same system. Methods of classification include:
• current or capital;
• economic type;
• function;
• organization or organizational unit (and appropriations for each of those units); and
• detailed type.

Classification as Current or Capital
183. An example of current and capital classifications is shown below.
APPENDIX 7
Operating Fund Account
ABSTRACT OF OPERATING AND CAPITAL EXPENDITURE
FOR THE YEAR 1997
Revised
Heads of Expenditure Estimate Expenditure Increase Decrease
$ $ $ $
: : : : : : : :
PRINTING AND STATIONERY
Operating 1,608,050 1,592,706.73 ... 15,343.27
Capital 366,150 363,474.12 … 2,675.88
VAT 176,400 156,021.11 … 20,378.89
SUPPLIES
Operating 4,361,807 4,687,721.79 325,914.79 …
Capital 559,493 559,492.43 … 0.57
VAT 506,500 505,836.61 .... 663.39
INFORMATION, TECHNOLOGY &

COMPUTING SERVICES
Operating 2,185,342 2,098,724.92 … 86,617.08
Capital 378,000 367,389.44 … 10,610.56
VAT 253,300 253,075.04 … 224.96
Example 7.4
Report on the Accounts and Finance, Parliament of Fiji
For the Year 1997, Appendix 7, page 1 (FD)
Classification by Economic Type
184. Under a cash accounting system all payments may be classified by economic type, e.g., wages and
salaries, capital, and non-reciprocal transfers including grants, contributions and donations. The
object classification enables an entity to exercise control at various levels of management.
185. The following examples illustrate the disclosure of payments for goods and services by economic
type.

APPENDIX 8 –(continued)
DETAILED STATEMENT OF OPERATING AND CAPITAL EXPENDITURE
FOR THE YEAR 1997
SEG’s Heads of Service Revised Expenditure Increase Decrease
Estimate
2 – OFFICE OF THE PRIME MINISTER $ $ $ $
Programme 2-Public Service Commission
Summary of Total Expenditure
1 Established Staff................................................. 2,816,000 2,813,935.36 .... 2,064.64
2 Unestablished Staff............................................ 118,060 116,606.06 .... 1,453.94
3 Travel and Communications .............................. 111,200 96,962.12 .... 14,237.88
4 Maintenance and Operations.............................. 23,500 22,167.54 .... 1,332.46
5 Purchase of Goods and Services ........................ 166,500 119,819.64 .... 46,680.36
6 Operating Grants and Transfers ......................... 1,647,090 1,331,734.66 .... 315,355.34
7 Special Expenditures.......................................... 80,400 54,539.49 .... 25,860.51
Total-Operating............................................ 4,962,750 4,555,764.87 .... 406,985.13
Net Decrease......................................... .... .... .... 406,985.13
8 Capital Construction 1,665,000 1,069,744.01 .... 595,255.99
9 Capital Purchase 213,450 199,266.02 .... 14,183.98
Total-Capital................................................ 1,878,450 1,269,010.03 .... 609,439.97
Net Decrease......................................... .... .... .... 609,439.97
: : : : : : : : : :
Example 7.5
Report on the Accounts and Finance, Parliament of Fiji
For the Year 1997, Appendix 8, page 2 (FD)
3. Expenditure by standard accounts classification

1993 1992
Salaries and wages $3,975 $ 4,089
Employee benefits 794 838
Transportation and communication 308 291
Services 1,414 1,581
Supplies and equipment 645 704
Acquisition/construction physical assets 566 702
Transfer payments 40,583 39,124
Interest and other expenditures on provincial debt $5,635 $4,793
less: Interest and other investment income 342 597
Interest on debt issued for provincial purposes 5,293 4,196
Other transactions 129 158
Total expenditure $53,707 $51,683
Example 7.6
Public Accounts of Ontario, 1992–93
Notes to the Financial Statements, page 6 (CAD)
Classification by Function
186. A classification by function or program provides useful information on the purposes or objectives of
expenses. It helps allocative decision making and the review by the legislative and executive branches
of government. This information provides data which could be used to calculate expenditures per unit
of activity. Most government outlays can be assigned to a specific function or broad sector of the
government. Some, however, require judgment. For example, military colleges are usually classified
as “defense” rather than “education”.
187. Existing functional classification systems include the United Nations’ System of National Accounts

and the International Monetary Fund’s Government Finance Statistics. These are discussed in
Chapter 19. The following example illustrates the classification by function of cash payments made
by the whole of government.
STATEMENT 1 - CONSOLIDATED FUND OF INDIA - REVENUE ACCOUNT-

DISBURSEMENTS
(In crore of Rupees)
Accounts Budget Revised Budget
1997-98 1998-99 1998-99 1999-2000
A. GENERAL SERVICES 114219.68 130367.66 136161.12 149742.44
(a) Organs of State 1443.63 1424.48 1425.57 1141.09
(b) Fiscal Services 2628.63 2900.20 2954.15 3012.52
(c) Interest Payment and
Servicing of Debt 65637.27 75000.00 77248.00 88000.00
(d) Administrative Services 7199.69 8223.74 8610.86 8795.79
(e) Pensions and Miscellaneous
General Services 10008.35 10922.26 13691.56 14106.23
(f) Defence Services 27302.11 31896.98 32230.98 34686.81
B. SOCIAL SERVICES 11239.86 14768.39 14187.83 15416.35
C. ECONOMIC SERVICES 97979.42 95245.40 100019.86 102678.65

(a) Agriculture and Allied
Activities 12875.14 15703.87 15227.35 16509.58
(b) Rural Development 4901.91 5373.23 5162.10 4969.49
(c) Special Areas Programmes 524.74 859.19 858.33 1656.02
(d) Irrigation & Flood Control 216.14 279.54 272.08 279.81
(e) Energy 15102.06 2709.32 2497.00 3032.83
(f) Industry and Minerals 9114.29 8798.26 10363.53 10870.72
(g) Transport 30769.03 33968.54 33027.39 36266.09
(h) Communications 17463.24 20383.93 21260.56 23534.83
(i) Science Technology and Environment 2627.32 3045.94 3006.47 3327.04
(j) General Economic Services 4385.55 4123.58 8345.05 2232.24
D. GRANTS-IN-AID AND
CONTRIBUTIONS 53267.36 53910.79 50976.27 59745.34
Disbursements of Union territories 1025.97 1090.43 1237.23 1236.47
TOTAL - REVENUE DISBURSEMENTS 277732.29 295382.67 302582.31 328819.25
Example 7.7
Annual Financial Statement of the Government of India for the financial year 1997-98
Statement I – Consolidated Fund of India – Revenue Account – Disbursements, pages 4 and 5 (Rs. Crore)
Classification by Organization
188. Payments can also be divided into separate sections for each ministry, department or agency. These
organizations can then be held responsible for these items (e.g., Ministry of Agriculture, Ministry of
Health). Such a classification is tailored to the particular structure of the government. Within each
spending organization, the payments can be further classified by the type of payment or by
organizational unit. They may also be further classified by appropriation category.
189. An example showing classification of payments by organizations is shown below.

APPENDIX 1V
DETAILS OF RECURRENT EXPENDITURE FOR THE YEAR ENDED 31st DECEMBER 1997
ORIGINAL SUPPLEMENTARY APPROVED ACTUAL MORE THAN LESS THAN

ESTIMATE APPROVALS & ESTIMATE EXPENDITURE ESTIMATE ESTIMATE
VIREMENTS
CI$ CI$ CI$ CI$ CI$ CI$
HEAD 13. PORTFOLIO OF
FINANCE AND ECONOMIC
DEVELOPMENT
1. Personal Emoluments 1,602,125 67,467 1,669,592 1,621,062 - 48,530

2. Traveling & Subsistence 204,749 -3,900 200,849 191,590 - 9,259
3. Supplies & Materials 26,954 12,110 39,064 34,021 - 5,043
6, Utilities 1,122,029 1,082 1,123,111 998,437 - 124,674
7. Other Operating & Maintenance
Services 2,119,935 366,258 2,486,193 2,133,893 - 352,300
8. Grants, Contributions & Subsidies 5,006,450 994,485 6,000,935 5,633,459
- 367,476
10. Awards and Indemnities 75,000 - 75,000 64,720 - 10,280
11. Retiring Benefits – Non -
Statutory 1,275,009 23,500 1,298,509 1,252,720 - 45,789
14. Reference Materials & Other 1,144 -475 669 499 - 170
17. Repayments & Reserve 2,375,125 10,000 2,385,125 1,806,632 - 578,483
19. Loans 952,307 - 952,307 455,449 - 496,858
21. Insurance 2,854,094 -533,356 2,320,738 1,441,664 - 879,074
TOTAL HEAD 13 17,614,921 937,171 18,552,092 15,634,146 - 2,917,946
Example 7.8
Appendix IV, page 34 (CI$)

CHAPTER 8
CASH BASIS – EXTERNAL REPORTING
Introduction
190. This Chapter considers the types of financial reports commonly prepared by government financial
reporting entities using the cash basis of accounting. Government financial reporting entities are those
entities in respect of which it is reasonable to expect the existence of users dependent on financial
reports for information which will be useful to them for accountability and decision making purposes.
The term may refer to the whole of government, departments or ministries of government, or other
entities that are part of a government.
Reporting Model
191. The financial statement reporting model (refer to definition of reporting model in the Glossary)
frequently associated with the cash basis of accounting is a Statement of Receipts and Payments, also
referred to as a Cash Flow Statement, which reconciles opening and closing cash balances.
192. Accordingly, information disclosed in the financial statements under the cash basis indicates whether
the government has spent more or less cash than it collected during the reporting period.
193. The Statement shows the excess (or shortfall) of receipts over payments. If operating receipts and
payments are disclosed separately from borrowings and repayments this provides a useful measure of
whether a government has managed to meet current cash requirements from current cash receipts, and
whether its net cash balance has increased or decreased. For a more detailed discussion of the benefits
of the information presented under cash accounting refer to Chapter 4.
194. There is no prescribed format for a Statement of Receipts and Payments. Receipts and payments may
be shown as separate categories, or alternatively, certain types of receipts and payments such as
current and capital flows may be grouped together. Statements of Receipts and Payments may also be
prepared for each of the main operating accounts.
Notes to the Financial Statements and Statement of Accounting Policies

195. The Notes to the Financial Statements are regarded as an integral part of the financial statements.
They provide more detailed disclosure (e.g., disclosure of the amounts of specific taxation receipts
collected) than is possible or desirable on the face of the main statements.
196. The Notes to the Financial Statements include a Statement of Accounting Policies. It is fundamental
to the understanding and interpretation of governmental financial reports that those who use them are
aware of the accounting policies on which they are based. IAS 1, Presentation of Financial
Statements discusses the selection and disclosure of accounting policies.
Accounting policies are the specific principles, bases, conventions, rules and practices adopted by
an enterprise in preparing and presenting financial statements. ( paragraph 21)
197. IAS 21 requires disclosure of all significant accounting policies, which is normally made by way of a
Statement of Accounting Policies.
198. Under cash accounting, the principal accounting policies are the definition of the reporting entity, the
point of recognition for receipts and payments and the translation of amounts denominated in foreign
currency. Examples of accounting policies for the cash basis of accounting are included in
Appendix 2.
Additional Disclosures
199. Governments operating under the cash basis of accounting may collect additional information and
disclose it as memoranda items. Although not a product of a cash-based accounting system, such
information may be regarded as having sufficient value to warrant its collection. It would be reported
in addition to, rather than as part of, the financial statements.
Governmental Financial Reporting Chapter 8: Cash Basis – External Reporting 47

200. The additional statements or note disclosures could include:
• items recognized under accrual accounting
• resources (lists of physical assets and investments)
• borrowings;
• items normally disclosed under accrual accounting
• commitments
• contingencies (guarantees, indemnities and securities);
• other items
• unappropriated payments
• tax expenditures; and
• forecast information.
201. One benefit of disclosing asset information, even by way of supplementary schedules, is that once
information about assets is formally reported, the accuracy of asset information usually improves.
This allows better management of assets. Initial asset disclosures may be narrative only, with
valuations gradually being added over time.
202. Although borrowings are not recognized as liabilities under the cash basis, separate schedules of
borrowings are often prepared and published because of the importance of the government’s level of
debt for fiscal and monetary policy purposes. If borrowings are disclosed, it may also be appropriate
to disclose details of securities over assets. Non-cash loans may also be disclosed.
203. Where additional records of assets and liabilities are maintained by entities using the cash basis of
accounting, those entities will incur additional record keeping costs. These costs will be largely the
same as the costs normally borne by entities maintaining details of assets and liabilities as part of an
accrual accounting system. However, the prior collection of information on assets and borrowings
may be helpful if governments subsequently adopt accrual accounting, and would help reduce
implementation costs. Where such additional information is disclosed it should be both
comprehensive and reliable. Inaccurate or incomplete data presents as many risks to decision makers
as a complete lack of information. That is, it may be better to have a complete data set on a particular
class of assets than to have a partial set of information on all assets. Where information is not
complete, this should be clearly signalled to users.
204. Examples of contingencies are claims, pending or threatened litigation, guarantees of the indebtedness
of others and indemnities. A commitment is an entity’s responsibility for a future liability based on an
existing contractual agreement. Disclosure of contingencies and commitments shows an entity’s
possible exposure to loss and future liabilities.
205. Where extensive disclosures of assets, liabilities and other items that are inherent to accrual
accounting are made by entities using the cash basis of accounting, it may be more cost effective for
those entities to adopt accrual or modified accrual accounting and thereby reap the benefits of
recognizing these items within an integrated reporting system.
206. An example of additional asset and liability disclosure is shown below.
48 Chapter 8: Cash Basis – External Reporting Governmental Financial Reporting

NOTE 9 TO THE ACCOUNTS
STATEMENT OF CONTINGENT LIABILITIES
DETAILS OF CONTINGENT LIABILITY YEAR Currency APPROVED LIABILITY CI$ VALUE

ISSUED LIABILITY 31/12/97 31/12/97
PORT AUTHORITY
Guarantee of loan for developing property in the 1988 CI$ 1,500,000 1,084,139 1,084,139
Industrial Park Area
Guarantee of loan for land purchase 1.25 acres 1990 CI$ 300,000 227,116 227,116
CAYMAN ISLANDS MUSEUM

Guarantee of loan for renovation of the Old Law 1988 CI$ 300,000 12,695 12,695
Courts Building Example 8.1
WATER AUTHORITY
Accounts for the year
Guarantee of loan for the Water and Sewerage
ended 31st
1991 US$
December 1997
21,850,000 18,633,111 15,527,593
Notes
Project and Red Bay Spotts Extension to the Accounts, page 20 (CI$ and USD)
Example 8.1
Notes to the Accounts, page 21 (CI$)
207. As discussed in Chapter 2, compliance reporting may form part of the end of year governmental
financial reports, or the budget statements for the following year. Examples of compliance reporting
are shown in Chapter 2.
Tax Expenditures
208. Tax expenditures are estimates of the revenue foregone because of preferential provisions of the tax
structure. They are due to special exclusions, exemptions, deductions, credits, deferrals, and tax rates
that depart from a ‘baseline’. These exceptions are generally intended to achieve public policy
objectives by providing benefits to qualifying individuals or entities or by encouraging particular
activities. They also may be intended to improve tax equity or offset imperfections in other parts of
the tax structure. Tax expenditures are not revenue. They are not inflows of resources to the reporting
entity. (SFFAS No. 7, page 75)
209. The U.S. standards allow entities to disclose tax expenditure information that is relevant to the
performance of the entity’s programs but caution that this information should be appropriately
qualified and explained to help the reader assess the possible impact of the specific tax expenditures
on the success of related programs. In addition, with similar cautionary language, they permit the
disclosure of the cost to state and local governments and to citizens of federal laws which mandate
them to make expenditures or incur other types of costs, such as costs related to federal regulations
that establish the characteristics of a product or the methods of production (also referred to as directed
flows of resources or unfunded mandates). (SFFAS No. 7, page 28)
210. Tax expenditures represent tax receipts foregone by the government. Although tax expenditures result
in fewer taxes being collected than would otherwise be the case, no government currently recognizes
tax expenditures as a payment of cash. It is not accepted practice to recognize opportunity costs.
However, governments may wish to disclose estimates of tax expenditures as supplementary
information.
Forecast Information
211. Governments which collect taxation receipts usually prepare budget statements outlining forecasts of
budgeted receipts and payments. The forecast budget documents contain details of the appropriations
or legislative authorities for which approval is sought. This information may be presented in
conjunction with external financial reports, but it is more commonly published as a separate
document. The type of information presented in budget documents is determined by the nature of
appropriations. A full discussion of forecast information is outside the scope of this Study.
Governmental Financial Reporting Chapter 8: Cash Basis – External Reporting 49

50 Chapter 8: Cash Basis – External Reporting Governmental Financial Reporting
CHAPTER 9
MODIFICATIONS TO THE CASH BASIS
Introduction
212. This Chapter describes various modifications to the cash basis. Under the most common modification
to the cash basis the books are held open for a specified period after year end (e.g., around one
month). The intention behind this modification is to overcome some of the perceived timing
difficulties experienced under the cash basis whereby cash flows which relate to current year spending
may not occur until after the end of the year. As well as adopting modifications to the cash basis,
governments may also provide additional disclosure of certain items normally recognized under
accrual accounting. The disclosure of particular items will vary from jurisdiction to jurisdiction. In
addition to the items disclosed under the cash basis, there may be separate disclosure of the near-cash
balances represented by receivables and payables subsequently received or paid during the specified
period and various financial assets and liabilities. For example, the government of Malaysia uses a
specified period within its federal annual financial statements. It also prepares memorandum accounts
which disclose the following items:
• assets
• recoverable loans
• investments
• subscriptions to international organizations
• statutory deposits;
• liabilities
• public debt
• guarantees
• notes payable.
213. Although the adoption of modifications to the cash basis and additional disclosures often occur
together, this Chapter focuses on modifications to the cash basis — specifically the application of the
specified period. The benefits of disclosing additional information under the cash basis and issues
surrounding the reporting of additional disclosures are discussed in Chapter 8.
The Specified Period – Introduction

214. The specified period is usually established by government resolution and is applied to all government
entities using this method of accounting. It is generally around one month in length. Receipts and
payments which occur during the specified period but which originated in the previous reporting
period are recognized as receipts and payments of the previous fiscal year (PSC Study 2 Elements of
the Financial Statements of National Governments). Cash flows at the beginning of the reporting
period which have already been accounted for in the previous reporting period are deducted from the
current period’s cash flows.
215. The recognition and reporting of cash balances, cash receipts and cash payments in conjunction with a
specified period is virtually identical to the recognition and reporting of these items under the cash
basis. However, the use of a specified period does lead to some differences in these elements. These
are discussed below.
The Specified Period – Cash Balances

216. The modification to the cash basis refers only to the holding open of the books to recognize certain
amounts received and paid during the specified period. In addition to amounts normally recognized
under the cash basis, they include the net balance of amounts received and paid during the specified
period which originated in the previous reporting period.
Governmental Financial Reporting Chapter 9: Modifications to the Cash Basis 51

The Specified Period – Cash Receipts
217. In addition to the inflows generally recognized as receipts under the cash basis of accounting, amounts
received during the specified period which originated in the previous reporting period are recognized
as receipts of the previous reporting period. The recognition criteria for receipts in relation to the
specified period are discussed below.
The Specified Period – Cash Payments

218. In addition to the outflows generally recognized as payments under the cash basis of accounting,
payments made during the specified period which originated in the previous reporting period are
recognized as payments of the previous reporting period. This extension of the reporting period
applies to all categories of payments.
The Specified Period – Measurement Focus

219. The measurement focus under this method of accounting is on current financial resources and changes
in those resources.
The Specified Period – Length

220. The exact length of the specified period may vary between governments. In addition, individual
governments using a specified period may have used different specified periods over time or for
different types of flows. Such changes make it difficult to compare results between jurisdictions or for
one jurisdiction over a period of time and in some cases may provide an opportunity to influence
reported results. Best practice would suggest that:
• the specified period be consistently applied from year to year;
• the specified period be the same for both receipts and payments;
• to the extent possible, the same criteria for recognition of receipts and payments during the
specified period be applied to all receipts and payments;
• around one month is an appropriate specified period because accounts for goods purchased on
credit are commonly settled within this period. A specified period which is any longer may
make it difficult to produce timely financial statements; and
• the accounting policies used be fully disclosed.
221. The accounting policies illustrated below provide details of the modifications to the cash basis of
accounting used by the Province of Ontario. This Province has since changed its basis of accounting.
Reporting entity
The financial statements, prepared using the concept of a Consolidated Revenue Fund, are designed to provide an
accounting of the financial resources appropriated by the Ontario Legislature. The accounting policies and
practices followed by the Province are designed to report the financial transactions of Government ministries as
Consolidated Revenue Fund cash inflows and outflows. Activities of agencies of Government of Ontario are
reported only to the extent to which their operations have been financed from, or have contributed to, the
Consolidated Revenue Fund.
Basis of accounting
The cash basis of accounting used by the Province is modified to allow for an additional thirty days to pay for
goods and services received during the fiscal year just ended and for certain non-cash transactions. Cash inflows,
however, are closed at March 31 for cash received.
Capital costs are charged to expenditure when paid.
Example 9.1
Public Accounts of Ontario, 1992 –93
Notes to the Financial Statements, page 5
52 Chapter 9: Modifications to the Cash Basis Governmental Financial Reporting

The Specified Period – Recognition Criteria for Receipts
222. The main recognition criterion for receipts during the specified period is that the receipt must have
originated in the preceding period. Across jurisdictions, there is no uniformity in the application of
this phrase. Some governments consider that all receipts received during the specified period have
originated in the preceding period. Other governments recognize only some of these receipts. The
examples given below illustrate the application of the specified period to receipts. In any event, it is
desirable that the criteria used by a government be consistently applied from year to year and be
disclosed in the Statement of Accounting Policies.
223. Although preparers would need to exercise their own judgment, the following types of receipts
received during the specified period would generally be recognized as a receipt of the prior reporting
period:
• taxation receipts where the taxation was imposed on a transaction which took place or where the
taxation was due to be paid in the preceding reporting period;
• receipts from the sale of goods and services where the invoice had been issued prior to the end of
the preceding reporting period;
• grants, contributions and donations which were due to be received prior to the end of the
preceding reporting period;
• interest receipts where the interest was earned on balances held in the preceding reporting period;
• proceeds from sales of non-current assets where the transaction has been completed (contract
signed and delivery completed) and payment was due prior to the end of the preceding reporting
period;
• loans made by a government which are due to be repaid at balance date but which are repaid
during the specified period;
• borrowings where the loan agreement had been completed (signed) prior to the end of the
preceding reporting period; and
• custodial receipts which were due prior to the end of the preceding reporting period.
224. In order to ensure that cash receipts are accounted for once only, cash receipts in the current period
which are recorded as receipts of the preceding accounting period are not also recognized as receipts
of the current period.
The Specified Period – Recognition Criteria for Payments

225. The consistent application and disclosure of accounting policies is also relevant to payments made
during the specified period. The specified period varies between jurisdictions, but a specified period
of one month is fairly common. The criteria used to determine whether payments made during the
specified period are recognized in the preceding period also vary between jurisdictions.
226. The overriding criterion may be that an amount must have been appropriated in the preceding
financial year in order to be recognized as a payment of that year. The following examples illustrate
the application of the specified period to payments. Payments made in the specified period under the
following conditions would be treated as payments of the prior reporting period:
• taxation refunds made during the specified period where the refund had been approved prior to
the end of the preceding reporting period;
• the purchase of goods or services where both the invoice and the goods or services had been
received prior to the end of the preceding reporting period;
• government transfers (e.g., for welfare payments) where the payment related to the preceding
reporting period;
• other grants, contributions and donations made where the item had been due for payment in the
preceding reporting period;
• the acquisition or construction of assets where the purchase contract had been signed or invoice
received and the assets or goods and services relating to construction had been received prior to
the end of the preceding reporting period;
• interest payments relating to the use of borrowed funds during the preceding reporting period;
• the repayment of any portion of debt due to be repaid at the end of the preceding reporting
period;
Governmental Financial Reporting Chapter 9: Modifications to the Cash Basis 53

• investments in other entities (both loans and capital injections) where the agreement to provide
the investment occurred during the preceding reporting period, and where the actual payment
was due in the preceding reporting period; and
• custodial payments where the amount paid had been due in the preceding reporting period.
Specified Period – Benefits and Limitations
227. The benefits of this modification to the cash basis of accounting is that it has a broader measurement
focus. Instead of being on cash balances, the focus is on current financial resources (cash plus near-
cash balances, with near cash being amounts recognized in the specified period). The recognition of
certain receipts and payments during the specified period means that there is some information on
receivables and payables. Although these are not recognized as assets and liabilities, the collection of
information on the amounts and types of near-cash equivalents will allow the reporting entity to better
control these amounts. One reason why a government may adopt this modification is that it allows
amounts appropriated for a particular financial year to be recognized as a payment of that year, despite
the fact that payment is delayed until the specified period. However, it does not recognize payments
which occur beyond the specified period.
54 Chapter 9: Modifications to the Cash Basis Governmental Financial Reporting

PART III – ACCRUAL BASIS
CHAPTER 10
ACCRUAL BASIS – DESCRIPTION
Introduction
228. This Part aims to assist those governments currently applying, or considering adopting, accrual
accounting. Because accrual accounting provides more comprehensive information than that provided
under cash accounting and is more complex than cash accounting, there are a wider range of
accounting issues that governments must address. These issues concern the recognition of assets and
liabilities and the associated revenues and expenses. Some of these issues are almost identical to the
issues faced in the private sector, for example the recognition of assets such as office equipment and
motor vehicles, and the accounting treatment required for borrowings. Other issues such as the point
of recognition for taxation revenues and welfare payments have not been addressed by the private
sector. Where possible this Study makes use of the extensive research and literature which has
already been developed within the private sector. The Study explores some of the areas where entities
using accrual accounting need to develop specific accounting policies. It is not prescriptive. The PSC
is also developing a core set of International Public Sector Accounting Standards (IPSASs) which set
out recommended practice in relation to accounting treatments and disclosures.
229. In the main this Study refers to the International Accounting Standards (IASs) issued by the
International Accounting Standards Committee (IASC) as an authoritative and appropriate source of
private sector accounting standards. The IASs provide a comprehensive and well developed
framework for resolution of such issues. The PSC has decided to use IASs as the starting point for
IPSASs in an effort to be consistent, where possible, with existing international guidance, as well as
avoiding the need to “reinvent the wheel” for the public sector. Although the public sector context is
different, the fundamental objectives of financial reporting are the same across both public and private
sectors. Using IASs as the basis of the PSC Standards will lead to a consistent approach to similar
issues within public and private sector standards. The IPSASs will be developed by reviewing
existing IASs, and adapting them as appropriate for the public sector. In relation to issues which are
specific to governments (such as the recognition of taxation revenues), or where the relative size of the
assets and liabilities concerned is much greater than in the private sector (such as infrastructure
assets), this Part of the Study attempts to apply the relevant principles from the IASC framework and
draws upon literature from international governments.
230. This Chapter discusses the elements recognized under the accrual basis of accounting. Financial
reports portray the effects of transactions and other events by grouping them into broad classes
according to their economic characteristics. These broad classes are termed elements. The accrual
basis recognizes transactions and events when they occur rather than when cash is paid or received.
The elements recognized under the accrual basis of accounting are assets, liabilities, net assets/equity,
revenues, and expenses. Although the focus of accrual accounting is on all assets, not just cash,
accrual accounting records contain complete information on cash flows and a Statement of Cash
Flows is an integral part of accrual financial statements.
231. The accrual basis provides users with information about such matters as the resources controlled by
the entity, the cost of its operations (or the cost of providing services) and other information useful in
assessing financial position and changes in it, and in assessing whether the reporting entity is
operating economically and efficiently (PSC Study 1 Financial Reporting by National Governments,
paragraph .089). The measurement focus under accrual accounting is on economic resources and
changes therein (PSC Study 2 Elements of the Financial Statements of National Governments,
paragraph 044). Two main measurement bases are used under accrual accounting — historical cost
and current cost. The interpretation of information prepared under accrual accounting will differ
according to which measurement base(s) has been used in the preparation of the financial statements.
Measurement bases are discussed in further detail in Chapter 18.
Governmental Financial Reporting Chapter 10: Accrual Basis – Description 55

Assets
232. The accrual basis requires recognition of all assets which meet the generally accepted definition of an
asset and the recognition criteria. Assets include cash, accounts receivable, accrued revenues,
physical assets and other long-term assets. PSC Study 5 Definition and Recognition of Assets
discusses the application of the asset definition in the IASC Framework for the Preparation and
Presentation of Financial Statements to assets held by governments.
233. Chapter 12 provides a detailed discussion of the definition of assets, the various types of assets which
may be recognized by governments, and some asset recognition issues.
Liabilities
234. The accrual basis recognizes liabilities relating to goods and services acquired up to the end of the
reporting period, including accrued salaries and wages, accrued vested vacation pay and other accrued
compensated absences. In addition, all borrowings and debt are recognized, as are transfer payments
due, even where no value is received directly in return. Therefore, the financial statements would
report accounts payable, accrued liabilities, transfer payments payable, debt and other borrowings.
235. The issues associated with accounting for and reporting liabilities in the public sector have been
addressed in PSC Study 6 Accounting for and Reporting Liabilities, and are discussed further in
Chapter 13.
Net Assets/Equity
236. Under the accrual basis of accounting, the financial statements will include a Statement of Financial
Position which discloses information about assets and liabilities. Where assets and liabilities are not
equal, a residual figure for net assets/equity will be reported. Where this figure is positive it can be
interpreted as the net resources that may be applied for the provision of goods and services in the
future, and therefore the community’s investment in the reporting entity. Where the figure is negative
it may be viewed as the amount of future taxation or other revenues which are already committed to
paying off debt and other liabilities. Net assets/equity can comprise some or all of the following
components:
• contributed capital;
• accumulated surpluses and deficits; and
• reserves (for example revaluation reserve; foreign currency translation reserve).
237. Where any of those components is individually material, it is usually disclosed separately.
Revenues
238. Revenues reflect the amounts due or earned during the year, whether collected or not. Revenues
which have been recognized but not received are accounted for as an asset: revenue receivable.
239. Revenues include:
• taxes;
• revenues from the sale of goods and services; and
• net gains on the sale of assets.
240. By comparison with the cash basis of accounting revenues do not include financing inflows, or gross
proceeds from sales of assets. Nor do revenues include custodial flows where the government is
merely acting as an agent of another party or where the government is acting as trustee. Custodial or
agency receipts are discussed further in Chapter 14.
241. The definition of revenues and its application to revenues in the public sector have previously been
discussed in PSC Study 9 Definition and Recognition of Revenues, and are covered in Chapter 14 of
this Study.
56 Chapter 10: Accrual Basis – Description Governmental Financial Reporting

Expenses
242. Expenses are the costs incurred during the period related to the acquisition of goods and services,
whether or not payment has been made. They include amounts transferred or payable to eligible
beneficiaries consistent with government policies (transfer payments). Expenses may also include the
payment of grants, contributions and donations which are non-repayable. Expenses do not include
repayment of debt or contributed capital.
243. Expenses include the costs associated with:
• the purchase of goods and services;
• the depreciation of physical assets;
• the net loss on sale of assets;
• non-reciprocal government transfers; and
• non-repayable grants, contributions and donations.
244. In contrast with the cash basis of accounting expenses do not include payments associated with the
acquisition or construction of physical assets, the repayment of debt or investments in other entities
(both loans and capital injections). Nor do expenses include custodial flows where the government is
merely acting as an agent of another party or where the government is acting as trustee. Custodial or
agency flows are discussed further in Chapter 14.
245. The cost of physical assets is recognized as an asset at the time of purchase. This cost is then
allocated as depreciation over the life of the asset, with the exception of most land.
246. The definition of expenses and its application to expenses in the public sector have previously been
discussed in PSC Study 10 Definition and Recognition of Expenses/Expenditures, and are covered in
Chapter 15 of this Study.
Recognition Criteria
247. The IASC Framework for the Preparation and Presentation of Financial Statements describes the
process of recognizing financial elements, and establishes recognition criteria as follows:
Recognition is the process of incorporating in the balance sheet or income statement an item that
meets the definition of an element and satisfies the criteria for recognition set out in paragraph 83.
It involves the depiction of the item in words and by a monetary amount and the inclusion of that
amount in the balance sheet or income statement totals. Items that satisfy the recognition criteria
should be recognised in the balance sheet or income statement. The failure to recognise such items
is not rectified by disclosure of the accounting policies used, nor by notes or explanatory material.
An item that meets the definition of an element should be recognised if:
(a) it is probable that any future economic benefit associated with the item will flow to or from the
enterprise; and
(b) the item has a cost or value that can be measured with reliability. (paragraphs 82-83)
248. These criteria have also been adopted in a number of conceptual frameworks internationally.
“Probable” means that the chance of an event occurring is more likely than less likely and
“measurable” means reasonably estimable.
249. It is important to consider the interrelationship between elements. An item which meets the definition
and the criteria for recognition of a particular element will automatically result in both the recognition
of one element, and a change in another element. For example, the purchase of an asset may result in
the reduction of another asset, or the recognition of a revenue or liability.
Reporting Model
250. The financial statement reporting model frequently associated with accrual accounting is based on the
preparation of a Statement of Financial Position (also known as a Balance Sheet or Statement of
Assets and Liabilities), a Statement of Financial Performance (also known as a Statement of Revenues
and Expenses or an Income Statement), and a Statement of Cash Flows. The Statement of Cash Flows
Governmental Financial Reporting Chapter 10: Accrual Basis – Description 57

provides a summary of cash receipts and cash payments during the year, classified under various sub-
headings. Notes to these statements or supplementary schedules may also report summary
information about such matters as compliance with spending mandates and relevant performance
indicators.
58 Chapter 10: Accrual Basis – Description Governmental Financial Reporting

CHAPTER 11
ACCRUAL BASIS – BENEFITS AND LIMITATIONS
Introduction
251. This section examines the benefits which both internal and external users of governmental financial
reports may obtain when these reports are prepared using accrual accounting. In previous PSC
publications the term full accrual has been used. In this Study the term accrual is used to mean the
same as full accrual. It is acknowledged that internal users will also have access to more detailed
information and a wider range of information than that provided in governmental financial reports.
252. Governmental financial reports have both an accountability role and an informative role. In an accrual
context they provide information which enables users to:
• assess the performance, financial position and cash flows of the entity;
• assess the entity’s compliance with accrual budgets; and
• make decisions about providing resources to, or doing business with, the entity.
253. Accrual accounting provides users with information which:

• allows the government to demonstrate accountability for its use of all resources;
• allows the government to demonstrate accountability for its management of all assets and
liabilities recognized in the financial statements;
• shows how the government financed its activities and met its cash requirements;
• allows users to evaluate the government’s ongoing ability to finance its activities and to meet its
liabilities and commitments;
• shows the financial position of the government and changes in financial position; and
• is useful in evaluating the government’s performance in terms of its service costs, efficiency and
accomplishments.
Financial Position
254. Governments require information on the overall financial position and detailed information on the
current stock of assets and liabilities to:
• make decisions about the feasibility of the services they wish to provide;
• demonstrate accountability to the public for their management of assets and liabilities;
• plan for future funding requirements of asset maintenance and replacement;
• plan for the repayment of, or satisfaction of, existing liabilities; and
• manage their cash position and financing requirements.
255. Governments need to be able to assess both the impact of past decisions on the current financial
position, and the impact of current decisions on the future financial position. This information is only
available when details of all assets and liabilities are recognized.
256. Managers of government organizations are often entrusted with the management of significant assets
and liabilities. Managers therefore need to determine the most efficient way of using the assets,
controlling the liabilities, and reporting on their stewardship.
257. Accrual accounting requires organizations to maintain complete records of assets and liabilities. The
discipline of collecting this information can be as useful as the final figures. In the absence of accrual
accounting many organizations do not have complete asset registers, or complete details of liabilities.
For example, when governments first start to compile asset registers there may be insufficient
information to determine ownership of some assets. Complete information on assets and liabilities,
including that relating to ownership and control, is a precursor to proper management of assets and
liabilities.
Governmental Financial Reporting Chapter 11: Accrual Basis – Benefits and Limitations 59
Assets
258. Information on assets is required for three main reasons:
• to provide for the efficient management of assets;
• to help managers to deliver a better service; and
• to save money both through the efficient use of assets and through the disposal of surplus assets.
259. The management of public assets requires sufficient records to identify the existence of assets and the
costs of holding and operating these assets. The recognition of assets in a Statement of Financial
Position requires that governments undergo a rigorous process of identifying all assets, verifying
ownership and placing a value on assets. While the adoption of accrual accounting is not a necessary
prerequisite for this to occur, it is often the driving factor. Financial reporting deadlines require that
this process be completed within a given timeframe and the review of this information by an external
auditor provides assurance as to its reliability.
260. Better information regarding assets leads to better decisions on maintenance, disposal of surplus assets
and replacement of decayed or obsolete assets. These decisions are particularly important in relation
to major physical assets such as infrastructure assets, the replacement of which could strain the
financial capacity of a government.
Current Assets
261. Significant funds may be tied up in current, or short-term, assets such as receivables and inventories.
The net amount invested in current assets and current liabilities may also be referred to as working
capital. Funds tied up in working capital are not available for other uses such as increasing levels of
activity in a program or for debt reduction. When information on the composition and level of
working capital is available, managers are able to manage working capital more efficiently.
Physical Assets
262. Accrual accounting and the compilation of information within an asset register allow the identification
of the ongoing costs, such as depreciation and maintenance, of owning and operating assets.
Information on these costs is needed to measure the total cost of goods and services produced. As
discussed later in this Chapter, both governments as a whole and individual managers need to know
the total cost of goods and services in order to determine which goods and services to provide, and the
most efficient way of providing those goods and services. Both summarized and detailed asset
information is useful. Total asset figures show how much government funding is tied up in asset
holdings. This allows the government to make informed decisions when considering capital
investment acquisitions or disposals. Detailed asset information is more likely to be of use to those
Ministers or managers with responsibilities for particular government departments or agencies. The
asset register is the asset database which provides the basis for the figures in the financial statements.
It includes information on asset purchase prices, asset condition, expected lives. It may also include
information on current replacement cost.
263. Records of maintenance costs allow managers to budget for these costs and to determine the best time
to replace assets. Information on deferred maintenance is also useful as it will consume future
resources and may affect the reliability of an asset. Detailed information on deferred maintenance is
generally collated and used by managers who have responsibility for particular assets. It is not
normally disclosed in the external financial statements unless the amount of deferred maintenance is
considered material for the users of the financial statements. Appropriate selection and application of
depreciation methods and regular reviews for indications of impairment ensure that the information in
the financial statements is sufficient for external users.
264. Information on loss or damage through theft, accident or natural disaster is more easily identified
under accrual accounting and is essential for management of these risks. Once organizations have
access to information on such losses, they are then able to manage these risks, either through external
insurance or self insurance.
60 Chapter 11: Accrual Basis – Benefits and Limitations Governmental Financial Reporting
265. By recognizing the decline in asset values through use and obsolescence, managers are encouraged to
consider the costs of holding and using fixed assets. Managers are able to manage those costs, and to
make informed decisions such as lease or buy decisions.
266. Citizens also rely on governments to manage natural resources and Government Business Enterprises
(GBEs) and to make decisions regarding their retention or disposal. Financial reporting of assets is
required to assist users to understand the current and possible future effects of such transactions. For
example, the disposal of a GBE for cash consideration (at more than book value) would increase the
current cash resources of the government. However, it would also reduce possible future cash flows
from dividends. Information on the level of assets and changes in assets provides information on
whether the resources necessary to enable continuity of services have grown, declined or have been
maintained.
Liabilities
267. The main benefit of information on all liabilities is that it forces governments to acknowledge and plan
for the payment of liabilities which may have accumulated over time, not just borrowings.
Historically, governments have tended to focus on their outstanding debt as a primary measure of the
government’s liabilities or indebtedness, particularly in formulating or assessing economic policy.
Liabilities can also arise as a result of the acquisition of assets or services. All liabilities, regardless of
their nature, must be paid for by the government at some point in the future. Liabilities can be
substantial, and just as real as market borrowing. Information that reports the extent of the financial
obligations and exposure to potential liabilities is useful because it bears directly on future revenue
requirements and on a government’s ability to pay its obligations and finance its operations.
Liabilities other than borrowings include accounts payable, accrued expenses and other long-term
liabilities such as pension liabilities.
268. Reporting on a government’s total liabilities at reporting date is necessary to ensure complete
reporting of transactions and events, and to understand and assess demands on resources. When used
with other available financial data, adequate information about the nature and terms of liabilities
facilitates assessments of such matters as debt management and exposure to foreign exchange
liabilities.
269. Once liabilities are recorded and reported, it is possible to allocate responsibility for their
management. If liabilities are not reported, they are less likely to be taken into account when making
decisions, and governments cannot exercise proper stewardship. Without full and complete
information about their liabilities, contingencies and commitments, governments and other users of
government financial reports cannot make realistic assessments about the government’s financial
condition. The risk of making poor decisions is much greater if legislators, government managers, and
their advisers have incomplete or fragmented information that fails to show all that a government
owes.
270. Reporting liabilities is important for both accountability and decision making. In addition to the cost
of future services, governments have to meet past debts as they come due. Governments must be able
to estimate realistically whether they can continue to afford the quality and quantity of services they
deliver, and whether they can afford new programs and services. Governments, as well as analysts
and other users of government financial reports, cannot make sound decisions on those matters
without an understanding of the full nature and extent of all the government’s liabilities.
271. Information on potential liabilities is also of interest to external users. Information on contingent
liabilities helps users to understand the government’s exposure to risk. Information about a
government’s commitments gives an appreciation of the extent to which the government’s resources
are already committed to meet certain obligations in the future. Information about contingencies and
commitments also allows management to monitor these items.
Net Assets/Equity
272. Financial statements prepared under accrual accounting show the reporting entity’s net assets/equity
(assets less liabilities). Clear information about net assets/equity helps the government to manage debt
levels, and to monitor the level of debt in relation to other liabilities and asset holdings.
273. Information on net assets/equity enables governments to make better decisions regarding the extent of
government activity and the financing of that activity. Current activities may be financed from current
revenues. Alternatively to the extent that certain assets may be sold, activities may be financed by a
reduction in net assets/equity. Net assets/equity may be reduced by:
• the consumption of existing assets;
• asset sales if sale proceeds are then used to finance current expenditure;
• increased borrowing; and
• the incurrence of other additional liabilities (e.g., unfunded superannuation/pension obligations).
274. Most assets (e.g., schools, hospitals and roads) held by governments are held for the purpose of
delivering services to the community and are not immediately available for sale. However,
governments do make choices about the level of such services (and by implication the assets that are
required), the location of such assets, and in some cases the ownership arrangements for these assets.
For example, governments may enter into private finance arrangements whereby a private sector entity
takes over existing assets or constructs new assets and has a service contract with the government.
Where current activities are funded out of net assets/equity, this will affect a government’s ability to
meet its liabilities and commitments in the future.
275. Accrual accounting highlights the impact of financing decisions on net assets/equity and may lead
governments to take a longer term view when making financing decisions. Decisions which have
long-term financial implications can be evaluated in terms of both their current and future impacts.
For example, the longer term financial impact on net assets/equity of changing levels of, or
entitlements to, government benefits can be evaluated.
276. Information on net assets/equity also means that governments may be held accountable for the
financial impact of their decisions on both current and future net assets/equity.
277. Information on levels of net assets/equity in various government agencies may be used to introduce a
system of capital charging, whereby government agencies are required to pay a sum to the
Government for their use of capital, thereby making the agencies more aware of the costs associated
with tying up scarce resources in assets. Various arrangements exist in different countries. New
Zealand has a system of capital charging whereby central government departments are charged around
10% (reviewed annually) on the balance of net assets each year. In the Swedish Central Government,
a system whereby interest is charged on both the acquisition of fixed assets (through internal loans in
the National Debt Office) and for current assets or temporary cash deficits (through interest bearing
accounts with the National Debt Office) has been in use for five years. The United Kingdom plans to
introduce capital charging to government departments and believes that this will “focus attention
throughout the financial planning cycle on the cost of holding assets as well as on new capital
spending” (Better Accounting for Taxpayer’s Money – the Governments Proposals, July 1995,
paragraph 1.21). All these systems are designed to make agencies aware of the fact that funds
provided to finance assets have a cost and to provide an incentive for agencies to minimize the amount
of capital funding they require. Capital charges ensure that proposals for new spending are considered
in light of the existing asset base and whether the purchase can be funded from that base.
Net Assets/Equity in a Government Accounting Context

278. Net assets/equity is the term given to the balance of assets less liabilities. The assets and liabilities
recognized in the financial statements are restricted to those elements that meet the definitions and
satisfy the associated recognition criteria. For government reporting entities there may be significant
assets and liabilities that do not satisfy the recognition criteria and are therefore not recognized in the
Statement of Financial Position (e.g., the power to tax and the present value of future payments under
welfare schemes).
279. Accordingly, it can be argued that the figure for net assets/equity in governmental accrual-based
financial statements is not a complete measure of expected future cash flows. Although this may be
the case, it is nonetheless a highly significant indicator of government financial condition. Moreover,
by supplementing the accounting measure of net assets/equity by disclosures on the (cash) effects of
future transactions expected under current or proposed policy settings, it is possible to enhance the
decision-usefulness of the figure for reported net assets/equity.
280. The various statements used to show movements in net assets/equity are discussed in Chapter 16.
Financial Performance
281. Information on revenues and expenses is important in assisting governments and other users to assess
the financial condition and performance of governments. Information on revenues is essential for
decision making at the whole of government level (e.g., in assessing the impact of taxation and other
revenues on the government’s fiscal position and in assessing the need for borrowing in the long-
term). Information about expenses is important for sound decision making about the financing of
future services and resource allocation. Accrual accounting allows for the measurement of the total
cost of providing services on an aggregated basis, and also allows for more accurate cost measurement
of specific programs and activities. It includes all revenue and expense flows, both cash and non-cash.
Comparing revenues with expenses helps users to assess inter-period net assets/equity (i.e., whether
current revenues are sufficient to cover the costs of programs and services provided in the current
period).
282. In addition to providing information to external users, governments need information about expenses
in order to assess their revenue requirements, the sustainability of their programs and their flexibility.
At a more detailed level, governments need information on the cost of each good or service provided,
both to decide whether to continue with that activity and also to allow for proper budgeting and
control of activities.
283. Governments are usually elected on a broad range of policy issues. At some point a government must
translate its general policies into specific decisions regarding the provision of goods and services
through activities and programs, the use of transfer payments or legislative measures. Ideally these
resource allocation decisions would be based on an assessment of the costs and benefits of each
proposal, and the relative importance of competing proposals. By providing improved financial
information to users, accrual accounting has the potential to alter resource allocation to, and within,
the public sector. This may occur directly or via voting behavior.
284. Although the wider social costs and benefits of proposals can be difficult to assess, the specific cost of
pursuing policy objectives through the provision of services by a particular government organization
can be identified. The costs include not only the cost of goods and services produced or purchased
and paid for during the accounting period but also the cost of using long-lived assets and other non-
cash costs.
285. Governments need to know the total costs of their activities so that they can decide:
• which policy objectives to pursue;
• how best to meet these policy objectives;
• whether to fund the production of services within government sub-entities, or whether to
purchase goods and services directly from non-government organizations; and
• whether user fees cover the costs associated with a service.
286. Governments at various levels make decisions regarding both the type and level of government
services, and the best way of providing those services. They therefore need information about the cost
of providing these services in order to make rational decisions about the viability and desirability of
specific programs and activities, and to assess the performance of the government sub-entities
responsible for the provision of these services through activities and programs.
287. Some jurisdictions have provided incentives for greater efficiency within the public sector by creating
competition between private and public sector suppliers. Effectively, the government is facing a make
or buy decision. Comparisons between public sector and private sector suppliers can only take place
when information on the full cost of both options is available.
288. Once the government has determined the activities and programs it would like its sub-entities to
pursue, it then needs financial information to ensure that the sub-entities are delivering the specified
services, and delivering them within agreed budgets. Accrual accounting can be used to provide this
information. The same information, at a more detailed level, can also be used within sub-entities for
the management of activity and program costs.
289. Once costs are identified it is then possible to delegate the authority to manage those costs. An
accounting system can be established to produce both external financial reports and internal
management reports. The level of detail in internal management reports and the extent to which
authority to manage costs is delegated is determined by each reporting entity.
290. Accrual accounting allows an organization to record the total costs, including depreciation of physical
assets, of carrying out specific activities. The recognition of all costs, regardless of whether a cash
transaction has taken place, generally provides more accurate measures of operating costs than other
accounting bases. By accruing accounts receivable and accounts payable it spreads the impact of the
actual timing of cash flows on reported results. By recognizing depreciation as an expense it removes
the large cash flow impact of asset purchases by allowing the cost of the asset to be recognized each
year that it is in use. It is the only basis of accounting which recognizes as an expense the cost of
allowing the current stock or value of physical assets to decline.
291. Accrual accounting also allows an organization to recognize all employee-related costs, even if the
cash flows associated with these costs do not arise until a future accounting period. For example,
decisions to offer government employees future pension benefits instead of current salary or other
current benefits may shift the cash flows to future years. Accrual accounting means that the actual
cost will be recognized in the year in which it occurs. The clear identification and reporting of the
actual costs of remunerating employees allows managers to compare the cost of various types of
employment or remuneration options.
292. Managers within sub-entities need financial information to determine the most efficient way of
producing their outputs and of managing the resources over which they have been delegated authority.
This may involve choices regarding the location of activities; in-house provision or the use of external
contractors; renting or leasing buildings and equipment. Managers also need to monitor actual costs
against budgeted costs and actual cash flows against budgeted cash flows. They need regular financial
reports for internal monitoring of actual spending against budget, and reporting to governments and
the electorate.
293. Government sub-entities supplying goods and services to other parties also need accurate and
complete cost information for pricing purposes. Accrual accounting helps to identify the effective
government subsidy where goods and services are supplied at less than cost. Explicit identification of
such subsidies allows governments to examine the level and existence of such subsidies in the light of
competing spending proposals.
Cash Flows
294. Reporting of cash flows is an important and integral part of accrual accounting. A Statement of Cash
Flows is one of the main external statements prepared under this basis. Accrual accounting does not
diminish the information available under the cash basis of accounting and may actually lead to better
information on cash flows, and therefore to better cash management. Because accrual accounting
accounts for all revenues and expenses, whether or not they involve cash flows in the current reporting
period, more complete and systematic information on future cash flows is recorded. For example,
under accrual accounting detailed records of accounts receivable, accounts payable, long term
liabilities and the current state of physical assets are recorded. This additional information may allow
more accurate cash budgets to be prepared. Under accrual accounting managers are usually
responsible for the management of not only revenues and expenses but also cash flows.
295. A United Kingdom paper commented on the use of accrual accounting (which it refers to as resource
accounting) in managing cash flows as follows:
Resource accounting will require a more systematic approach to recording debtors and creditors,
which will allow departments to plan and control cash flow more effectively than under a purely
cash-based accounting system. At present, cash flow is mostly controlled at the end of the payment
process; more comprehensive information on debtors and creditors should help departments to
forecast cash flow difficulties, and to take remedial action well in advance (for example by
rescheduling purchases). (Better Accounting for the Taxpayer’s Money: Resource Accounting and
Budgeting in Government, A Consultation Paper, July 1994, paragraph 2.20)
Benefits of Accrual Accounting in Practice
296. Although relatively few governments currently use accrual accounting, there is a growing trend
towards accrual accounting as part of wider financial management reforms (Scott, 1996). At present,
governments using accrual accounting include:
• Australia (state, federal and local government);
• Canada (target date for reporting on a full accrual basis at whole of government level is fiscal
year 2001-2002);
• Finland (government agencies and whole of government);
• France (local government);
• Germany (some government organizations);
• Iceland (agencies and whole of government);
• Ireland (pilot project for selected government departments);
• Italy (local government);
• Malaysia (local government);
• Netherlands (agencies and local government);
• New Zealand (national and local government);
• Sweden (central government agencies and local government);
• Switzerland (local government);
• Tanzania (local government);
• United Kingdom (all local authorities, executive agencies and health service trusts); and
• United States (federal government).
297. The federal government of Malaysia is considering introducing the accrual basis. In the Netherlands
some Ministries currently using cash accounting are considering the introduction of accrual
accounting. The central government in Tanzania, which currently uses cash accounting, intends to
move to accrual accounting. The benefits anticipated or actually experienced by some of the countries
using or intending to use accrual accounting are discussed below.
Benefits – New South Wales, Australia

298. New South Wales was the first jurisdiction in Australia to publish accrual-based financial reports on
both the State Public Sector and the Budget Sector. A number of other jurisdictions have since
followed this lead. In common with New Zealand, New South Wales has introduced legislation –– the
General Government Debt Elimination Act 1996 — which sets out fiscal principles and targets. These
principles and targets are “directed at achieving a strong, sustainable budget position, a stable tax
regime, a gradual reduction of debt and service delivery costs as well as the enhancement of the net
worth of the General Government Sector”. (Public Accounts of the NSW Budget Sector 1995–96)
299. The principles and targets include references to operating surpluses, levels of net debt and net
assets/equity, the funding of superannuation/pension liabilities, the maintenance of physical assets,
constraints on the relative growth of costs, the management of financial risks and the level of taxes.
The use of accrual accounting has provided information on each of these targets.
300. The State of New South Wales reports on each of these fiscal targets in its State and Public Accounts.
Two examples of such reporting are given below.
Commonwealth Grants increased from $8,348 million in 1995–1996 to $8,480 million in 1996–97,
i.e. 1.6%. However, after adjusting for an increase in CPI of 1.4% and population growth,
Commonwealth Grants on a per capita basis decreased by 1.1%. This is in line with Fiscal
Principle No.5 – Net Cost of Services which is to keep growth in net cost of services and outlays
below the growth in inflation and population (i.e. zero growth in per capita terms). (Consolidated
Financial Statements of the NSW Public Sector 1996–97, page 9)
Net assets of the Budget Sector were $22,953 million at 30 June 1997, an increase of 20.2% ($3,858
million) on the level at 30 June 1996. This was due to an increase in total assets of $3,775 million
and a $83 million reduction in total liabilities. The increase in Budget Sector net assets is in
accordance with Fiscal Principle No. 2, which is to maintain or increase net worth (ie net assets) of
the General Government sector in real terms. (Consolidated Financial Statements of the NSW
Public Sector 1996–97, page 14)
Benefits – New Zealand
301. New Zealand has experienced the benefits of accrual accounting, both at the whole of government
level in terms of financial management and at a sub-entity level in terms of better management
information and better performance.
302. New Zealand was facing an economic crisis prior to its financial management reforms.
In the late 1980s New Zealand faced a deteriorating fiscal situation. The government was concerned
that large deficits would lead to a sharp rise in public debt, and damage prospects for growth and
incomes. If interest rates rose and exchange rates fell, there could have been concerns about New
Zealand’s ability to service its overseas debt. The root cause of the persistent fiscal problem was the
steady rise in expenditure as a percentage of Gross Domestic Product. The government was advised
that the solution for improved economic performance was to contain government spending and
reduce pressures on the tax system. (The Treasury 1990)
303. Concerns about its fiscal position and economic performance led the New Zealand Government to
introduce a series of reforms, including accrual accounting. The requirement for government
departments and the whole of government to use accrual accounting was included in the Public
Finance Act 1989. A further reform occurred in 1994 when the Fiscal Responsibility Act established
requirements for the government to report on its forecast fiscal position using generally accepted
accounting practice (GAAP) including disclosure of expenses, revenues, the surplus (deficit), debt,
and net worth. The government is also required to set targets for its fiscal objectives. The outcome of
these reforms is described below.
A series of reforms, including accrual accounting, were instituted in the central government sector
in 1989. The results have been startling. In each of the years 1992-1994, New Zealand’s system of
government was rated as being the most effective performer among the 22 OECD countries (World
Competitiveness Report). On an accrual basis, New Zealand government expenditures over the
period 1990 to 1995 remained broadly stable in nominal terms, implying a sharp reduction in
expenditure as a percentage of GDP. (Cangiano 1996, page 24)
304. Over the period 1985-94, the fiscal balance shifted from a deficit of about 9% of GDP to a surplus of
3%, while gross public debt declined substantially (Cangiano 1996).
305. Accrual accounting also held advantages for Ministers making resource allocation decisions.
The new focus on outputs brought about by the (Public Finance) Act became especially apparent.
The new focus on outputs brought about by the Act meant ministers had genuinely meaningful
information about the services produced by their departments and were in a position to make
informed trade-offs between competing priorities. (Richardson 1995, page 104)
306. The benefits of accrual accounting were not confined to the upper levels of government. A study of
senior public service managers rated accrual accounting as “the undisputed success story” and ranked
it as more successful than all other reforms (Stace and Norman 1995).
307. Participants in the Stace and Norman study generally agreed that:
• (there is) “better financial reporting in my organization” and “at the government level”.
• “The clear separation of capital from operational expenditure allows more rational decision
making in the financial field.”
• The more open financial reporting allows the public to better “assess the financial performance
and position of government.”
• (there is) “greater financial discipline and checks on unnecessary activity”(as a result of user
pays). (Stace and Norman 1995, page 6)
308. As mentioned earlier in this Chapter, the clear identification of costs means that authority to manage
those costs may be delegated. The benefits of this delegation have also been seen in New Zealand.
Cangiano (1996) reports that since the introduction of the financial management reforms in New
Zealand, there has been a widespread tendency to underspend budgeted allocations. This is
attributable to an increased capacity on the part of departments and agencies to manage their own
budgets and resources independently.
Benefits – Switzerland
309. In Switzerland, accrual accounting is widely used at a cantonal level but not yet at the federal level. In
1978 the Conference of Cantonal Finance Ministers published a manual on the so-called “New
Accounting Model” (now referred to as “Harmonized Accounting Model”), recommending that the
cantons should introduce this system of double-entry accounting as soon as possible. Today, nearly
all the cantons and municipalities have introduced the accrual accounting model: only the
Confederation is still based on the principle of cash or modified cash accounting. This widespread use
of the model allows sensible financial comparisons not least in the sense of benchmarking and is the
starting point for new cost information systems.
310. The model consists of asset accounting and profit and loss accounting and is therefore largely modeled
on private sector accounting. The profit and loss account is subdivided into a current account and a
capital account which is a specialty of the public sector not commonly used in the private sector, The
capital account contains all expenses and receipts that are capital in character and which exceed SFr
100,000, and the corresponding receipts. Their balance, net investment, is transferred to the asset
account as capital appreciation on the closing of accounts and then, in the following year, written off
with the other assets according to standard rates. Expenses below SFr 100,000 are not transferred to
the asset account; they pass directly to the profit and loss account and are therefore entirely written off
in the same year. Whereas financial assets are free assets, administrative assets are operating assets.
Benefits – United Kingdom

311. The Government introduced accrual accounting (referred to as resource accounting) across
government during 1998. The first year for which resource accounts will be published will be 1999–
2000. Resource budgeting will be implemented in 2000 for the plans for 2001–2002 onwards. The
perceived benefits of resource accounting (as described in the White Paper on resource Budgeting and
Accounting in Government ) are as follows:
After consultation and further work, the Government has concluded that a fully resource based
system of public expenditure planning and control would achieve improved management and value
for money by the taxpayer by:
• making decision makers focus more on resources consumed and not just on cash spent;
• treating capital and current expenditure in a way which better reflects their different economic
significance; and
• encouraging a greater emphasis on outputs and the achievement of aims and objectives.
(Better Accounting for Taxpayer’s Money – the Governments Proposals, July 1995, paragraph 1.1)
Benefits – United States
312. The United States (U.S.) federal government prepares accrual consolidated financial statements that
have been subjected to an audit by the Comptroller General of the United States. The 1997
Consolidated Financial Statements of the United States Government were the first such set of
statements prepared. These statements were based on, although not in full compliance with, the
accounting standards created by the Federal Accounting Standards Advisory Board (FASAB). This
section outlines the background to FASAB accounting standards and the move towards accrual
accounting in the U.S..
313. During the late 1980s and into the 1990s, several audits by the General Accounting Office identified
sloppy record keeping, inaccurate financial reports, and a basic lack of internal control in many federal
agencies. This situation, compounded by financial management scandals, aroused the Congress to
deal with the poor state of federal financial management. The Chief Financial Officers Act of 1990
was the first of several pieces of legislation aimed at improving financial management and included a
requirement for audit of several pilot agencies. The success of these pilots led to an expansion of
these requirements in 1994 to require all major agencies of the federal government’s executive branch
to have agency-wide financial statement audits beginning with fiscal year 1996 and consolidated
federal financial statement audits for the executive branch of the United States Government beginning
with fiscal year 1997.
314. Agency management and congressional leaders have found that good financial information has
become critical to making informed decisions, especially as efforts to bring down the budget deficit
have increasingly constrained budgetary resources. This increased emphasis on good financial
information, in turn, led to a major effort to develop a new set of accounting standards. The FASAB
was created to consider and recommend accounting standards and principles for the Federal
Government to improve the usefulness of federal financial reports.
315. The resulting federal accounting standards are based on a set of objectives centered around providing
information on budget integrity, operating performance, stewardship, and systems and controls.
Previous standards based on accrual accounting standards for commercial enterprises were judged to
be inadequate. The current set of U.S. federal standards provide information about:
• budgetary resources made available, obligations incurred, and outlays; and a reconciliation of
budgetary obligations incurred to the net cost of operations;
• net cost of agency operations (total cost of operations less earned revenues) and appropriations
and taxes used to finance the net cost of operations;
• operating assets such as receivables, inventories, and property, plant, and equipment; and
operating liabilities which include pensions and other post-employment benefits earned by
governmental employees; and
• stewardship resources and obligations which include most heritage and military assets, certain
investments in the nation’s well-being such as investments in human capital (education and
training programs financed by the federal government for the benefit of the general public), and
social insurance obligations.
316. Under these standards, only the dollar values of operating assets and liabilities are reflected in the
Balance Sheet. Stewardship resources and obligations are required to be reported as part of the
financial statements, albeit as supplementary stewardship information. Thus, all accountabilities are
reported, but they are reported separately. The U.S. believes that the consumption of service potential
of stewardship resources such as military assets cannot be reliably measured through depreciation.
For this and other reasons it has elected to exclude these assets from the Balance Sheet and treat the
annual expenditures on them as a separate element of cost in the operating statement. Extensive
stewardship reporting is also required on physical quantities, conditions and costs of these resources.
The U.S. also believes that for various reasons, including the fact that social insurance benefits and the
related payroll taxes are subject to change, that the actuarial valuations of social insurance obligations
are not operating liabilities. Nevertheless, the future effects of the obligations involved in programs
for Social Security, Medicare, etc. need the type of ample disclosure that stewardship reporting can
provide. As a result, various measures of the economic sustainability of social insurance programs are
required to be reported.
317. The emphasis on accrual accounting has been spurred on by Congressional interest in measuring
performance results, which includes the cost of outputs and outcomes. As a result, the “bottom line”
of the operating statement is the agency’s net cost of operations and the components of it provide
information about the cost of the major programs and activities for which the agency is responsible.
To aid in this endeavor, the FASAB has also established cost accounting standards that require
agencies to measure the full costs of goods and services they provide. Such full costs will reflect all
related costs incurred by the government regardless of which agency actually makes the expenditures.
318. Even the U.S. budget, which is essentially cash based, has moved to the use of accrual accounting for
some programs, most notably being credit programs: direct loans and loan guarantees. The use of the
cash basis accelerated the budget impact when direct loans were made and it delayed the impact when
a guarantee was made. Because of this, more programs began using guarantees, which made it more
difficult to control the cost of credit programs. Accrual accounting has proven to be a better method
for planning and controlling the use of resources for these programs and is now being considered for
federal insurance programs.
319. U.S. federal government accrual accounting standards, which have been developed using “due
process” procedures similar to those used by the private sector standard setters, have the force of law
in the U.S..
Costs of Adopting and Operating Accrual Accounting Systems

320. The costs of introducing accrual accounting include the costs of:
• identifying and valuing existing assets;
• developing accounting policies;
• establishing accounting systems, including the purchase of computer systems and pilot testing
the system;
• development of skills and training for both the preparers and users of financial information.
321. Some costs, such as the cost of purchasing computer systems, are easily identified. Other costs such
as the development of accounting skills in personnel may be more difficult to identify. The actual
costs of adopting a particular basis will depend on the existing capacity of personnel in terms of
experience and training, and the reliability and completeness of existing systems. In some
jurisdictions the development of institutional capacity may be an essential and major step in the
implementation of accrual accounting. In other jurisdictions this may be much less important due to
existing skills and knowledge. The adoption costs will also be influenced by the nature of the
accounting system. If the accounting system is intended to collect information for both internal and
external reporting then it will need to be more extensive.
322. Adoption costs can be minimized by making use of accounting policies used by other, similar entities,
and by having a staged transition to full accrual reporting. The transition may be staged by
organization, or even by financial element within organizations. For example, financial assets could
be recognized initially with physical assets being recognized over subsequent accounting periods.
Difficult asset valuation issues may be deferred until other more easily valued assets have been
accounted for. Infrastructure assets are one group of assets which are generally more difficult to value
than other assets (there are also variations in the definition of infrastructure assets between
jurisdictions). One option for a country adopting accrual accounting is to delay valuation of this class
of assets so as to thereby allow time for implementation issues to be resolved, and also to spread the
cost of the change.
323. Despite the advantages of a staged transition, there are also drawbacks. It may be difficult for users to
make comparisons over time and to understand the extent of changes made during the period. When a
range of bases is used by various entities or when the classes of assets recognized change from one
year to the next it may be difficult to interpret the information provided during the transitional period.
Full disclosure of any changes made during the year is desirable and, where possible, comparative
information on the same basis should be available.
324. The benefits of accrual accounting depend, in part, upon how extensively accrual information is used
for budgeting and management purposes. For example, both the Commonwealth Government of
Australia and some of the state governments have recently moved to accrual-based budgeting and
believe that this generates additional benefits which are not realized when accrual accounting is used
solely for external reporting purposes.
325. A higher level of training and accounting skills are required to operate an accrual accounting system
than a cash-based system. This may result in increased personnel costs. However, New Zealand is
one jurisdiction which considers that the accrual accounting systems are not necessarily more
expensive when all the ancillary costs associated with its previous cash accounting system were
included. It points to the fact that commercial software may be able to be used by a number of
entities, that integrated recording systems streamline the processing of certain transactions and the
need for multiple reconciliations can be minimized and major savings can be achieved. In New
Zealand, although the need for more qualified people increased as a result of the reforms, the total
number of people associated with transaction processing actually decreased.
326. Each jurisdiction would need to analyze both the costs and benefits of adopting accrual accounting
and the capability of the jurisdiction to effectively implement such a change, before making a decision
to adopt this basis of accounting. Political commitment and the adequacy of existing systems are
factors which can affect the success of a change in accounting basis. Jurisdictions which have made
the change are often strongly in favor of accrual accounting.
Conclusion
327. The accrual basis provides users with financial information about such matters as the resources
controlled by the entity, the cost of its operations (cost of providing goods and services), enhanced
cash flow information, and other financial information useful in assessing financial position and
changes in financial position, and in assessing whether the reporting entity is operating economically
and efficiently.
328. Accrual accounting is essential if financial reporting is to provide information useful in evaluating the
government’s performance in terms of service costs, efficiency and accomplishments. It can assist
users by providing better information for decision making and accountability and by changing the way
managers think and operate.
CHAPTER 12
ACCRUAL BASIS – ASSETS
Introduction
329. PSC Study 5 Definition and Recognition of Assets considers issues associated with the definition and
recognition of assets in the public sector. This Chapter builds on the material in Study 5. It provides a
definition of assets, and outlines the recognition criteria for assets. It then describes various types of
public sector assets which meet the definition of an asset, discusses recognition issues associated with
these types of assets and provides examples of classification systems commonly used in the disclosure
of assets.
Definition of Assets
330. The accrual basis of accounting reports on the economic resources or service potential (assets) and
obligations (liabilities) of the entity, and changes therein. It requires the capitalization of outlays on
the acquisition of all capital assets and the depreciation of those assets as their service potential is
consumed or lost.
331. PSC Study 2 Elements of the Financial Statements of National Governments states:
... the fundamental characteristics of an asset are:
(i) the existence of service potential or future economic benefits;
(ii) the service potential or future economic benefits must arise from past transactions or events
(that is, ‘future’ assets cannot be recognized in the financial statements); and
(iii) the service potential or future economic benefits must be controlled by the reporting entity as at
the reporting date. (paragraph .065)
332. These characteristics flow from the definition of an asset in the IASC Framework for the Preparation
and Presentation of Financial Statements, which states:
An asset is a resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise. (paragraph 49)
333. The IASC definition refers only to future economic benefits. The PSC, in common with a number of
other public sector standard setters, considers that the definition of an asset needs to incorporate both
economic benefits and service potential. Service potential is the capacity of an asset, singly or in
combination with other assets, to contribute directly or indirectly to an entity’s objectives in the public
3
sector. Some jurisdictions use only the term “future economic benefits” to cover both concepts. This
is illustrated in the following excerpt from the Australian Statement of Concepts No. 4, Definition and
Recognition of the Elements of Financial Statements.
The expression ‘service potential’ has been omitted from the definition and recognition criteria. As
is noted in paragraph 18 of this Statement, the characteristic of future economic benefits is
synonymous with the notion of service potential, a term which is used more commonly in respect of
not-for-profit entities. The expression ‘future economic benefits’ has sometimes been used in
accounting texts to signify access to future cash inflows. However, the term is used in the Statement
with a broader meaning – namely, the capacity to provide goods and services in accordance with
the entity’s objectives, whether those objectives are the generation of net cash inflows or the
provision of goods and services of a particular volume and quality to beneficiaries. This amendment
has been made so as to simplify the expression used in the Statement, and does not change the
intended meaning of the definitions and recognition criteria. (paragraph A10(a), SAC 4)
3
Adapted from “Crown Accounting Policies for External Financial Reporting”, Crown Assets, paragraph 2a, page 27,
New Zealand Treasury, November 1991.
Governmental Financial Reporting Chapter 12: Accrual Basis – Assets 71

Recognition of Assets
334. Under the accrual basis of accounting, all assets that meet the definition and recognition criteria for an
asset are reported in the Statement of Financial Position.
335. Under the IASC Framework for the Preparation and Presentation of Financial Statements an asset
should be recognized when it is probable that the future economic benefits will flow to the enterprise
and the asset has a cost or value that can be measured reliably (paragraph 89).
336. The first half of the recognition criteria, that of probable future economic benefits or service potential,
may be relatively easy to apply. However, reliable measurement of public sector assets may initially
be more difficult. Cost records, valuation methods, accounting standards and/or market values may
not exist for some public sector assets. For physical assets which are acquired or constructed, relevant
costs may include the purchase price, import duties and transport, handling and other costs directly
attributable to the acquisition of the item. IAS 16, Property, Plant and Equipment contains a
discussion of this issue.
337. Where cost records are unavailable or the cost of acquisition (if any) no longer has any relevance to
users because of subsequent changes in values, an initial valuation of assets is often required. Where
an active market for an asset class exists (e.g., the market for certain financial instruments), then the
task of achieving sufficient reliability to justify recognition can follow established practice. Markets
for a specific service may often exist outside the particular jurisdiction; for example, certain utilities,
such as water or electricity supply, are privately operated and shares in the operating entities may be
traded elsewhere. The values attributed to these private sector operating entities can provide some
benchmark in considering the value of public sector operations in the same field. If there are no cost
records or market values available for assets, then estimates may be required. Quite frequently, when a
government first adopts accrual accounting, estimates will be required. Where assets are recognized
class by class, over a period of time, additional disclosure of unrecognized assets may be appropriate
(a discussion of disclosure of unrecognized assets is included in this Chapter).
338. Particular problems may be experienced with the reliable measurement some assets such as and
taxation receivable. These assets are all discussed separately in this Chapter. Where the lack of a
reliable measurement precludes the recognition of these assets, additional note disclosure may be
provided. Conflict between the qualitative characteristics of relevance and reliability is unavoidable,
and it is a matter of judgment to assess the balance which best meets the needs of users.
339. In addition to establishing recognition criteria, most entities also specify asset recognition thresholds.
Assets less than a certain monetary value are treated as an expense. Only assets above the recognition
threshold are recorded as assets in the financial statements. The recognition threshold varies from
entity to entity and depends upon the size of the entity — larger entities usually adopt a higher
recognition threshold. Refer also to the discussion of physical assets later in this Chapter.
Types of Assets
340. Types of assets generally held in the public sector may be classified using the following headings:
• Financial assets;
• Physical assets; and
• Intangible assets.
Each of these categories is discussed below.
Financial Assets
341. The definition of financial assets given in IAS 32, Financial Instruments: Disclosure and Presentation
is:
A financial asset is any asset that is:
(i) cash;
(ii) a contractual right to receive cash or another financial asset from another enterprise;
(iii) a contractual right to exchange financial instruments with another enterprise under
conditions that are potentially favourable; or
(iv) an equity instrument of another enterprise. (paragraph 5)
72 Chapter 12: Accrual Basis – Assets Governmental Financial Reporting

342. Financial assets can include some of, or all the following:
• cash and temporary investments;
• revenues receivable;
• loans and advances to other governments;
• other loans and advances;
• investments;
• derivatives; and
• prepayments.
343. A more detailed discussion of some of these categories of financial assets is given below. (Note that
under some modifications of the accrual basis the definition of financial assets is broader and includes
inventories held for sale in the ordinary course of operations and land held for resale.)
344. Financial assets have clear future benefits and their value may normally be measured with reliability.
They therefore meet the criteria for recognition. Under a historical cost accounting model, foreign
exchange assets are commonly carried at closing rates and short- and long-term loans are carried at
face value. Under hyperinflationary conditions, financial asset balances are converted to current
values. IAS 39, Financial Instruments: Recognition and Measurement provides guidance on the
measurement and disclosure of financial assets and liabilities.
Financial Assets – Cash

345. Cash in the form of money in the bank clearly has the three characteristics of an asset. IAS 7, Cash
Flow Statements (paragraph 6) contains the following definitions:
Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value.
The term “other monetary assets” may also be used to describe near-cash assets such as bullion
and cash in transit.
Financial Assets – Investments
346. Financial investments in the private sector are assets held for capital growth or investment income.
This concept also applies in the public sector to investments such as shares in companies. In the public
sector, investments may also include the government’s ownership interest in other government entities
such as ministries, departments, and agencies. Many of these investments are held because the
government has decided that ownership of activities is the best way of providing services to the
public. Investments in government entities generally meet the definition and recognition criteria to be
recognized as assets, although only to the extent that the investments are recoverable. Similarly,
additional capital injections to government-owned entities are only be recognized as an addition to an
asset to the extent that they are recoverable. Capital injections which are made for the purpose of
supporting an entity in financial distress are not likely to be recoverable and would therefore be
recorded in the Statement of Financial Performance as an expense.
347. Under accrual accounting, an initial value is required for each investment recorded in the accounting
system. For some investments such as investments in government departments or agencies, there will
be no acquisition price (or construction cost) or known market value for the investment as a whole. In
the absence of this information, the value of the investment may be determined by valuing all the
assets and liabilities represented by the underlying investment. The book value of an investment may
also be reassessed periodically for evidence of impairment or to support a revaluation of the
investment.
348. The definition of the reporting entity is also relevant when it comes to the recognition of investments
within financial statements. Where the concept of control determines the reporting entity, only those
investments which are controlled by the reporting entity would be included in its financial statements.
Where consolidated financial statements are prepared, investments in controlled entities are removed
from the financial statements and replaced with information on the individual assets and liabilities of
those entities.

349. Examples of accounting policies for financial investments and note disclosure of investments follow.
Investments
Marketable securities held for trading purposes
Marketable securities held for trading purposes are recorded at net current value.
Equity investments
Equity investments (other than those forming part of the reporting entity) are recorded at
the lower of cost and net current value.
Other investments and marketable securities held for investment purposes
Other investments, including marketable securities held for investment purposes, are
recorded at the lower of cost and net current value.
Investments held for hedging purposes are recorded on the same basis as the item being
hedged.
Example 12.1
Financial Statements of the Government of New Zealand
for the year ended 30 June 1999
Statement of Accounting Policies, pages 61 and 62
Investments
Investments are valued at cost or market valuation.
Example 12.2
Consolidated Financial Statements of the NSW Public Sector 1996–97
NSW Budget Sector, Notes to and forming part of the Financial Statements, page 66

NOTE 28. INVESTMENTS
1997 1996 1
1997 1996
$m $m $m $m
Total Asset Market Value

Value (where applicable)
GOLD HOLDINGS 1,757 3,825 1,757 n/a
DEPOSITS 5,657 4,098 3,784 n/a
GOVERNMENT SECURITIES 21,183 14,387 20,590 n/a
DEBENTURES 56 - 1 n/a
SHARES
Shares in associated entities 202 216 149 n/a
Shares in companies 336 855 95 n/a
Shares in international financial
institutions 714 1,551 71 n/a
Total shares 1,252 2,622 315 n/a
INTERNATIONAL MONETARY
FUND QUOTA 4,448 4,306 - n/a
ASSOCIATED ENTITIES 332 4,119 - n/a
OTHER INVESTMENTS 946 1,115 - n/a
Total investments 35,631 34,472 26,447 n/a
Investment maturity schedule
Not later than one year 13,600 13,160

Later than one year and not
later than 2 years 1,619 1,566
Later than 2 years and not
later than 5 years 2,699 2,611
Later than 5 years 17,713 17,135
Total investments by maturity 35,631 34,472
1
Trial and unaudited.
Example 12.3
Financial Statements of the Commonwealth Government of Australia
Notes to and forming part of the financial statements, page 61 (AUD)
Financial Assets – Loans Outstanding
350. Loans owing to a government meet the definition of an asset. Any interest owing on such loans would
meet the definition of revenue and would be a revenue receivable until received. Loans receivable
may require adjustment from the amount provided to the recipient where particular conditions of
interest concessions or terms for forgiveness reduce the value of the loan to below its original cost.
Accounts receivable or debtors are shown at book value less a provision for doubtful debts.

351. An example of an accounting policy for loans outstanding is shown below.
Note 1. I. Loans and Interest Receivable

Loans are accounted for as receivables after the funds have been disbursed. For loans obligated
after the effective date of the Credit Reform Act, October 1, 1991, the amount of the Federal loan
subsidy is computed. The loan subsidy includes estimated delinquencies and defaults net of
recoveries, the interest rate differential between the loans rates and Treasury borrowings,
offsetting fees, and other estimated cash flows associated with these loans. The value of loans
receivable is reduced by the present value of the expected subsidy costs. For loans obligated prior
to October 1, 1991, principal, interest and penalties receivable are presented net of an allowance
for estimated uncollectible amounts. The allowance is based on past experience, present market
conditions, an analysis of outstanding balances and other direct knowledge relating to specific
loans. Note 8 provides additional information concerning loans receivable.
Example 12.4
U.S. Department of the Interior
FY 1998 DOI Annual Accountability Report
Notes to Principal Financial Statements
as of September 30, 1998 and 1997, page 67
Financial Assets – Accounts Receivable
352. This category could include moneys owing on goods and services provided to third parties, and
moneys owing from a higher level of government or other parties where grants or appropriations have
been recognized as revenues but which have not yet been received.
353. Examples of the accounting policies and note disclosure of accounts receivable are given below.
Receivables and advances
Receivables and advances are recorded at the amounts expected to be ultimately collected
in cash.
Example 12.5
Statement of Accounting Policies, page 61
Note 1.F. Accounts Receivable
Accounts Receivable consist of amounts owed to Interior by other Federal agencies and the
public. Federal accounts receivable arise generally from the provision of goods and services to
other Federal agencies and, with the exception of occasional billing disputes, are considered to be
fully collectible. Receivables from the public generally arise either from the provision of goods
and services or from the levy of fines and penalties resulting from Interior’s regulatory
responsibilities. An allowance for doubtful accounts is established for reporting purposes based
on past experience in the collection of accounts receivable and analysis of outstanding balances.
Note 4 provides additional information concerning accounts receivable.
Example 12.6

Receivables
Receivables are recorded at the amounts

expected to be ultimately collected in cash
and are therefore net of provisions for
doubtful debts.
Example 12.7
NSW Budget Sector, Notes to and forming part of the Financial Statements, page 66
4. RECEIVABLES 96-97 95-96

$m $m
Current Receivables
Debtors
• Sale of Goods and Services 248 *
• Asset Sales 194 77
• Taxation 172 275
• Crown Land leases 16 16
Amounts owing by Non-Budget Sector Agencies
• Dividends 948 660

• Tax equivalents 113 323
• Corporatisation adjustments - 33
Advances Receivable 57 57
Other 113 443

1,861 1,884
Less Provision for Doubtful Debts (65) (220)
1,796 1,664
Example 12.8
NSW Budget Sector, Notes to and forming part of the Financial Statements, page 71 (AUD)
Financial Assets – Taxation Receivable and Accrued Taxation
354. When a government exercises its powers to levy taxes it recognizes the ensuing cash receipts as
taxation revenue. In addition, it may need to recognize additional amounts of taxation revenue relating
to taxation receivable and accrued taxation. Taxation receivable is usually recognized when
assessments have been issued by the taxation authority in relation to income earned during the current
financial year and the amounts are due to be received. Apart from any disputes over the amount of the
assessment, such amounts are reasonably certain to be received by the taxation authority. Where
taxation receivables are the subject of a dispute which will be settled by an administrative body or by
judicial decision, both the definition and recognition criteria need to be carefully applied. Such
receivables may meet the definition of an asset but may not meet the criteria for recognition. Taxation
receivable is recognized only when there is a reliable and binding assessment of the taxpayer’s
liability as at the end of the financial year. Taxation receivable would not be recognized in relation to
taxes where the taxpayer’s liability has not been assessed at the end of the financial year.

355. By contrast with taxation receivable, accrued taxes are amounts which are not yet due to be received
by the taxation authority, but where the individual or entity has earned income in the current financial
year on which taxes will be payable in the near future. Accrued taxes are calculated only in
circumstances in which the government has reliable information on both the levels of income earned
and the amounts of taxation historically collected in relation to such income. The recognition of
accrued taxes will depend upon both the reliability of information available and the nature of the
particular power to tax. The justification for recognizing accrued taxes is that the taxes are to be
received by the government in the future. Many items of taxation receivable will meet the definition
of an asset in that they represent future economic benefits arising from past events which are
controlled by the reporting entity. However, future tax receipts relating to income earned in future
periods rather than past periods would not generally meet the definition of an asset.
356. Uncertainties surrounding the estimation of taxes and the level of associated doubtful debts may mean
that some taxes are not recognized until returns are filed or the actual payment is received. This will
often be the starting point for jurisdictions which have adopted accrual accounting. As more
information is collected over a number of accounting periods, it may be possible to adopt recognition
points prior to receipt. All taxation receivables that meet the definition and recognition criteria are
recognized, and then, if necessary, a provision is made for any portion which is not expected to be
recovered. Although only the net amount may be reported in the financial statements, the accounting
records would contain details of both total taxes receivable and the provision for bad debts. The
recognition of taxes is discussed in Chapter 14.
357. An example of an accounting policy for, and note disclosure of, taxation receivable is shown below.
Note 1.E. Taxes Receivable

“Taxes receivable” primarily consist of uncollected tax assessments, penalties
and interest when tax payers have agreed the amounts are owed, or a court
has determined the assessments are owed. This Financial Report does not
include unpaid assessments when neither taxpayers nor a court has agreed
that the amounts are owed (compliance assessments) and the Government
does not expect further collections due to factors such as the taxpayer’s
death, bankruptcy or insolvency (write-offs). Taxes receivable are reported
net of an allowance for the estimated portion deemed to be uncollectible.
N
Note 4. Taxes Receivable

Taxes Receivable as of September 30
Gross taxes receivable ..........……………………….………… 82.9

Allowance for doubtful accounts ..……………………………… 55.8
Taxes receivable, net as of September 30, 1998 .…………… 27.1
Example 12.9
Notes to the Financial Statements, pages 64 and 67 (USD)
Financial Assets – Prepayments
358. At the end of the reporting period the entity may have paid for some services in advance of receiving
or using the services. For example, rent may be paid every two months — one month in arrears and
one month in advance. The month’s rental paid is advance is termed a prepayment. Prepayments are
often immaterial in relation to other assets and may be reported in the financial statements together
with other current assets such as receivables.
359. In the public sector some transfers for welfare benefits are paid in advance. Such prepayments may
meet the definition and recognition criteria for assets. Chapter 13 includes a discussion on a related
issue; i.e., the treatment of transfers payable and when they would meet the definition of liabilities.

Physical Assets
360. The term “physical assets” is used to classify assets other than financial or intangible assets. Physical
assets, excluding inventory, are usually referred to as non-current assets or long-term assets unless
they have been classified as “current” because of imminent disposal. Inventories are normally
classified as current physical assets.
361. Long-term physical assets include :
• property, plant and equipment;
• infrastructure assets;
• investments;
• heritage assets;
• defense or military assets; and
• natural resources.
362. Assets may belong in one or more of these categories. Any category of physical assets which
constitutes a significant proportion of total asset holdings may be separately disclosed.
363. The recognition of physical assets occurs only under the accrual basis. Where an asset has been
recognized in the Statement of Financial Position and is disposed of in the subsequent period, there
will usually be a difference between the proceeds of disposal (if any) and the carrying amount
included in financial report. Such residuals are recognized in the period of disposal.
364. Reporting entities may choose to recognize assets only in excess of a minimum financial amount. This
minimum level may be determined in relation to the value of fixed assets held by the organization.
The Annual Report of the West Sussex County Council 1997/98 states “A de minimis level of
£15,000 has been applied generally, except for vehicles, so as to exclude individual assets or works
below this figure from the asset registers.” (page 33) Similarly the New Zealand Defence Force
Annual Report for the year ended 30 June 1999 states “Fixed asset additions costing $5,000 are
capitalised and recorded at historical cost.” (page 114)
365. Some entities may operate a policy with two recognition thresholds: a minimum level below which
assets cannot be capitalized, a band where discretion may be exercised by the preparer, and an amount
above which assets must be capitalized. Where individual assets fall below the threshold but the value
of the asset class as a whole is above the threshold, assets may be pooled and recognized as a class.
Another practice for categories of assets which are renewed regularly e.g., renewable equipment, is to
recognize the initial purchase of the asset as a fixed asset but to treat all replacements as an expense.
Changes to the value of the recorded asset would only occur if a major increase or decrease in quantity
or value occurs.
366. Governments may follow the generally accepted accounting principle of historical cost as a basis for
the recognition of assets. Alternatively, they may adopt modified historical costs where certain assets
are periodically revalued to amounts which do not exceed their recoverable amounts. (This option is
specifically prohibited in some jurisdictions.) Where a revaluation has taken place, there must be
appropriate disclosure of asset measurement policies and valuation methods. Some jurisdictions may
also adopt current cost models. Refer to Chapter 18 for a discussion of measurement bases.
367. Consumption of an asset’s service potential is treated as an expense in the period in which it occurs.
Refer also to Chapter 15.

368. Examples of accounting policies for and note disclosures of various fixed assets are shown in the
extract below.
Note 1.H. Property, Plant and Equipment
General Purpose Property, Plant and Equipment
General purpose Property, Plant and Equipment consists of buildings, structures, and facilities used for
general operations, power, irrigation, fish and wildlife enhancement, and recreation; land acquired for
general operating purposes; equipment, aircraft and vehicles; and construction in progress. In general,
buildings and structures are capitalized at acquisition cost and depreciated using the straight-line method
over a useful life of from 20 to 50 years with the exception of dams and certain related property which is
depreciated over useful lives of up to 100 years. Equipment is capitalized at acquisition cost and is
depreciated using the straight-line method over the useful lives generally ranging from 5 to 20 years.
Capitalization thresholds are determined by the individual bureaus and generally range from $50,000 to
$500,000 for real property and from $5,000 to $15,000 for equipment.
: : : : : : : : : : : : : :
Example 12.10
as of September 30, 1998 and 1997, page 66 (USD)

Capital Assets
9. Apart from some small exceptions, all expenditure on the acquisition of capital assets, or
expenditure which adds to the value of existing assets, is capitalised as fixed assets, provided
that the fixed assets yield benefit to the Authority for a period of more than one year.
10. The Authority has, however, adopted a de minimis value of £10,000 for equipment and plant,
and £50,000 for other assets, below which assets will not be capitalised. The de minimis
limit does not apply to assets used by statutory DSOs, and no formal de minimis limit applies
to land and buildings or to infrastructure.
11. Fixed assets are stated in the Consolidated Balance Sheet at current value, net of depreciation
where appropriate. All expenditure (exceeding routine repairs and maintenance) on fixed
assets with a benefit to the Authority of more than one year, has been capitalised on an
accruals basis.
12. Fixed assets have been valued on the basis recommended by CIPFA and in accordance with
the Statement of Asset Valuation Principles and Guidance Notes issued by the Royal Institute
of Chartered Surveyors (RICS). Fixed assets are classified as operational assets those
presently used by the Authority for the delivery of public services, or for support tasks) and
non-operational assets (surplus property awaiting sale, or investment property, or assets
under construction). Assets are further categorised into land and buildings, vehicles, plant,
furniture and equipment, infrastructure and community assets.
13. Assets have been valued at the lower of net current replacement cost and net realisable value
as stated in the RICS Guidance Notes subject to the following exceptions:
• short lived operational assets (i.e. vehicles, plant and equipment) are valued at historic
cost (less depreciation where appropriate) as a proxy for current replacement cost.
• infrastructure assets are included in the Consolidated Balance Sheet at net historic cost
(where known).
• uncompleted building works are included in the Consolidated Balance Sheet at historic
cost.
Example 12.11
Surrey County Council
Statement of Accounts 1997/98
Accounting Policies, page 9 (GBP)

ASSETS Valuation of Land
Non-Current Physical Assets Land held for continued use that would be replaced
because of a government policy is valued at the
Capitalisation and Initial Recognition greater of current market buying price for that land
in its existing use and current market selling price
In general, non-current physical assets with a based on feasible alternative use. However, for
value greater than $5,000 are capitalised except most public sector land assets, there is no prospect
for computer equipment which is normally of alternative use because there are natural, legal or
capitalised irrespective of the $5,000 threshold socio-political restrictions on their use and disposal.
where it is considered to be part of a network of Such land is valued at “value in use”.
assets.
Land held for continued use but not to be replaced
Assets are initially recognised at their acquisition given the existing government policy is valued at
cost. Cost is determined as the fair value of the the greater of the present value of future net cash
assets given as consideration plus other costs flows and current market selling price based on
incidental to the acquisition. feasible alternative use.
Assets acquired at no cost or for nominal Surplus land is valued at market selling price.
consideration are initially recognised as assets and
revenues at their fair value at the date of Undeveloped Crown land is currently not
acquisition. Fair value means the amount for recognised pending the completion of an extensive
which an asset could be exchanged between a valuation program. Land under roads and within
knowledgeable, willing buyer and a road reserves which has been recognised in the
knowledgeable, willing seller in an arm’s length financial report of the Roads and Traffic Authority
transaction. (at $14.7 billion), has not been recognised in the
State’s Consolidated Financial Statements as there
The cost of non-current physical assets is currently no methodology available to reliably
constructed for own use includes the cost of determine the value.
materials, direct labour, attributable interest, other
financing costs and foreign exchange gains and
losses arising during construction as well as an
appropriate proportion of variable and fixed
overhead costs that can be reliably attributed to
the assets.
Example 12.12
The NSW Public Sector, Notes to and forming part of the Financial Statements, pages 28 and 29 (AUD)

\
Valuation of Plant and Equipment, Infrastructure systems include assets such as

Infrastructure Systems and Buildings roads, bridges, sewerage systems, water supply
and reservoirs, power generation plants and
Plant and equipment, infrastructure systems and transmission lines.
specialised buildings that are held for continued
use and would be replaced because of Revaluation Policies
government policy are valued at depreciated All physical non-current assets are revalued at
current cost. Current cost is the minimum cost least every five years to current value.
of replacing the remaining service potential of Revaluation increments are credited directly to
an asset with a modern equivalent asset (eg the asset revaluation reserve unless they
current market buying price, current reverse any previous decrements which have
reproduction cost or current replacement cost). been charged to the Operating Statement.
Non-specialised buildings are valued at market Assets acquired or constructed since the last
selling price. valuation are valued at cost.
Assets held for continued use that would not Non-current assets used by profit-seeking
necessarily be replaced because of government agencies are revalued downward when their
policy are valued at the greater of the net carrying amount is greater than their
present value of the cash flows and the current recoverable amount. The recoverable amount
market selling price. test is not applied to non-current assets of not-
for-profit agencies whose service potential is
Surplus assets are valued at market selling not related to the generation of net cash
value. inflows.
Example 12.13
The NSW Public Sector, Notes to and forming part of the Financial Statements, page 29 (AUD)

NOTE 13: FIXED ASSETS
30/06/98 30/06/99
$000 $000
Land
9,016 At cost 9,016
114,528 At valuation 111,290
123,544 Land – net current value 120,306
Buildings
47,762 At cost 64,152
647,428 At valuation 635,127
(53,959) Accumulated depreciation (88,844)
641,231 Buildings – net current value 610,435
Specialist Military Equipment
495,704 At cost 1,190,728
743,299 At valuation 593,848
979,606 Specialist Military Equipment – net current value 1,428,530
Plant & Equipment
114,814 At cost 123,167
67,818 At valuation 63,040
100,417 Plant & Equipment – net current value 95,891
Office & Computer Equipment
27,452 At cost 32,682
26,094 At valuation 2,841
10,665 Office & Computer Equipment – net current value 11,828
Capital Work in Progress
16,890 At cost 14,664
16,890 Capital Work in Progress – net current value 14,664
Total Fixed Assets
2,310,805 At cost and valuation 2,840,555
1,872,353 Total Carrying Amount of Fixed Assets 2,281,654
All Fixed Assets in each asset class were valued for the purpose of the opening Mode B Statement of
Financial Position as at 1 January 1991 by independent Registered valuers, except for Specialist
Military Equipment which was valued by representatives from the single Services.
Valuations of Land (as at 30 June 1994) and Buildings (as at 30 June 1997) are at net current values
determined by independent valuers. Major vessels, aircraft and other items of Specialist Military
Equipment are held at their internally assessed valuation as at 30 June 1997.
Substantially all the title to, or interest in land remains in the name of the Crown, although equitable
ownership rests with NZDF. In certain cases, in the event of land being sold, potential claims may be
lodged under the Treaty of Waitangi Act 1985. The effect on the valuation of Land and Buildings, if
any, resulting from such potential claims cannot be quantified.
Example 12.14
Annual Report of the New Zealand Defence Force
Notes to the Financial Statement, page 128 (NZD)

369. Inventories are defined in IAS 2, Inventories as assets which are:
• held for sale in the ordinary course of business;
• in the process of production for such sale; or
• in the form of materials or supplies to be consumed in the production process or in the rendering
of services.
370. These categories may also be applied to governments, although in the public sector inventories are
more often held for use in the rendering of services than for production and sale.
371. The classification of inventories as physical assets, rather than financial assets, is in accordance with
the generally accepted use of the term “financial assets” under accrual accounting. However, under
some modifications to the accrual basis of accounting a distinction may be made between inventories
for sale which are regarded as financial assets, and the remaining two categories which are regarded as
physical assets (PSC Study 5 Definition and Recognition of Assets, Figure 3.3). Inventories may be
classified in various ways on the face of the financial statements or they may be shown as one figure,
with more detailed note disclosure.
372. Examples of accounting policies for and note disclosures of inventories are given below.
Inventories
Inventories are valued at the lower of cost or net

realisable value. Cost is calculated using the
average cost or the “first in first out” method.
Example 12.15
The NSW Public Sector, Notes to and forming part of the Financial Statements, page 29
Inventories
Inventories are not held for resale and are
comprised mainly of munitions, technical spares
in support of fixed assets and consumable items.
Inventories are recorded at weighted average

cost. Appropriate allowance has been made for
obsolescence.
Example 12.16

8. INVENTORIES 96-97 95-96
$m $m
Current
Raw Materials 231 172
Work in Progress 84 145
Finished Goods 57 49
Forestry 62 59
Consumable Stores 269 395
Land Held for Resale 140 175
843 995
Non-Current
Forestry 1,403 1,274
Land Held for Resale 495 464
Work in Progress 54 97
Other 27 57
1,979 1,892
Example 12.17
NOTE 31. INVENTORIES 1

1997 1996
$m $m
INVENTORIES HELD FOR SALE
Raw materials and stores 88 2,177
Work in progress 78 63
Finished goods 1,972 494
Land held for sale 224 151
Total inventories held for sale 2,362 2,885
INVENTORIES NOT HELD FOR SALE

Consumable stores 3,794 3,632
Total inventories not held for sale 3,794 3,632
Total inventories 6,156 6,517

1
Example 12.18
Notes to and forming part of the Financial Statements, page 66 (AUD)

Note 1.F. Inventories
and Related Property
“Inventories” are valued at
historical cost. Historical cost
methods include first-in-first-out,
weighted average and moving
average. Estimated repair costs
reduce the value of inventory held
for repair. Excess, obsolete and
unserviceable inventories are
valued at estimated net realizable
values.
Example 12.19

Note 5. Inventories And Related Property
“Inventories and related “Seized monetary acquired through forfeiture
properties” consist of the instruments” comprise only proceedings; property
categories listed below, net monetary instruments. acquired by the
of allowance for obsolete These monetary Government to satisfy tax
and unserviceable instruments are awaiting liability; and unclaimed
inventory, as of September judgment to determine and abandoned
30, 1998. ownership. The related merchandise.
“Operating materials and liability is included in “Stock pile materials” are
supplies” are comprised of “Other liabilities.” Other strategic and critical
tangible personal property property seized by the materials held for use in
purchased for use in Government, such as real national defense,
normal operations. property and tangible conservation or national
“Materials and supplies personal property, is not emergencies due to
held for future use” included as a Government statutory requirements.
includes tangible personal asset. It is accounted for in “Commodities” are items
property not readily agency property- of commerce or trade that
available in the market or management records until have an exchange value
held because there is more the property is forfeited, used to stabilize or support
than a remote chance that returned or otherwise market prices.
they will eventually be liquidated. “Other related property”
needed. “Forfeited property” is includes all other related
“Inventory held for sale” is comprised of monetary property not included
tangible personal property instruments, intangible above (for example,
held for sale, net of property, real property and property acquired through
allowances. tangible personal property military base closings).
Inventories and Related Property as of September 30

(In billions of dollars) Defense All Others Total
Inventory held for sale …………………………………… 69.4 0.5 69.9
Stockpile materials ……………………………………….. 4.3 37.7 42.0
Operating materials and supplies ………………………. 31.1 2.6 33.7
Materials and supplies held for future use …………….. 20.3 0.1 20.4
Commodities ……………………………………………… - 0.3 0.3
Seized monetary instruments …………………………… - 0.2 0.2
Forfeited property ………………………………………… - 0.2 0.2
Other related property …………………………………… 0.1 - 0.1
Total inventories and related property ……………… 125.2 41.6 166.8
Example 12.20
Physical Assets – Property, Plant and Equipment

373. According to IAS 16, Property, Plant and Equipment,
Property, plant and equipment are tangible assets that:
(a) are held by an enterprise for use in the production and supply of goods or services, for rental
to others, or for administrative purposes; and
(b) are expected to be used during more than one period. (paragraph 7)

374. Investment properties may be accounted for either as property under IAS 16, or as long-term
investments in accordance with IAS 25, Accounting for Investments. All buildings and plant etc. are
regarded as having the characteristics of an asset unless they are shown to have no future economic
benefits or service potential.
Physical Assets – Infrastructure Assets

375. The term infrastructure assets is sometimes used to describe the following types of assets:
• road networks, including bridges, kerbs, channels and footpaths
• sewer systems
• water supply systems
• drainage systems
• landfill sites
• flood control works
• power supply systems
• communication networks
• recreation reserves.
376. This list of examples is not exhaustive. Infrastructure assets generally have the following
characteristics:
• long lived. In some cases it is difficult to define the life of the asset, particularly if a regular
maintenance program is consistently applied to the asset;
• components may be replaced periodically over the asset’s useful life. For example, the visible
part of a road, the road surface, may be replaced several times before any work is carried out on
the road pavement. Associated drainage assets may significantly outlive the road pavement
before being replaced; and
• fixed in place. Parts of the network may be extended or no longer used, but the overall asset
remains intact and serviceable.
377. Implicit in many definitions of the term is the idea of a network. For example, a length of road derives
its service potential and future economic benefits from being part of a roading system. Infrastructure
assets typically have very large values when considered as single systems; they are important to users
both for their economic value and the essential services they provide. It can therefore be argued that
there is benefit in separately displaying infrastructure assets in the Statement of Financial Position.
378. Infrastructure assets will usually meet the definition of an asset. In terms of the recognition criteria,
the benefits from these assets will usually be probable. However, reliable measurement of
infrastructure assets may be more difficult due to the absence of cost data or inactive markets. The
remaining approaches to measurement derive from current cost, that is, measuring the asset at the
current cost of replacing the service potential embodied in the asset. For a fuller discussion of
measurement issues refer to Chapter 18.
379. An infrastructure system can be considered as a single asset or more usefully as a collection of assets;
for example a water supply system could be a collection of individual assets in classes such as land,
buildings, plant, and pipe networks. The individual assets may be measured in terms of their
individual historical cost (if available) or their replacement cost adjusted for age and obsolescence in
relation to each asset’s role in the water supply system as a whole. Some jurisdictions consider that
estimates of current replacement cost provide significantly more useful information for decision-
making about resource allocation than historical cost data.
380. For a discussion of the recognition of the loss of service potential of infrastructure assets, refer to
Chapter 15.
381. Excerpts from financial statements showing note disclosure of infrastructure assets are given below.

Notes to the Financial Statements (continued)
as at 30 June 1999
Forecast Actual
1998 Estimated 30 June 30 June
Budget Actual 1999 1998
$m $m $m $m
NOTE 13: State Highways
Cost or Valuation
8,406 8,359 Opening balance 8,359 8,210
224 158 Net additions 148 153
- - Net revaluations 263 (4)
8,630 8,517 Total Cost or Valuation 8,770 8,359
Accumulated Depreciation
69 - Opening balance - -
71 81 Depreciation charged for the period 81 80
- - Net revaluations (81) (80)
140 81 Total Accumulated Depreciation - -
8,490 8,436 Net State Highways 8,770 8,359
The State highways comprise the land, formation works, road structure, drainage works and traffic
facilities of the roads, plus bridges, culverts, tunnels, stock and pedestrian underpasses, protection
works and retaining structures. The land was valued on a net current value basis while other
elements of the state highways were valued on the basis of depreciated replacement cost.
Replacement costs were determined by estimating the costs of new construction of the network by
the most appropriate method of construction. The methodology applied used information from the
road assessment and maintenance management (RAMM) database and the bridge inventory held
by Transit New Zealand. This information was supplemented by the local knowledge and expertise
of the valuers. Land, formation works, and 30% of the road structure have not been depreciated as
it is considered that the service potential of these components does not reduce over time.
The valuation is updated annually through the use of price indices. In addition, the state highway
regions of New Zealand are subject to an in depth valuation review on a cyclic basis at an interval
not exceeding seven years. In 1998/99 two state highway regions were the subject of a detailed
valuation review.
After allowing for new works and depreciation during the year to 30 June 1999, the depreciated
replacement cost is assessed at $8,770 million (30 June 1998: $8,359 million).
Only those highways clearly owned by the Crown are included in the Statement of Financial
Position. Urban state highways (excluding motorways) are not included in the Statement of
Financial Position, as these assets are owned by local authorities.
Example 12.21
Notes to the Financial Statements, page 83 (NZD)
Physical Assets – Investments
382. Governments may hold physical assets either for use or as investments. Physical assets which are
commonly held as investments include land, buildings and forests. It is usual to identify investments
separately.
383. Investments may be recognized in the financial statements of a government at historical cost or at a
revalued amount.

Physical Assets – Heritage Assets
384. Public sector entities are often charged with the custody of culturally significant resources, such as
works of art, historic documents, areas of land of historic, scientific or environmental significance,
monuments and culturally significant buildings. Such resources are sometimes described as heritage
assets. Descriptions of heritage assets follow:
In general usage, the term “heritage assets” refers to physical assets that a community intends
preserving because of cultural, historic or environmental associations. (Rowles 1992)
The term “heritage assets” [is used] to refer to fixed assets that a government intends to preserve
indefinitely because of their unique historical, cultural or environmental attributes. A common
feature to most heritage assets is that they cannot be replaced. Examples of heritage assets are
monuments, art and museum collections, wilderness preserves, battlefields and buildings designated
for preservation. (CICA 1989, Chapter 3, paragraphs 34–40)
385. Implicit in the use of the term is the idea that the government or government body is acting as
custodian of the asset in question. The ownership and care of culturally prized assets is politically
sensitive. For this reason, and because heritage assets can entail considerable amounts of expense and
investment in their protection and preservation, it may be useful to users for heritage assets to be
displayed separately from other assets.
386. It is possible to argue that heritage assets are not readily distinguished from other physical assets and
should not be classified separately. However, where preparers believe this information is useful, the
separate disclosure of heritage assets may be appropriate.
387. The probable future benefits of a heritage asset relate to its unique historical, cultural or environmental
attributes. It could be argued that the decision by a government to preserve a heritage asset is proof of
its future benefit. There has been considerable debate over the measurability of heritage assets.
388. This Study acknowledges that there may be some difficulty placing a monetary value on the historical,
cultural or environmental attributes of some heritage assets. However, accrual accounting requires the
recognition of all assets which meet the recognition criteria. If measurement difficulties prevent the
recognition of heritage assets in a particular jurisdiction, additional disclosure of these assets may be
appropriate (refer to the discussion of unrecognized assets later in this Chapter). If heritage assets as a
class are not recognized, this represents a modification to accrual accounting which it is appropriate to
comment on in the Statement of Accounting Policies.
389. It is worth noting that there is no use of the term “heritage assets” in the private sector,
notwithstanding that many private sector institutions own and hold similar assets for similar reasons.
Recognition and measurement difficulties do not prevent the private sector from buying, selling,
taxing, insuring or transferring by inheritance etc. various works of art, historic buildings and rare
documents. Values often need to be established for insurance purposes. Similarly, it is possible to
establish a transfer price when such assets pass from public to private ownership and vice versa, as
occurs routinely. Instances of illegal export and looting of collections of cultural treasures confirm
that when the opportunity is afforded, rare items of cultural interest can be readily traded, even where
it is illegal.
390. In general, the selection of a measurement base for particular heritage assets should be made to
provide users of financial reports with an understanding of the economic costs of holding that heritage
asset. As with other assets, a range of measurement bases may be used to value heritage assets
including historical cost, market value, replacement cost and value in alternative use. Where a
jurisdiction is still in the process of determining values for heritage assets, symbolic values such as $1
may be used to alert readers to the existence of such assets.
391. In many instances heritage assets are subject to general restrictions on disposal (for example, statutory
prohibitions on the export of culturally significant items) or to restrictions specific to the asset(s)
recognized. Such restrictions should be disclosed in the narrative to the financial statements. Where
there are legal restrictions on the sale of an asset, that asset may be measured as if the legal restriction
had been removed or at a value which discounts market prices for similar assets by a factor to reflect

the restriction. In general, financial reports prepared using the going concern assumptions will be
more useful if the values recognized reflect the current and actual legal position of the entity.
392. If a heritage asset is recognized at cost or market value and the asset suffers loss of service potential,
then the loss of service potential of the heritage asset is recognized. Many heritage assets will have
physical deterioration identical to other physical assets. However, it is possible that if particular
heritage assets are maintained, restored as necessary by skilled professionals and have a long life, then
their depreciation will be so small as to be immaterial.
393. An extract from an asset valuation accounting guideline on heritage assets follows. This extract
illustrates the application of the concept of deprival value. Under the concept of deprival value a
method of valuation or measurement base may be selected depending upon the reaction of the entity if
it were deprived of that asset.
4.15. The following table summarises the application of deprival value to particular classes of assets.
Measurement Bases to be Applied Under these Guidelines to Particular

Categories of Physical Non-Current Assets
Asset Category Where service potential would Where service potential would
be replaced if an Agency was not (or could not) be replaced if
deprived of the asset an Agency was deprived of asset
Asset Held for Continued Use

: : : : : :
Heritage assets Current market buying price, Greater of net present value and
current replacement cost or current market value (selling
current reproduction cost, as price)
applicable, of the gross service
potential utilised by the Agency
if the service potential would
otherwise be acquired by the
Agency
Surplus Assets
All such assets Not Applicable Current market value (selling
price)
Example 12.22
Commonwealth Government Accounting Guidelines, Australia
Accounting Guideline A 1. Asset Valuation, page 13
Physical Assets – Defense or Military Assets

394. Defense or military assets include weapons, munitions and support infrastructure. If these assets are a
significant category of physical assets, they are usually shown as a separate category. The separate
classification of assets used for defense purposes indicates that although non-current, such assets could
be consumed at short notice in the event of hostilities. The expenses arising from the destruction of
military assets in the event of hostilities or for any other reason can be recognized at the time of
consumption.
395. For an example of disclosure of military assets, refer to Example 12.14.

396. The System of National Accounts classifies some military assets as capital expenditure (assets) and
some as current expenditure (expenses).
Outlays for military purposes are however, considered to be current expenditures, except for outlays
by the military authorities on land and certain items for civilian use such as schools, hospitals, and
family-type housing, and in some cases roads when for civilian use. ‘Military purposes’ are
construed in terms of final use; they include the military airport, but not the bulldozer used in
constructing the airport. (Inter Secretariat Working Group on National Accounts, 1993)
397. The Study acknowledges that it would be desirable to have consistent treatment of such assets in both
SNA reports and external financial statements. As previously mentioned, accrual accounting under
the IASC Framework for the Preparation and Presentation of Financial Statements requires the
recognition of all assets which meet the recognition criteria. If measurement difficulties prevent the
recognition of military assets in a particular jurisdiction, additional disclosure of these assets may be
appropriate (refer to the discussion of unrecognized assets later in this Chapter). If military assets as a
class are not recognized, this represents a modification to accrual accounting which it would be
appropriate to comment on in the Statement of Accounting Policies.
398. Examples of accounting policies for military assets from both whole of government financial
statements and the statements of a defense department are shown below.
Specialist military equipment
Specialist military equipment is recorded at depreciated replacement cost. Valuations have

been obtained through specialist assessment by New Zealand Defence Force advisers.
Example 12.23
Specialist military equipment with unit values of over

$100,000 is valued every three years, internally, and
is stated at depreciated current replacement cost after
due allowances for technological change. Some
aircraft rotables, in the absence of replacement costs,
are valued based on latest purchase price.
Example 12.24
Statement of Accounting Policies, page 114 (NZD)
Physical Assets – Natural Resources
399. A government may have control of natural physical resources (e.g., control of the continental shelf or
other parts of the sea bed, geothermal resources).
400. A description of natural resources is:
Natural resources are economic resources in their natural undeveloped state. They can be further
categorized as renewable or depletable. Renewable resources are those natural resources that can
be developed and managed to produce a sustained yield for an indefinitely long period. Examples of
renewable natural resources are farm land, forests, fish stocks and water for electricity generation,
irrigation, recreation and consumption. Depletable resources are such natural resources as

petroleum and mineral deposits that will diminish to the point of exhaustion over the period of their
production. If not managed to provide a sustainable yield, renewable resources can also be
depleted. (CICA 1989, paragraph 48)
401. In order to meet the definition of an asset, natural resources must have future economic benefits or
service potential which are under direct government control. Many natural resources do meet these
criteria.
402. Examples of natural resources which may meet the definition and recognition criteria for assets
include:
• a state-owned coal mine’s coal reserves;
• off-shore oil extraction operations; and
• repurchased fishing rights.
However, the state’s general rights over minerals underground or areas of sea within the government’s
jurisdiction would not normally be recognized as an asset. Undiscovered mineral resources do not
usually meet the definition and recognition criteria for assets. Where rights to natural resources are
not recognized, the existence of these assets may be acknowledged by way of narrative disclosure.
403. In conclusion, natural resources must meet both the definition and recognition criteria for assets before
they are included in the financial statements of the government. Some natural resources may not meet
the recognition criteria because of measurement difficulties.
Intangible Assets
404. In private sector accounting practice, intangible assets are held to be recognizable rights to future
economic benefits. Examples include patent rights, databases and goodwill arising on purchase. The
scope of intangible assets is potentially much broader in the public sector due to the wide scope of the
powers of government.
405. Where the state creates and delegates powers by creating rights to fishing quota, rights to prospect,
rights to use parts of the radio spectrum etc., it is creating assets which may be sold or transferred to
other parties. A right available for issue by the state may often have the required characteristics of an
asset. As with any intangible asset, there may be difficulties in recognition and measurement.
406. Intangible assets may be classified as identifiable or non-identifiable. Although many intangible
assets will meet the definition of an asset, the recognition criteria for assets means that in practice only
identifiable intangible assets are likely to be recognized. For example, the power to tax would not be
recognized as an intangible asset. Some jurisdictions only allow identified intangibles or purchased
goodwill to be recognized as assets. In such cases unidentified intangibles may not be recognized,
even where market values are available (e.g., internally generated goodwill).
For accounting policy purposes intangible assets are classified into identifiable and non-identifiable
intangible assets.
Identifiable intangible assets are those intangible assets which can be sold or acquired separately
from other assets. They include rights that are created by virtue of legislation but are unconnected
to natural resource use, patents, databases and concessions.
Non-identifiable intangible assets are all other intangible assets. These assets cannot be sold separately.
They include goodwill, human resources and the power to tax. (New Zealand Treasury, Crown
Accounting Policies for External Financial Reporting, Assets, paragraph 10, page 35, June 1995)
407. The basis of measurement of intangible assets may be historical cost or by reference to the market
value of the future benefits. Loss of service potential may be assessed in relation to changes in market
value of the intangible asset. An example of an accounting policy for intangible assets is shown
below.

Intangible assets
Intangible assets which can be sold or acquired separately from other assets are recorded at
net current value if a foreseeable future benefit exists. Otherwise, intangible assets are not
recognised.
Example 12.25
Assets not Recognized
408. Users of financial reports prepared under the accrual basis will have the expectation that all significant
assets are recognized. However, significant assets may be unreported for a variety of reasons,
including:
• pragmatic reasons (classes of assets may be recognized progressively over a number of reporting
periods);
• recognition criteria, particularly that of reliable measurement, may not be met; or
• the jurisdiction’s policy of not recognizing certain classes of assets.
409. Some jurisdictions have chosen not to recognize certain classes of assets such as heritage and defense
assets. For example, the U.S. federal government chooses not to recognize certain classes of military
4
equipment (referred to as national defense PP&E) or heritage assets in the Statement of Financial
Position. It considers that the consumption of military assets’ service potential through depreciation
cannot be reliably measured and that the valuation of heritage assets in dollars is not objective or
meaningful.
410. As previously discussed, the System of National Accounts classifies some military assets as capital
expenditure (assets) and some as current expenditure (expenses). The PSC intends to conduct further
work on the recommended accounting treatment for both these classes of assets.
411. Where significant assets are unrecognized, the Statement of Accounting Policies would disclose this
fact, and provide narrative details of these assets. The narrative disclosures may describe the state of
repair and include related operating costs. Excerpts from U.S. federal accounting standards describing
required disclosures for such assets (referred to as supplementary stewardship information) are shown
below.
Military Assets (National Defense Property, Plant and Equipment)

At a minimum, the following information shall be reported:
• A description of the major types of national defense PP&E by the holding entity and the values
assigned under the valuation method used.
• The value of national defense PP&E added and withdrawn during the year, the increase or the
decrease in value resulting from revaluations of assets held to latest acquisition cost, year and
the end-of-year value for each major type of property using the entity’s valuation method.
• A description of the methods of acquisition and withdrawal of national defense PP&E. This
should be reported at the major program or category level; individual transactions, unless
significant, need not be reported.
• Condition of the assets unless it is already reported in a note to the financial statements in which
case a reference to the note will suffice.
• A reference to the applicable note to the financial statements if deferred maintenance is reported
4
National defense PP&E consists of: (1) the PP&E components of weapons systems and support PP&E owned by the
Department of Defense or its component entities for use in the performance of military missions, and (2) the vessels
held in a preservation status by the Maritime Administration’s National Defense Reserve Fleet. Space exploration
equipment is treated as general PP&E. Source: SFFAS No. 11 Amendments to Accounting for Property, Plant, and
Equipment – Definitional Changes October 1998.

for the assets. (SFFAS No. 8, Supplementary Stewardship Reporting, Effective: FY 1998,
paragraph 68, pages 25 and 26 as amended by SFFAS No. 11 Amendments to Accounting for
Property, Plant, and Equipment)
Heritage Assets
The following are examples of information that should be considered for presentation:
• Description of each major category of heritage asset.
• The number of physical units added and withdrawn from the heritage asset records during the
year and the end-of-year number of physical units for each type of heritage asset. Heritage
assets consist of (1) collection-type heritage assets, such as objects gathered and maintained for
exhibition, for example, museum collections, art collections, and library collections; and (2)
noncollection-type heritage assets, such as, parks, memorials, monuments, and buildings.
• Description of the methods of acquisition and withdrawal of heritage assets.
• Condition of the assets unless it is already reported in a note to the financial statements in which
case a reference to the note will suffice.
• A reference to a note to the financial statements if deferred maintenance is reported for the
assets. (SFFAS No. 8, Supplementary Stewardship Reporting, Effective: FY 1998, paragraph 50,
page 19)
412. Refer also to Chapter 16 for a discussion of additional disclosures in the financial statements.
413. Examples of the disclosure of assets not recognized are shown below.
1.40 Certain collection assets such as

library, museum and archival collections and
other heritage assets, such as national parks,
have either not been recognised and/or revalued
as reliable measurement of these assets is not
available at this time.
Example 12.26
Notes to and forming part of the Financial Statements, page 40

U.S. GENERAL ACCOUNTING OFFICE
ANNUAL STEWARDSHIP INFORMATION
AS OF SEPTEMBER 30, 1998
Heritage assets are property, plant, and equipment (PP&E) possessing one
or more of the following characteristics: historical or natural significance;
cultural, educational, or aesthetic value; or significant architectural
characteristics. In general, the cost of heritage assets is not often relevant or
determinable, and the useful life of heritage assets is not reasonably
estimable for depreciation purposes. Rather, the most relevant information
about heritage assets is their existence and condition. Therefore, heritage
assets are required to be reported only in terms of physical units. However,
in the case of the GAO building, its value is known as described below.
On October 28, 1988, Public Law 100-545 transferred control of the

General Accounting Office building and land in Washington, D.C., from the
General Services Administration to GAO without a monetary exchange. At
the time of transfer, the depreciated value of the building was $15,664,000,
and the book value of land was $1,191,000. GAO recorded the building and
the land as assets at the values stated above.
The GAO building is listed in the National Register of Historic Places as a

symbol of a new age in federal office design. The building holds historical
significance as the first structure erected exclusively for occupancy by the
General Accounting Office. It was one of the first federal office buildings
to be completely air-conditioned and artificially lit; and it was the first
modern, block-type building to be constructed for the federal government.
Its construction marked a distinct departure from the “fish-bone” type of
office building, which used either interior courts or a series of wings
branching from a central spine in order to provide both air and light.
Statement of Federal Accounting Standards Nos. 6 and 8 require that

heritage assets be reported in a separate stewardship reporting section and
not on the SOFP. GAO removed the building and land from the SOFP with
the preparation of its 1996 principal statements.
Since acquiring control of the building, GAO has expended considerable

resources for renovation and improvement of the building, including
asbestos abatement, major redesign of office space, installation of
communication wiring for local area network, upgrading of fire alarm
system, and renovation of the parking garage—all to enhance use of the
building for operating purposes. The costs of these projects have been
capitalized as general PP&E and depreciated over their expected useful
lives. Building improvement for operational efficiency is expected to
continue.
Maintenance of the building has been kept on a current basis, and the
expense is recognized as incurred. There is no significant deferred
maintenance cost.
Example 12.27
Comptroller General’s 1998 Annual Report, United States General Accounting Office (GAO)
Annual Stewardship Information, pages 77 and 78 (USD)

Administered Assets
414. A government entity will normally recognize only those assets which it controls. However,
government entities may administer assets on behalf of another level of government, or another entity
(e.g., trust accounts which the entity does not control, and advances of funds received by the entity
with respect to administered transfers). Where administered assets are not regarded as being within
the control of the reporting entity, accountability for the management of such assets may be
demonstrated by disclosing information in either the Notes to the Financial Statements or a separate
Schedule. However, there are a range of practices associated with the reporting of administered assets
and some entities include such funds as both assets and liabilities in the Statement of Financial
Position. This latter practice usually occurs where the money held in trust is not distinguishable from
other funds or in bank accounts.
“Different models of administrative arrangements in different jurisdictions mean that the manner in
which administered transactions are displayed in the financial report may vary from jurisdiction to
jurisdiction.” (AAS 29, 1996, paragraph 13.9.4)
415. Refer also to Chapters 13, 14 and 15 for a discussion of administered liabilities and administered
transactions.
416. Examples of disclosure of administered assets are shown below.
18. TRUST FUNDS 96-97 95-96

$m $m
Budget Sector 119 37

Non Budget Sector 1,424 1,114
1,543 1,151
Trust monies are held by the trustee on behalf of beneficiaries. Therefore,
these monies are not included in the consolidated financial statements assets.
Budget Sector trust monies mainly comprise various forms of unclaimed

monies and Supreme Court trust funds held in statutory accounts as follows:
Health Department 82 -
Attorney General’s Department 10 19
Others 27 18
119 37
Trust monies held by Non Budget Sector agencies include: -
Protective Commissioner 726 612
NSW Treasury Corporation 174 340
Rental Bond Board (see Note 1 Change in Accounting Policy) 363 -
Others 161 162
1,424 1,114
Example 12.28

Note 18. Indian Trust Funds
The Indian Trust including the Alaska
Funds differ from other Native Escrow
dedicated collections Fund. The assets
reported in Note 17. held in trust for Native
The Department of Americans are owned by
the Interior (Interior) the trust beneficiaries
has responsibility for and are not Federal
the assets held in trust assets. Therefore, these
on behalf of American amounts are not
Indian Tribes and reflected in the Balance
individuals. Trust funds Sheet or Statement of
are held in accounts for Net Cost.
approximately 315 Indian Trust Fund
tribes, 317,000 balances presented
individual Indian below do not include
Accounts and other trust land managed by
funds, the Government.
U.S. Government as Trustee for Indian Trust Funds
Held for Indian Tribes and Other Special Trust Funds
Statement of Changes in Trust Fund Balances as of September 30
(Unaudited)
(In millions of dollars)
Receipts ……………………………………..........……………………… 521.7

Disbursements …………………………………...........………………… (465.4)
Receipts in excess of disbursements …………..........……………….. 56.3
Trust fund balances, beginning of year ………..........………………… 2,403.7
Trust fund balances, end of year ……………...........……………….. 2,460.0
U.S. Government as Trustee for Indian Trust Funds
Held for Individual Indian Monies Trust Funds
Statement of Changes in Trust Fund Balances as of September 30
(Unaudited)
(In millions of dollars)
Receipts 313.6
Disbursements ……………………………………………….......…..…. (354.1)
Disbursements in excess of receipts ……………………........………. (40.5)
Trust fund balances, beginning of year ……………………........…….. 519.7
Trust fund balances, end of year ……………………........…………. 479.2
Example 12.29
Notes to the Financial Statements, page 81(USD)
Classification
417. Classification depends upon users’ needs and on how best they can be met. The following constraints
are also important:
• level of detail of the information required;
• the ability to classify the information and the reliability of the resulting numbers; and
• benefit versus cost.

418. Common classifications of assets include classification by liquidity and classification by function.
These classifications are discussed below. The System of National Accounts and the Government
Finance Statistics also have classification systems for assets. These are discussed in Chapter 19.
Classification – Broad Order of Liquidity

419. Assets may be classified and disclosed according to the broad order of their liquidity. The main basis
for deciding the number of classes and the content of each is the purpose of the Statement of Financial
Position, which helps users to assess the nature, amounts, and liquidity of available resources and their
function in use. Alternatively, reporting which distinguishes assets by function may assist users to
estimate the amounts, timing and uncertainty of future cash flows. For example, assets held for sale
may be reported separately from assets held for use in production, because of the potential effects of
each in the timing of future cash flows. In addition, assets may be grouped according to the relative
certainty of their valuation.
420. Assets may also be classified as current or non-current. It is unusual for a government to be assessed
in terms of its continued existence as a going concern, and the categorization of assets and liabilities as
current will at best usually only provide indications of short-term funding requirements. However, the
distinction informs users about the entity’s acquisition of current assets and its intentions to dispose of
certain assets and is considered to be useful in some jurisdictions. Information using both types of
classification may be provided as in the following example. In this example information on all asset
and liability types has been shown in the financial statements together with a brief summary of current
and non-current assets and liabilities at the foot of the statement.
ASSETS AND LIABILITIES

as at 30 June 1997
1
1997 1996
Note $m $m
: : : : : :
FINANCIAL ASSETS
Cash 2(b) 3,203 3,788
Receivables 27 33,251 31,203
Investments 28 35,631 34,472
Accrued revenue 29 26,010 23,594
Other financial assets 29 936 179
Total financial assets 99,031 93,236
NON-FINANCIAL ASSETS
Land and buildings 30 20,345 26,540
Infrastructure, plant and equipment 30 52,468 47,336
Intangibles 30 2,284 251
Inventories 31 6,156 6,517
Other non-financial assets 32 1,503 1,885
Total non-financial assets 82,756 82,529
Total assets 181,787 175,765
Current liabilities 58,824 52,253

Non-current liabilities 197,518 195,345
Current assets 54,722 56,866
Non-current assets 127,065 118,899
The above statement should be read in conjunction with the accompanying notes.
1
Example 12.30
Assets and Liabilities, page 24 (AUD)

Classification – Financial and Non-financial
421. Assets may be classified as financial and non-financial. Non-financial assets may be further classified
as physical assets and intangible assets. An example of the financial/non-financial classification is
shown in Example 12.30.
Classification – Restricted, Unrestricted, Secured Assets

422. Secured assets are those specific assets which have been identified as being reserved to a lender in the
event of default. It is accepted practice in private sector financial reporting that where assets are
disclosed, secured assets are disclosed separately from unsecured assets in the Notes to the Financial
Statements. The term restricted assets is applied where assets are disclosed but are subject to
restrictions as to disposal of the asset or income derived from its use; such assets are often those
donated to the entity for a specific purpose (CICA 1989). Other restrictions may be imposed by
statute, as in a restriction of the right to dispose of reserve land or national parks. External restrictions
on assets may also arise as a result of an agreement with external parties to set aside assets for a
specific purpose, such as sinking funds set aside to retire debt or unspent debenture proceeds of a local
government earmarked for specific capital works. The disclosure of restrictions relating to revenues
and assets is discussed in CICA PS 3100.
423. Assets may also be classified by legal conditions accepted by government as part of the appropriation
process or obligations to lenders, including lenders at a higher level of government.

CHAPTER 13
ACCRUAL BASIS – LIABILITIES
Introduction
424. The issues associated with accounting for and reporting liabilities in the public sector have been
addressed in PSC Study 6 Accounting for and Reporting Liabilities, and are discussed further in this
Chapter. The Liabilities Study considered the application of the liability definition and liability
recognition criteria in the public sector. It concluded that the IASC definition and recognition criteria
are generally appropriate for the public sector, although there may be some unique issues in the public
sector, such as the treatment of some government obligations. This Chapter discusses the types of
liabilities in the public sector, and the recognition and classification of these liabilities.
Definition of Liabilities
425. The IASC Framework for the Preparation and Presentation of Financial Statements defines a liability
as:
…a present obligation of the enterprise arising from past events, the settlement of which is expected
to result in an outflow from the enterprise of resources embodying economic benefits. (paragraph
49)
426. The fundamental characteristics of liabilities identified by the IASC are:

• the existence of a present obligation arising from past events. That is, a transaction or other
event in the past has given rise to a “duty or responsibility” to a third party, which has not yet
been satisfied; and
• that liabilities have adverse financial consequences for the reporting entity. That is, the entity is
required to incur additional liabilities, or dispose of cash or other assets to one or more entities,
to settle the obligation.
427. PSC Study 6 reviewed the definitions of liabilities used by governments in a variety of countries and
found that most of these definitions were consistent with the fundamental characteristics described
above.
Recognition of Liabilities
428. Liabilities should be recognized when they meet both the definition of a liability and the recognition
criteria for liabilities. The recognition criteria, as given by the IASC Framework for the Preparation
and Presentation of Financial Statements, are:
…it is probable that an outflow of resources embodying economic benefits will result from the
settlement of a present obligation and the amount at which the settlement will take place can be
measured reliably. (paragraph 91)
429. Before liabilities may be recognized in the financial statements they must both :
• meet the definition of a liability; and
• satisfy the recognition criteria.
430. All liabilities which meet the definition and recognition criteria should therefore be recognized. Two
items which often do not meet the definition and recognition criteria are commitments and
contingencies. If these items meet the definition and recognition criteria then they are recognized as
liabilities and included within the financial statement totals. However, where they do not meet the
definition and recognition criteria then information concerning them is usually shown in the Notes to
the Financial Statements.
Governmental Financial Reporting Chapter 13: Accrual Basis – Liabilities 103

431. As financial statements attempt to capture liabilities, some of which will be settled well into the future,
measurement difficulties arise. Many liabilities have to be estimated. The fact that amounts to be
paid involve an estimate would not be sufficient reason to defer recognition of a liability. Provided
that the measurement technique chosen is an accepted method, an estimate of a large liability is
preferable to ignoring the existence of the liability. For example, various methods have become
accepted for the estimation of future insurance claims or pension liabilities.
Types of Liabilities
432. The types of liabilities that governments may report include:
• accounts payable arising from the purchases of goods and services;
• accrued interest payable;
• accrued salaries and wages;
• accrued vested vacation pay or other accrued compensated absences;
• employee pension obligations and other accrued employee benefits, including any accrued
termination benefits;
• amounts payable under guarantees and indemnities where sufficient evidence is available to
indicate that it is more likely than not that the amounts will be payable;
• liabilities relating to unearned revenues;
• transfer payments payable;
• currency issued;
• lease obligations related to finance leases;
• bank loans and other short-term borrowings;
• long-term debt (both to the private sector and to other government entities);
• environmental liabilities; and
• obligations under accident compensation schemes.
433. Most of these liabilities are similar to those of business enterprises and do not pose unique accounting
or reporting issues for governments. Government liabilities include transfers payable and currency
issued. Government transfers payable arise from entitlements, shared cost agreements or grants where
there is not a direct exchange relationship with the recipient. In concept, liabilities associated with
transfer payments are not significantly different from other accounts payable. The main difference
between these payables and other accounts payable is the lack of a direct exchange relationship. As
there is no point of exchange, a different recognition point must be identified.
434. Occasionally the issue arises as to which entity should recognize certain liabilities, particularly where
there are two levels of government involved. For example, environmental liabilities may be due to
past actions of the government as a whole although the liability is associated with the property of a
particular government agency. The liability will usually be recognized by the party with the legal
responsibility for clean up costs, although any compensating contributions from other levels of
government may be recognized as a receivable if the contributions meet the recognition criteria for
receivables.
435. Receipts of unearned revenues are only recognized as liabilities if they meet the recognition criteria
for liabilities. The recognition criteria would be met if there are clearly defined obligations relating to
the revenue which would result in a sacrifice of future economic benefits by the reporting entity, such
as the requirement to deliver goods and services in the future. Where there was no clearly defined
future obligation, such receipts would not meet the recognition criteria.
436. The definition of a liability may also be applied to current and potential future obligations. At one
extreme, legally enforceable obligations, such as those arising from binding contracts, clearly meet the
definition of a liability. Such obligations may exist as a result of reciprocal or “exchange”
transactions (e.g., purchases of goods or services), or unpaid amounts due under non-reciprocal or
“non-exchange” transactions (e.g., grants or entitlements). It can be argued that, in the government
context, the existence of a present obligation arising from past events occurs only when there is a legal
104 Chapter 13: Accrual Basis – Liabilities Governmental Financial Reporting

obligation. The legal obligation could be the result of contracts, agreements or legislation that commit
the government to:
• repay borrowings;
• pay for goods and services acquired or provided prior to the accounting date;
• provide services or use resources in a specified way; or
• make transfer payments, even where no value is received directly in return (e.g., entitlements,
shared cost agreements or grants).
437. Usually, an external party has a legal right of recourse if the government fails to meet the terms of the
contracts, agreements or legislation.
438. In addition to legally enforceable obligations, most governments have established programs to fulfill
many of the general needs of the public, and often assume responsibilities for which they have no
prior legal obligation. Examples of items which may or may not meet the definition of liabilities
include:
• moral or equitable obligations to provide relief to victims of natural disasters;
• the announcement of a new program or spending initiatives; and
• future obligations under current policies.
439. It is necessary to consider these equitable or constructive obligations more carefully to see whether
they meet the definition of a liability. They are discussed in later in this Chapter (Future Obligations
under Current Policies). Some accounting standard setting bodies have already considered this issue
in the context of their own jurisdiction. For example, Australian Accounting Standard AAS 31
Financial Reporting by Governments states that “The intention of a government to make payments to
other parties, whether advised in the form of a budget policy, election promise, or statement of intent,
does not of itself create a present obligation which is binding on the government. A liability would be
recognized only when the government is committed in the sense that it has little or no discretion to
avoid the sacrifice of future economic benefits.” (paragraph 12.1.2)
440. Two additional criteria which may be useful in assessing the difference between legal obligations and
policy decisions are:
• whether or not the government has the discretion to avoid the obligation; and
• whether or not the government can vary its liability in the normal course of events without the
consent of the party affected.
441. Another useful perspective is to consider whether the other party or parties involved could reasonably
be considered to have a corresponding asset.
442. Although contingencies and commitments may result in sacrifices of future economic resources, they
may not meet either or both of the definition or recognition criteria for liabilities. These items are
both discussed in more detail later in this Chapter.
443. The following sections discuss definition, recognition and measurement issues associated with
particular public sector liabilities.
Payables and Accrued Liabilities

444. Accounts payable (sometimes referred to as trade creditors) are usually amounts owing to a creditor,
arising from the purchase of goods or services. At the end of the accounting period an invoice for
these items would generally have been received. In the public sector payables can also include
transfers payable which are the amounts actually owed, as at the end of the accounting period, to
recipients of non-reciprocal transfers (discussed later in this Chapter). Payables differ from accrued
liabilities in that the amounts concerned are due and payable at the end of the accounting period. In
contrast accrued liabilities represent an estimate of a liability that is not supported by an invoice or a
request for payment at the time the financial statements are prepared. The accrued liability is in
relation to an expense which has been incurred by the end of the accounting period but which is not
due for payment until a future date. An example of an accrued liability would be an estimate of rent
expense owed at the end of the accounting period when rent is paid in arrears.

Transfers Payable
445. The recognition of various types of government transfers and the liabilities associated with those
expenses are discussed in Chapter 15 under Government Transfers.
446. Chapter 15 states that when determining the amount of the expense and any associated liability to be
accrued in the current financial statements for those receiving entitlements in the current period, only
those amounts already owed, but not yet paid, meet the definition and recognition criteria for
liabilities. Amounts are “owed” by the government when the external beneficiary has satisfied the
conditions for the transfer during the reporting period. Potential obligations arising from an existing
policy, but relying on a future event (e.g., a person becoming or remaining unemployed next year) are
not considered to be “owed” at the present time and are therefore not recognized as liabilities.
However, in some jurisdictions liabilities for future obligations under current policies may be
recognized (refer also to the more detailed discussion later in this Chapter). Where future obligations
do not meet the recognition criteria a description of the item and an actuarial valuation of the possible
amount may be disclosed in the notes to the financial statements.
447. Generally the estimated, unpaid portion of incurred eligible expenditures owed to recipients pursuant
to a shared cost agreement would meet the definition and recognition criteria for liabilities.
448. A survey reported in PSC Study 6 Accounting for and Reporting Liabilities shows the following
accounting practices regarding transfer payments:
Transfer payments payable (e.g., grants, entitlements)
Australia Obligation is recognized and measured on the basis of the best estimate of the
amount payable as at the reporting date.
Canada Recorded in the financial statements at estimated amount ultimately payable,

as long as terms and conditions, if any, have been met.
France Recorded in the financial statements at commitment specified by laws.
Italy Recorded in the financial statements at commitment specified by laws.
Netherlands Recorded in the financial statements at historical cost.
New Zealand Recorded in the financial statements at estimated obligation to pay (for benefit
applications accepted where eligibility criteria have been met).
Taiwan Recorded in the financial statements based on approved budget.
United Kingdom Recorded in the financial statements at actual amounts due but unpaid.
United States Recorded in the financial statements at amounts due but unpaid.
(PSC Study 6, Appendix 1, page ii)
449. When the amounts involved are not material, transfers payable may be reported together with other
accounts payable.
Transfers Received
450. Governments which receive transfers from another level of government or a supranational body may
need to consider whether transfers received meet the definition and recognition criteria for liabilities.
Where there are restrictions on the use of funds until certain obligations have been met, and those
obligations are clearly specified, then they may meet the definition and recognition criteria for
liabilities. This issue is discussed further in Chapter 14.

Currency Issued
451. Where the reserve or federal bank forms part of the government reporting entity, currency issued is
recorded as a liability. This treatment is similar to banks recording deposits as liabilities. The interest
earned on the proceeds of currency issued is accounted for in the same way as other interest revenue.
Such interest may be referred to as seigniorage.
452. Under accrual accounting, only the consideration received from the issue of currency is recorded as an
asset. The power to create money in the future does not meet the definition and recognition criteria
for an asset. Examples of accounting policies for currency issued are shown below.
Australian currency on issue

1.43 Australian currency issued represents
a liability of the Reserve Bank of Australia
in favour of the holder. Currency issued for
circulation including demonetised currency
is measured at face value. When the Reserve
Bank issues currency notes to the
commercial banks, it receives in exchange
funds equal to the full face value of the
notes issued.
Example 13.1
Currency issued
Currency issued represents a liability in favour of the holder. Currency issued for
circulation, including demonetised currency, is recognised at face value.
Unissued currency stocks are reported as inventory and expensed when issued.
Example 13.2
Long-Term Debt and Borrowings
453. Long-term debt and borrowings will constitute the largest liability of many governments. Liabilities
denominated in foreign currencies are normally valued at the closing rate. The treatment of foreign
currency gains and losses is discussed more fully in Chapters 14 and 15.
454. Information to describe the nature and terms of a government’s liabilities for borrowing would
include:
• the amounts outstanding, interest rates and sinking fund amounts;
• the amounts payable on demand, within each of the next five years and appropriate description
of other long-term borrowing payment dates and amounts;
• the amounts payable in foreign currencies, the currency in which such amounts are payable, the
reporting currency equivalent and the basis of translation; and
• the terms and conditions of financial swap agreements.
455. Information to describe the nature and terms of a government’s liabilities to other governments would
include, at least, the amounts outstanding, interest rates, the amounts payable within a year and
appropriate description of amounts payable after one year.

456. The main issue regarding domestic currency liabilities is whether they should be measured at face
value or current market values. A common practice is to use face value in the financial statements but
to disclose market values in the notes, where this information is available. Normally market
information is readily available, as it is usual to mark-to-market when managing a debt portfolio. The
measurement of financial assets and liabilities has been considered by the IASC in IAS 39, Financial
Instruments: Recognition and Measurement. In summary, IAS 39 requires that:
• financial liabilities should be initially measured at cost;
• most financial liabilities should subsequently be measured at initial recorded cost amount less
principal repayments and amortization; and
• derivatives and liabilities held for trading are remeasured to fair value.
457. The Financial Statements of the Government of New Zealand provide an analysis of borrowings by
book value and by nominal and market value. They also include a maturity profile for borrowings,
and movements during the year. Each analysis provides details of New Zealand-dollar debt and
foreign currency debt. An example of the Statement of Borrowings is located in Appendix 2.
Examples of note disclosure of borrowings follow.
12. BORROWINGS 96-97 95-96

$m $m
Current 6,085 4,449

Non current 22,605 24,279
28,690 28,728
Borrowings comprise:
Liability to Commonwealth Government 3,641 4,097

Domestic and foreign borrowings 23,959 23,984
Bank overdraft 776 420
Finance leases(a) 314 227
28,690 28,728
The maturity profile of borrowings at current capital value
(1995-96 at face value):
Not later than one year 6,085 4,700

Between one and two years 2,137 5,398
Between two and five years 11,469 6,816
Later than five years 8,999 13,207
28,690 30,121
(a)
Finance leases liabilities are payable as follows:
Not later than one year 54 35

Between one and two years 53 62
Between two and five years 130 90
Later than five years 527 294
Minimum lease payments 764 481
Less: Future finance charges (450) (254)
Finance lease liability 314 227
Example 13.3

9. External Borrowing
External borrowing is used, within limits set by the government, to finance capital expenditure.
Loans held at the year end were:
31.3.98 31.3.97
£000 £000
Total external borrowing at 31 March 140,567 122,133

Less loans repayable on demand or within 12
months 14,312 16,474
Total external borrowing at 31 March not
repayable within the next 12 months 126,255 105,659
Made up of - Public Works Loans Board 96,379 70,659

- European Investment Bank 24,876 25,000
- Commercial Bank 5,000 5,000
- Nationalised Industries 0 5,000
126,255 105,659
These loans mature as follows … £000 % £000 %
Repayable within - one to two years 10,529 8.3 5,124 4.9

- two to five years 27,522 21.8 32,379 30.6
- five to ten years 34,292 27.2 28,963 27.4
- over ten years 53,912 42.7 39,193 37.1
126,255 100.0 105,659 100.0
Example 13.4
Consolidated Balance Sheet Notes, page 34 (GBP)
Lease Obligations Relating to Finance Leases

458. IAS 17, Leases (paragraph 12) requires private sector entities which purchase assets by way of finance
lease to recognize both a liability and an asset. This prevents entities from obtaining assets without
showing the corresponding liability for future lease repayments. Where government entities enter into
finance leases they too face similar asset and liability recognition issues. The types of arrangements
which governments enter into may range from straightforward finance leases to arrangements which
encompass both the purchase of an asset and the services associated with that asset (e.g., a hospital
and the building maintenance or cleaning services for it). Where such contracts include an identifiable
finance lease then the guidance in IAS 17 may be relevant.
Employee Entitlements (including Superannuation/Pension Liabilities)

459. Leave accrual ensures that personnel costs are shown in the period in which they occur. It also
provides information about the future obligations facing the government as an employer. The
presentation and disclosure of the accounting policies adopted in relation to recognition of expenses is
essential.
460. Types of leave which are commonly accrued include:
• annual leave;
• long service leave;
• retirement leave; and
• special leave entitlements.

461. Other types of leave are not accrued because they are taken on the basis of need, rather than vesting in
the employee or providing an absolute entitlement. Therefore no liability exists until the specified
event occurs.
462. The nature of a government’s obligation to employees under superannuation/pension schemes will
vary across jurisdictions. Some schemes may be fully funded, with both the government and the
employee making regular contributions which are sufficient to cover the final employee benefits.
Other schemes may operate on a pay-as-you-go basis. In such schemes the employee may make a
regular contribution to the scheme, but the government contributes only the amount required to pay
the amounts currently owing to retired employees. In some cases it may be possible for a government
to unilaterally change employees’ entitlements, and in other cases this may not be possible. Despite
these differences between jurisdictions, the process for ascertaining and recognizing
superannuation/pension liabilities remains the same.
463. Preparers of financial statements should determine first whether the government’s obligation to
employees meets the definition of a liability, and then whether the obligation meets recognition
criteria. The extent to which a government is able to change the future benefits to employees will
affect the probability of future payments being made and would need to be assessed at this point.
Such liabilities may be legally enforceable or equitable or constructive. The fact that a liability is
equitable or constructive does not mean that it does not meet the definition of a liability, but the
likelihood of the obligation resulting in a future payment would need to be considered. For example,
this point has been considered in the Australian SAC 4: Definition and Recognition of the Elements of
Financial Statements. In many cases the government’s obligation will meet both the definition and
recognition criteria.
464. Each year, as current employees earn an entitlement to future benefits, the total cost (both cash and
non-cash) of providing these future superannuation/pension benefits is recognized as an expense by
the employing government. If regular payments equal to this expense are made to the
superannuation/pension scheme the scheme is referred to as a funded scheme. Where payments are
less than the expense the scheme is referred to as an unfunded, or a partially funded, scheme. The
unfunded component of superannuation/pension benefits may be shown as an accumulating liability
on the Statement of Financial Position. When payment for the liability is finally made in future
periods, the payment is offset against the liability. As the expense has been previously recorded there
is no need to recognize the payment as an expense at that point. Not all jurisdictions follow the
practice of recognizing these amounts as liabilities in the Statement of Financial Position. Instead,
some jurisdictions provide note disclosure of these amounts.
465. The size of the accumulated liability will depend, in part, upon the type of scheme operating in a
jurisdiction. If superannuation/pension schemes are fully funded then the accrued liability may be
non-existent or negligible. However, in an unfunded, or pay-as-you-go scheme, this liability may be
substantial and may significantly alter the ratio of net assets/equity to Gross Domestic Product.
466. An example of the relative size of this liability is illustrated by the following figures taken from the
Financial Statements of the Government of New Zealand for the year ended 30 June 1999.
$m
Total assets 58,223
Total liabilities (including pension liabilities) 52,201
Pension liabilities 8,524

467. Reliable valuations of the future liability may be performed by an actuary. Examples of accounting
policies for, and note disclosure of, employee entitlements and superannuation/pension liabilities are
shown below.
Pension liabilities
Pension liabilities in respect of the contributory service of superannuation scheme members are
recorded at the latest actuarial value of the Crown’s liability for pension payments, net of the schemes’
assets.
Compensated absences
Liabilities for annual leave are recognised as they accrue to employees. Provision is also made for
expected payments of long-service and retiring leave obligations to employees.
Example 13.5

Employee Entitlements Superannuation
Wages and Salaries, Annual Leave and Sick An unfunded superannuation liability is recognised
Leave in respect of the defined benefit schemes. It is
measured as the difference between the present
Liabilities for wages and salaries, annual leave value of employees’ accrued benefits at balance
and vested sick leave are recognised and are date and the net market value of the
measured as the amount unpaid at balance date at superannuation schemes’ assets at that date. The
current pay rates in respect of employees’ services liability is assessed annually by the Government
up to that date. Actuary based on data maintained by the
Superannuation Administration Authority. It is
Non-vested sick leave is generally not recognised calculated based on the latest actuarial triennial
as future sick leave taken is not expected to assessment adjusted for any subsequent material
exceed future entitlements accruing. movements in value.
Long Service Leave The present value of accrued benefits is based on

expected future payments which arise from
A liability for long service leave is recognised. It membership of the fund to balance date in respect
is measured at either the present value of expected of the contributory service of current and past
future payments to be made in respect of services government employees. Consideration is given to
provided by employees up to the balance date or expected future wage and salary levels, expected
by applying the ‘nominal method’. The ‘nominal future investment earning rates, growth rate in the
method’ is an estimation technique which is Consumer Price Index, experience of employee
considered to be adequate in reliably measuring departures and periods of service.
the liability in certain circumstances. It is
calculated by applying the current remuneration
rates to the entitlements at year end for all
employees with five or more years of service.
Major Non Budget agencies and Area Health

Services have applied the present value basis. In
doing so, consideration is given to expected future
wage and salary levels., experience of employee
departures and periods of service. Estimated
future payments are discounted to present values.
All other agencies have continued to apply ‘the
nominal method’.
Example 13.6
The NSW Budget Sector, Notes to and forming part of the Financial Statements, page 67 (AUD)

13. EMPLOYMENT ENTITLEMENTS 96-97 95-96
$m $m
Current 2,295 2,545

Non current 14,512 16,785
16,807 19,330
Employee Entitlements comprise:
Unfunded superannuation 12,789 15,435
Long service leave and other leave entitlements 3,642 3,628
Other salary related liabilities 376 267
16,807 19,330
Unfunded Superannuation Liability
The Public Sector’s unfunded superannuation liability for the various defined benefits schemes is
assessed each year by the Government Actuary based on data maintained by the Superannuation
Administration Authority. It is based on the latest triennial actuarial assessment adjusted for any
subsequent movements in value.
These calculations are generally based on actual data up to 30 June 1997. The underlying demographic
assumptions are consistent with the 1994 triennial valuation of the Pooled Fund Superannuation Schemes.
However, the economic assumptions contained in the 1994 valuation have been revised to reflect
prevailing economic conditions and to be consistent with the requirements of Australian Accounting
Standard AAS25 “Financial Reporting by Superannuation Plans”.
The key economic assumptions as at 30 June 1997 underlying the unfunded liabilities are:
1997-98 1998-99 1999-2000 Thereafter
Earning rate 7.0%pa 7.0%pa 7.0%pa 7.0%pa
Salary growth rate 3.7%pa 4.0%pa 4.5%pa 5.0%pa
CPI growth rate 2.1%pa 2.5%pa 3.0%pa 3.5%pa
Unfunded superannuation liabilities as at 30 June 1997 have decreased by about $2.6 billion compared
to the previous year.
The bulk of the reduction resulted from a number of major positive adjustments to employee reserves
that were brought to account by the Superannuation Administration Authority in 1996-97. These
adjustments related to the allocation to employer reserve accounts of Pooled Fund tax credits, State
Superannuation Scheme Contributors’ Reserves, amount arising from corrections to employers’ annual
statements and additional interest earnings.
The balance of the decrease in unfunded liabilities was due to an adjustment made by the Government
Actuary to the value of accrued benefits to recognise changes in fund membership and valuation
assumptions to reflect current actuarial factors.
96-97 95-96
$m $m
The unfunded superannuation liability is composed of:
Pooled Fund
• State Authorities Superannuation Scheme 2,214 2,075
• State Authorities Non Contributory Superannuation Scheme 876 654
• State Superannuation Scheme 6,287 9,013
• Police Superannuation Scheme 2,495 2,800
Judges’ Pension Scheme 194 147
Parliamentary Contributory Superannuation Scheme 70 65
State’s share of University superannuation liabilities 652 678
Other 1 3
12,789 15,435
Example 13.7
The NSW Public Sector, Notes to and forming part of the Financial Statements, pages 37 and 38 (AUD)

Note 10. Federal Employee and Veteran Benefits Payable
t10. Federal Employee
The Government offers its employees, both civilian and military, retirement benefits, life and
health insurance, and other benefits.
The Federal Government administers more than 40 pension plans. The largest are
administered by the Office of Personnel Management (OPM), for civilian employees, and by
DOD, for military personnel. The Government has both defined benefit and defined contribution
pension plans. The largest are defined benefit plans.
Federal Employee and Veteran Benefits Payable as of September 30

(In billions of dollars) Civilian Military Total
Pension liability ………………………. 996.4 650.5 1,646.9
Health benefits payable …………….. 181.8 223.4 405.2
Veterans compensation
and burial benefits …………….…. - 578.1 578.1
Liability for other benefits …………… 34.1 20.8 54.9
Total Federal employee and
veteran benefits payable ……. 1,212.3 1,472.8 2,685.1
: : : : : : : :
Significant Assumptions Used

in Determining Pension Liability and the Related Expense
(In percentages) Civilian Military
Rate of interest ………………………… 7.0% 6.5%
Rate of inflation ………………………… 4.0% 2.1%
Projected salary increases …………… 4.3% 2.8%
Example 13.8
Notes to the Financial Statements, page 72 (USD)
Note 13. Other Liabilities

: : : : : :
“Accrued wages and benefits” consist of the estimated liability for civilian and commissioned
officers’ salaries and wages earned but unpaid. It also includes funded annual leave and other
employee benefits that have been earned but are unpaid.
: : : : : :
Other Liabilities as of September 30

: : : : : :
Accrued wages and benefits . . . . . . . . . . 11.1

: : : : : :
Example 13.9

Land Claims by Indigenous People
468. Governments in some countries are subject to land claims by indigenous people. These land claims
may be in respect of land still owned by the government or land initially taken over by the government
but now owned by private individuals. Liabilities may be settled by negotiation or through the legal
system. Prior to any acceptance of liability or a decision by the courts, a contingent liability may
exist. Once an agreement has been reached, or judgment obtained through the legal system, then a
liability exists which meets the recognition criteria. Land claims may be settled by way of monetary
compensation or by transfer of land. If the liability is to be settled by transfer of land, the liability will
reflect the value of the land. An example of recognition of a land claim as a contingent liability is
shown under the discussion of contingent liabilities in this Chapter.
Moral or Equitable Obligations to Provide Relief to Victims of Natural Disasters

469. Governments may have open-ended obligations for natural disasters. Preparers of financial statements
need to determine the point at which transfer payments and the associated liability to rectify such
damage should be recognized. In the case of a natural disaster the clean up costs etc., do not meet the
definition of a liability until the government accepts responsibility for them. This would be the case
where the government has a clear and formal policy regarding compensation or clean up costs. At this
point, assuming that the costs are both probable and measurable, the liability would then be
recognized.
Environmental Liabilities
470. Although a relatively recent category of liabilities, environmental liabilities may nonetheless be
significant. Many countries now have environmental laws and regulations which place responsibility
for damage to the environment onto the party causing the damage or onto the present owner of
property. In some cases the government may be the party which has either caused the damage and/or
be the current owner of the property. When determining how to report environmental liabilities in the
financial statements it is necessary to consider whether the event giving rise to a liability has occurred
and whether the ensuing liability is both probable and measurable. For example, if the government
damages property and is liable to provide compensation under existing laws, then the government has
incurred a liability.
471. One of the difficulties associated with environmental liabilities is assessing the extent to which
damage has been done, and the cost of rectifying the damage or complying with existing laws. Where
it is not possible to quantify the amount of an environmental liability then the liability would not be
recognized within the financial statement totals, but the existence of the liability and a description of
the extent of the potential liability could be provided by way of additional note disclosure.
472. The potential size of environmental liabilities are illustrated in the following excerpts from the
financial statements of the United States Government.
Another liability, which will likely

require substantial future budgetary
resources to liquidate, is related to
environmental clean-up costs. As of
September 30, 1998, the cost of cleaning up
environmental contamination was estimated
to be $224.5 billion.
Example 13.10
Management’s Discussion and Analysis, page 9 (USD)

Note 11. Environmental Liabilities
'XULQJ :RUOG :DU ,, DQG WKH &ROG Environmental Liabilities as of September 30
:DU WKH 8QLWHG 6WDWHV GHYHORSHG D
PDVVLYH LQGXVWULDO FRPSOH[ WR (In billions of dollars)
UHVHDUFK SURGXFH DQG WHVW QXFOHDU Energy:
ZHDSRQV 7KH QXFOHDU ZHDSRQV Environmental management
FRPSOH[ LQFOXGHG QXFOHDU UHDFWRUV and legacy waste ……………………………. 145.1
FKHPLFDO SURFHVVLQJ EXLOGLQJV PHWDO Active facilities ………………………………… 19.6
PDFKLQLQJ SODQWV ODERUDWRULHV DQG High-level waste and spent nuclear fuel ……. 10.7
PDLQWHQDQFH IDFLOLWLHV 7KH FRVWV Pipeline facilities ………………………………. 7.8
DVVRFLDWHG ZLWK UHPRYLQJ FRQWDLQLQJ Other …………………………………………… 3.2
DQGRU GLVSRVLQJ RI KD]DUGRXV ZDVWH
Total Energy ……………………………….. 186.4
IURP WKH SURSHUWLHV FRPSULVH WKH
DOD ……………………………………………… 34.0
UHVXOWLQJ HQYLURQPHQWDO OLDELOLWLHV
´(QYLURQPHQWDO OLDELOLWLHVµ LQ WKLV
All other agencies ………………………………. 4.1
UHSRUW DSSO\ RQO\ WR UHTXLUHG Total environmental liabilities ……………. 224.5
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Example 13.11
Obligations Under Accident Compensation Schemes
473. A number of jurisdictions, e.g., Australia, Canada, USA and New Zealand, have operated motor
vehicle or workers’ compensation type insurance schemes through legally separate public sector
bodies. At present, the accounting approach for such schemes is not uniform. The main issue is
whether the claims notified to, and accepted by the scheme, but which not be paid until future
financial years, will be recognized as a liability in the financial statements of the scheme. If they are,
then they will flow through to the consolidated financial statements of the government controlling the
scheme. At present some schemes do not recognize such liabilities. The recognition of these items
will depend on the nature of the legislative arrangements in place in each jurisdiction. Where such
liabilities are not recognized, actuarial estimates of the discounted present values of the cash flows
associated with such future liabilities may be presented as additional information in the financial
statements.

474. Another issue is whether potential obligations which have not yet been notified to the scheme should
be recognized as a liability. The recognition of these items will depend upon whether there is
sufficient information regarding their probability and measurability. An example of the recognition of
such liabilities is shown below.
All policies have been applied on a consistent basis during the period except for a
change to the accounting policy in relation to the Accident Rehabilitation and
Compensation Insurance Corporation (ARCIC).
Up until 30 June 1999 the Crown incorporated ARCIC on the basis of the accounting
policy of recognising revenue and expenses on a pay-as-you-go basis. The future
costs of past claims were not recognised in ARCIC’s or the Crown’s financial
statements, but instead were accumulated as an unfunded liability and disclosed as a
note to the financial statements.
As at 30 June 1999, ARCIC has recognised the ACC outstanding claims obligation
(future cost of past claims) in its financial statements, and from 1 July 1999 the future
costs of new claims will be recognised. Revenue will also be recognised on a
consistent basis. The impact of this is to significantly reduce the Crown’s investment in
its State-owned enterprises and Crown entities by the amount of the liability
recognised, net of an adjustment for revenue recognition alignment.
Example 13.12
The Announcement of a New Program or Spending Initiative
475. The intention of a government to undertake a new program or spending initiative which will result in
the payments to other parties, whether advised in the form of a budget policy or election promise, does
not of itself create a present obligation which is binding on a government. A liability would be
recognized only when the government is committed in the sense that it has little or no discretion to
avoid the sacrifice of future economic benefits or service potential. Where a new program or spending
initiative has been supported by enabling legislation, it is possible a liability may exist. However, an
obligation for such future spending would be more likely to be disclosed as a commitment in the
notes. Future spending which is within the normal scope of operations is not normally classified as a
liability or a commitment.
Future Obligations under Current Policies

476. Where the future obligations have already been incurred then they may meet the definition of a
liability. For example, long-term liabilities relating to employees’ current contracts generally meet the
definition and recognition criteria for liabilities in the period in which the obligation arises.
477. The point of recognition for welfare payments can be determined by applying the definition and
recognition criteria. A liability does not exist until the government acknowledges an obligation to the
recipient for the welfare payment. Governments do not normally acknowledge any liability for
welfare payments until someone applies for a welfare payment, and eligibility criteria have been
satisfied. If the government makes payment to the recipient prior to the eligibility criteria being met,
the government would not expense the payment, but would record it as a financial asset until the
transferee meets the eligibility criteria.
478. Once it has been established that someone is eligible for a welfare benefit, it is necessary to decide
how much of the government’s future obligations should be recognized within the current reporting
period. If welfare payments are made on a regular basis it is normal practice to recognize as a liability
only that portion of the welfare payment which falls due at each payment date. If a one-off lump sum
is due, then it would be recognized once the eligibility criteria have been satisfied, regardless of date
of payment. Future welfare benefits do not meet the definition of an expense and would not be

recognized as a liability within the current reporting period. At any point in time the government is
only obliged to pay for amounts owed to the individual at that particular time. Only these amounts are
recognized as expenses (refer to the discussion of Entitlements in Chapter 15). The nature of each
benefit and the determination and timing of entitlement will determine whether it is appropriate to
accrue a liability at the end of the reporting period. This will vary from jurisdiction to jurisdiction.
For example, where entitlement does not occur until the date of payment of a benefit, then there is no
liability in relation to that benefit.
479. Some jurisdictions prefer to provide information on certain types of future commitments, by way of
disclosure, rather than by recognition in the financial statement totals. The U.S. federal government
has adopted this approach for the reporting of social insurance obligations, principally because of the
“significant, vexing, theoretical and practical problems” associated with these obligations. (SFFAS
No. 8 page 49) Refer also to the separate discussion of provisions and contingent liabilities in this
Chapter. However, the U.S. has accrued unpaid amounts due for social insurance as of the reporting
date (refer to the example below).
Note 1.K. Social Insurance

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Example 13.13
480. Information on the government’s future obligations under welfare programs (e.g., projections of
general obligations and resources to cover them) may be reported in budget documents and/or
481. In the absence of a clear legal responsibility, the existence of an obligation for which the government
may have a liability must be assessed on the basis of available evidence. In situations such as these,
estimates may be necessary in determining not only the amount to be paid in settlement of an
obligation, but also the expectation that payment will be made.
Provisions and Contingent Liabilities

482. Provisions and contingent liabilities may arise when there is uncertainty as to amount or timing of
future payments or as to the likelihood of the payment occurring. The classification of such items as
provisions (recognized as liabilities) or contingent liabilities (not recognized as liabilities) is discussed
in this section.
483. IAS 37, Provisions, Contingent Liabilities and Contingent Assets deals with the relationship between
provisions and other liabilities, and between provisions and contingent liabilities. It defines provisions
and contingent liabilities as follows:
A provision is a liability of uncertain timing or amount. (paragraph 10)
A contingent liability is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability. (paragraph 10)

484. Provisions meet both the definition of, and recognition criteria for, liabilities. Contingent liabilities
however, meet either the definition of or the recognition criteria for, liabilities but not both. Items
which are recorded as contingent liabilities in one financial period may meet the definition and
recognition criteria for liabilities in a subsequent period. This may occur when a previously uncertain
event becomes certain e.g., a court case is decided and damages awarded against the government, or
when additional information allows for the reliable measurement of a liability.
485. IAS 37 also explains the application of the recognition criteria to provisions. It notes that present
obligations include both legal and constructive obligations. The Appendix to IAS 37 contains a
comparison of provisions and contingent liabilities.
486. The distinction between a provision and a contingent liability is complex for both governments and
business enterprises. One of the key issues is whether a present obligation exists. This depends on the
individual circumstances. Examples of situations when either a provision or a contingent liability may
arise within the public sector include possible obligations to:
• clean-up contaminated land;
• pay redundancy costs and other one off costs associated with an administrative restructuring;
• meet the indebtedness of others by way of guarantee;
• meet a new health and safety building code; or
• pay amounts awarded as a result of pending or threatened litigation.
487. In all of these cases, depending on the probability of the liability occurring, there may be no liability, a
need to recognize a provision or a need to disclose a contingent liability.
488. As more information on the probability of events occurring becomes available, items which have
previously been disclosed as contingent liabilities may meet the definition of a liability. For the
purposes of comparative reporting, the notes to the financial statements should indicate that an item
has been removed from the list of contingent liabilities and why it has been removed.
489. Examples of accounting policies for contingent liabilities follow, including an extract from financial
statements disclosing land claims as a contingent liability.

CONTINGENCIES
1.48 In these consolidated financial statements
contingencies are conditions, situations, or
circumstances that: exist at the end of the
reporting period, create uncertainty as to the
possible gain or loss to an entity and will be
confirmed only on the occurrence or non-
occurrence of one or more uncertain future
events.
Example 13.14
Note 1.L. Liabilities and Contingent Liabilities
Liabilities represent the amount of monies or other resources that are likely to be paid by Interior as
the result of a transaction or event that has already occurred. The financial statements should be read
with the realization that the Department of the Interior is a component of a sovereign entity, that no
liability can be paid by the Department absent an appropriation of funds by Congress, and the
payment of all liabilities other than for contracts can be abrogated by the sovereign entity. Liabilities
for which an appropriation has not been enacted are, therefore, classified as liabilities not covered by
budgetary resources, or unfunded liabilities, and there is no legal certainty that the appropriations
will be enacted.
Contingent liabilities are those where the existence or amount of the liability cannot be determined
with certainty pending the outcome of future events. Interior recognizes contingent liabilities when
the liability is probable and reasonably estimable. In accordance with Federal accounting guidance,
the liability for future clean-up of environmental hazards is “probable” only when the government is
legally responsible for creating the hazard. Thus, expected future payments for the clean-up of
environmental hazards caused by others are not recognized as liabilities by Interior. Rather, these
payments arise out of Interior’s sovereign responsibility to protect the health and safety of the public,
and are recognized in the accounting records as remediation work performed. See Note 13 for
additional information regarding contingent liabilities.
Example 13.15

NOTE 13. CONTINGENT LIABILITIES
The U.S. Department of the Interior is party to various administrative proceedings, legal actions, and
tort claims which may ultimately result in settlements or decisions adverse to the Federal
government. Interior has accrued liabilities where losses are determined to be probable and the
amounts can be estimated. Other significant contingencies exist where a loss is reasonably possible,
or where a loss is probable but an estimate cannot be determined. In some cases, once losses are
certain, payments may be from the Judgment Fund maintained by Treasury rather than from amounts
appropriated to Interior for Departmental operations.
A. Environmental Hazards
The U.S. Department of the Interior is subject to Federal, state, and local environmental laws and
regulations regarding air, water, and land use, the storage and disposal of hazardous materials, and
the operations and closure of facilities at which environmental contamination resulted. The major
Federal laws covering environmental contamination as related to Interior are the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) and the Resource
Conservation and Recovery Act (RCRA). Responsible parties, including Federal agencies, are
required to clean up releases of hazardous substances.
Interior is the Federal agency with oversight responsibility for the Nation’s national parks, wildlife
refuges, and public domain lands, which comprise approximately one-fifth of the Nation’s land mass.
In this role, Interior is faced with many hazardous waste clean-up situations. The hazards include,
among others, chemical hazards such as drums of toxic chemicals and soil and water contaminated
by chemicals, and physical hazards such as open mine shafts.
Interior has an active program to find and monitor its hazardous sites, secure the affected areas, and
begin clean-up of priority areas. However, the vast expanse of Interior lands prevents an acre by acre
review, so the exact total number of sites and a firm statement of cleanup costs are not determinable.
Once a site has been identified, it may take several years to perform an evaluation of the site and
determine the potential cost of remediation.
In 1998 and 1997, Interior recognized an estimated liability of $275 million and $223 million,
respectively, for sites where the Department either caused contamination or is otherwise related to it
in such a way that it may be legally liable for cleanup of the hazard, and the environmental cleanup
liability is probable and reasonably estimable. This estimate includes the expected future clean-up
costs, or for those sites where future liability is unknown, the cost of study necessary to evaluate
cleanup requirements. Interior’s total contingent liability for environmental cleanup of sites,
including those where liability is considered probable and reasonably estimable, may be over $338
million. The estimated liability excludes estimates of future mineral site restorations, discussed
below, for which Interior will voluntarily undertake remediation without legal responsibility to do so.
In addition to the limited number of cases discussed above where Interior may have created or
contributed to the hazards, other hazardous conditions exist on public lands for which the
Department might fund clean up. These costs, which are not included in contingent liabilities, may
result from:
• legal mining activities by others over the past two centuries and prior to current strict
environmental clean up and restoration laws;
• legal mining activities subject to current standards, but where the responsible party cannot be
found, has declared bankruptcy, or otherwise cannot be compelled to remove the hazard;
• illegal activities, including active and abandoned narcotics laboratories, hazardous materials
dumping, and illegal mining; and
• transportation spills, landfills, pipelines, and airports.
Example 13.16
U.S. Department of the Interior FY 1998 DOI Annual Accountability Report
as of September 30, 1998 and 1997, pages 80 and 81 (USD)

TABLE 10.8
STATEMENT OF CONTINGENT LIABILITIES
AS AT MARCH 31, 1999—Continued
Percentage of
expected losses
Authorized to outstanding
limit guarantees
(where Contingent (where
(1) (2) (3)
applicable) liability applicable)
$ $ %
Other explicit guarantees

Guarantees under the Prairie Grain Advance Payments Act ........................ 1,500,000,000 241,100,000 6.4
Guarantees under Section 19 of the Canadian Wheat Board Act ..................... (18)
Guarantees to holders of mortgages insured by the Mortgage Insurance Company of
Canada and GE Capital Mortgage Insurance Co. (Canada)........................... 147,451,608
Guarantees under the Agricultural Products Cooperative
Marketing Act .............................................................................................. 21,766,158
1,500,000,000 410,317,766
Total gross guarantees ...................................................................................... 35,368,866,889 47,744,914,110
(19)
Less: allowance for losses............................................................................. 4,090,000,000
Net exposure under guarantees .............................................................. 43,654,914,110

(2)(10)(20)(25)
INTERNATIONAL ORGANIZATIONS......................................................... 18,340,282,846
(10)(20)
CLAIMS AND PENDING AND THREATENED LITIGATION .................. 14,143,561,075
(22)
COMPREHENSIVE NATIVE LAND CLAIMS ............................................. 742,000,000
Subtotal (23) ...................................................................................................... 76,880,758,031

(24)
CONTINGENT LIABILITIES OF CONSOLIDATED CROWN CORPORATIONS 91,570,000
TOTAL............................................................................................................. 76,972,328,031
: : : : : : : :
(22)
The Government has 69 comprehensive aboriginal land claims either under negotiation, accepted for negotiation or under
review. Of the 69 comprehensive claims, 7 claims relating to the Council for Yukon Indians and 5 pertaining to the Dene-
Metis are in the final stages of negotiation. Should negotiations be ratified, the Government would be liable to pay financial
compensation over a number of years as follows:
(in millions of dollars)

Council for Yukon Indians.................................................................... 109
Portion of the Dene/Metis claim............................................................ 197
Nisga’a.................................................................................................. 190
496
Implementation costs ........................................................................... 246
Total...................................................................................................... 742
The remaining 57 comprehensive claims have not yet been quantified.
Example 13.17
Public Accounts of Canada, 1998-99
3
Section 10 Other Information Related to the Financial Statements (CAD)
5
The complete Statement of Contingent Liabilities from which this extract is taken may be viewed at
http://www.pwgsc.gc.ca.

Commitments
490. A commitment is generally acknowledged as the government’s responsibility for a future liability,
4
based on an existing contractual agreement . Although there may be a contractual agreement, the
contract does not yet give rise to a present obligation. This is because no exchange has yet taken place
or, in the case of a non-reciprocal transaction, the payment is not yet due. The obligation, and
therefore the liability, normally arises on delivery of the goods and services. For example, when an
entity enters into a commitment to purchase or construct a capital asset in the future, an obligation
normally arises only when the asset is delivered or the entity enters into an irrevocable agreement to
acquire the asset. The difference between commitments and liabilities is usually clear for contractual
obligations. Classification may be more difficult when obligations are embodied in legislation and
some judgment may be required.
491. Commitments differ from contingent liabilities in that there is generally certainty that the liability will
occur, but the present obligation will not occur until a future reporting period. The obligation is not
dependent upon the outcome of an uncertain future event. At the point at which the present obligation
does occur, the item ceases to be a commitment and is recognized as a liability.
492. Commitments may be disclosed in the notes or in a separate schedule. They are not accrued as
liabilities in the financial statements. Various international accounting standards require the disclosure
of commitments. IAS 1, Presentation of Financial Statements requires business enterprises to disclose
amounts committed for future capital expenditure. IAS 17, Leases is an example of a standard that
expands on the general disclosure requirement in IAS 1. It requires the disclosure of commitments for
minimum lease payments under finance leases and under non-cancelable operating leases with a term
of more than one year in summary form, showing the amounts and periods in which the payments will
become due.
493. Governments can readily report the types of commitments that businesses report such as those related
to purchase of goods and services to be provided as set out in existing contracts, agreements or
legislation.
494. An argument can be made that a government’s entire budget, once approved, can be considered an
expenditure commitment by the government. But disclosure of that “commitment” would be of little
use in the government’s financial statements. The amounts allowed for in a government’s annual
budget would be recognized as expenses by the end of the annual reporting period.
495. Generally obligations arising from ongoing social programs would not be disclosed as commitments
as there is no legal obligation to make the payments in the future (although this may vary between
jurisdictions). Information on the government’s future obligations under ongoing social programs is
needed to assess future borrowing requirements and taxation levels and the resulting impact on the
economy; the long-term viability of social programs; and policy options available to control or reduce
spending or deficit levels. This information may be disclosed in budget documents and/or financial
statements.
496. Another alternative is to disclose information about only those commitments that are abnormal in
relation to the government’s financial position or normal course of “business”, or that will have a
significant effect on the need for revenue in the future.
497. Information about employment agreements is not disclosed as a commitment because such agreements
are in the normal course of business. Similarly, it could be argued that ongoing social programs are in
the normal course of the government’s business and need not be highlighted unless there is a new
program commitment or a significant change to expand existing programs.
498. Some governments (e.g., the U.S. federal government) are required by law to project future
expenditure levels on the basis of existing policy and disclose this information.
4
In this Study the term commitment is used to refer to items which are not liabilities, but which an entity will be
required to pay in the future. The meaning of the term may vary across jurisdictions.

499. Examples of accounting policies for commitments, including some which show the treatment of
equally unperformed obligations, are shown below.
COMMITMENTS
1.50 Commitments are obligations or
undertakings to make future payments to
other entities that: exist at the end of the
reporting period and have not been
recognised as liabilities in the Statement of
Assets and Liabilities.
Example 13.18
Private Sector Financed Infrastructure Assets
There is currently no Australian Accounting However, certain private sector financed

Standard which specifically addresses the infrastructure arrangements provide for a
accounting for private sector financed private sector entity to design, construct,
infrastructure assets. Treasury has adopted the operate and maintain certain infrastructure for
following policies pending the development of a specified concession period, after which the
an accounting standard. infrastructure is transferred back to the
agency.
Agreements Equally Proportionately
Unperformed arising from private sector The interest of the agency in such
financed infrastructure arrangements are arrangements is recognised as an asset, being
generally not recognised as assets or liabilities the emerging interest in the remaining service
because there is significant uncertainty as to potential to be transferred to the agency. The
whether the definitions and recognition criteria emerging interest is valued by reference to
in SAC 4 Statement of Accounting Concepts the agency’s emerging share in the current
“Definition and Recognition of Elements of cost of the asset at the date of transfer. The
Financial Statements” would be satisfied. emerging interest is progressively recognised
Instead, the payments under these agreements from the date of completion of construction
are expensed systematically over the term of over the period of the concession agreement.
the agreements. Further, the commitments for
future payments under these agreements are
disclosed as “Commitments” in the notes to the
Example 13.19
The NSW Public Sector, Notes to and forming part of the Financial Statements, pages 29 and 30
Commitments
Future expenses and liabilities to be incurred on
contracts that have been entered into at balance
date are disclosed as commitments to the extent that
there are equally unperformed obligations.
Example 13.20

Administered Liabilities
500. A government entity will recognize only those liabilities which meet both the definition and
recognition criteria. It will not recognize liabilities unless they involve a future sacrifice of its own
revenues or assets. However, government entities may administer liabilities on behalf of another level
of government, or another entity (e.g., a government department may manage the central government
debt portfolio). In order to demonstrate accountability for the management of such liabilities,
information on the liabilities may be disclosed in either the Notes to the Financial Statements or in a
separate Schedule. However, in practice there are a range of practices regarding the reporting of
administered liabilities, and some entities recognize such liabilities in the Statement of Financial
Position. Refer also to the discussion of administered assets and administered transactions in
Chapters 12, 14 and 15.
Liabilities not Recognized

501. Where liabilities do not meet definition and recognition criteria they are not recognized in the
financial statements. However, they may be separately disclosed in the Notes to the Financial
Statements. For example actuarial valuations of social security (welfare) obligations under current law
could be provided as a note to financial statements. An example of note disclosure of liabilities not
recognized in the financial statements is shown below.
NOTE 35. LIABILITIES NOT RECOGNISED

1
1997 1996
$m $m
ON THE BASIS OF PROBABILITY
Details of liabilities not recognised, as the sacrifice of future

economic benefits is not considered probable, are as follows:
Off balance sheet interest rate financial instruments 3,077 2,904

Cross currency and other derivatives 3,712 -
Underwriting facilities 271 -
Direct credit substitutes 153 -
Credit enhancement 730 -
Other - 95
Total liabilities not recognised on the basis
of probability 7,943 2,999
ON THE BASIS OF RELIABLE MEASUREMENT
Details of liabilities not recognised, as the sacrifice of future

economic benefits can not be measured reliably, are as follows:
Off balance sheet interest rate financial instruments

1
Example 13.21
Classification of Liabilities
502. Classification depends upon users’ needs and on how they can best be met. The constraints identified
in Chapter 12 (Classification of Assets) apply here also. A possible classification of liabilities is:
• accounts payable and accrued liabilities;
• employee pension obligations or entitlements;
• liabilities relating to unearned revenue;

• debt; and
• loans and advances from other governments.
503. Liabilities may also be grouped by nature or function. The SNA and GFS functional classifications
shown in Chapter 19 could also be used.
504. Governments may want to distinguish between those liabilities that will probably be met in the next
budget period, and those that will be met in subsequent periods. As discussed in Chapter 12 this could
be done by disclosing liabilities in broad order of liquidity or by using the current and non-current
classification. When liabilities are classified according to order of liquidity, payables and provisions
tend to be at one end of the spectrum with borrowings and pension liabilities at the other end of the
spectrum.
505. Because of the nature and size of government borrowings, debt is usually highlighted. It is also
important to distinguish debt payable in foreign currency whenever the amount is significant, so that
readers are able to assess the impact of foreign exchange movements.

CHAPTER 14
ACCRUAL BASIS – REVENUES
Introduction
506. PSC Study 9 Definition and Recognition of Revenues, considered the extent to which the IASC
definition of income and revenues applies to revenues in the public sector. The Study concluded that
although some government transactions are identical to those in the commercial or for-profit sector,
many forms of government revenues are non-reciprocal transfers which require additional
consideration. Study 9 focused on the definition and recognition issues associated with non-reciprocal
transfers. This Chapter describes the types of revenues received by governments and discusses the
extent to which the IASC definition of revenues applies. It gives examples of revenues and discusses
recognition issues associated with these revenues, particularly non-reciprocal transfers.
Definition of Revenues
507. The IASC Framework for the Preparation and Presentation of Financial Statements defines income as
follows:
Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants. (paragraph 70)
508. The IASC Framework goes on to explain that income encompasses both revenues and gains.
The definition of income encompasses both revenue and gains. Revenue arises in the course of the
ordinary activities of an enterprise and is referred to by a variety of different names including sales,
fees, interest, dividends, royalties and rent. (paragraph 74)
Gains represent other items that meet the definition of income and may, or may not, arise in the
course of the ordinary activities of an enterprise. Gains represent increases in economic benefits
and as such are no different in nature from revenue. Hence they are not regarded as constituting a
separate element in this framework. (paragraph 75)
509. The PSC, in common with a number of public sector standard setters, has chosen to use the term
revenues to apply to both revenues and gains as defined by the IASC.
Recognition of Revenues
510. The accrual basis of accounting recognizes the effects of transactions and other events in the period
during which they occur, regardless of the timing of associated cash receipts. This means decisions
need to be made regarding the timing of recognition of revenue. The IASC Framework for the
Preparation and Presentation of Financial Statements gives the following criteria for recognition of
elements:
(a) it is probable that any future economic benefit associated with the item will flow to or from the
enterprise; and
(b) the item has a cost that can be measured with reliability. (paragraph 83)
511. “Probable” means that the chance of an event occurring is more likely than less likely and
“measurable” means reasonably estimable. Often revenue may be measured with a high degree of
reliability. However, in other cases, estimates of the amount may be required. The point of
recognition for different types of revenue is discussed later in this Chapter.
Governmental Financial Reporting Chapter 14: Accrual Basis – Revenues 127

Types of Revenues
512. Government revenues include:
• Non-reciprocal revenues
• direct and indirect taxes
• duties
• fees and fines
• other non-reciprocal transfers
• Reciprocal (or exchange) revenues
• sales of goods or services
• dividends
• interest
• net gains arising from the sale of assets
• Other gains
513. This list is not exhaustive. A fuller list is provided towards the end of this Chapter in the discussion
on Classification. Exchange revenues are derived from exchanges in a similar manner to the private
sector, whereas non-reciprocal revenues are usually derived from the use of the powers of
government.
514. Governments may derive revenues from all these sources, although the mix will depend upon the type
or level of entity. National or federal governments will normally derive most of their revenue from
exercising their power to tax or levy. They may also receive grants, contributions and donations from
other governments, supranational authorities or from the private sector.
515. Government departments typically have two main sources of revenue: exchange revenues from other
government entities or the private sector, and revenues from central government which may be
classified as reciprocal or non-reciprocal depending upon the jurisdiction. Government departments
or agencies may also collect revenues on behalf of the government or other entities, known as
custodial or agency receipts. The treatment of custodial receipts is discussed in Chapter 14.
516. Local government revenue may come from a variety of sources. It may include rates or polls levied
on domestic or business dwellings, grants from other levels of government, and revenue from trading
activities or services provided on a cost recovery basis.
517. There are a wide variety of other government reporting entities. Government Business Enterprises
(GBEs) would, by definition, normally receive most of their revenue from trading activities. Other
organizations may receive a mixture of exchange revenue and grants, contributions and donations.
518. Financing inflows, notably borrowings, do not meet the definition of revenue because they result in an
equal change in both assets and liabilities and have no impact on net assets/equity. Financing inflows
are taken directly to the Statement of Financial Position and added to the balances of financial assets
and financial liabilities. For a discussion of the treatment of these items refer to Chapters 12 and 13.
Appropriations
519. For the government as a whole, appropriations are an authorization by the legislature to expend funds.
For the individual entities of government which receive funds under appropriation, it is necessary to
determine whether the appropriation meets the definition of revenue, and if so, whether it should be
classified as reciprocal or non-reciprocal. Depending on the types of appropriations that may be made
within a jurisdiction, and the characteristics of the appropriation in question, appropriations may be:
• revenue;
• a capital contribution being a direct and permanent increase in the resource base of the entity
similar in nature to an equity injection to private sector entities or GBEs;
• a loan; or
• custodial receipts for transfer to third parties.
128 Chapter 14: Accrual Basis – Revenues Governmental Financial Reporting

520. Under the accrual basis of accounting, appropriations representing a direct and permanent increase in
the resource base of a governmental entity may be classified as capital contributions by the controlling
entity where the parent government is viewed as the “owner”. The recognition of such amounts as
contributions of capital and loan funds would depend on the nature of the appropriation system and the
framework within which government entities operate. Such recognition may be appropriate where
government entities have been corporatized or a purchaser-provider (or similar) model for the delivery
of services of the government departments has been adopted such that the relationship between the
entity and the government replicates that between owners and private sector or other government
entities. Refer to Financial Assets – Investments in Chapter 12 for a discussion of the accounting
treatment in the financial statements of the entity making such a contribution.
521. If the funds are provided in order to finance operating activities in the reporting period they are
revenue in nature. The legislative and administrative arrangements surrounding appropriations for
operating activities vary considerably from one jurisdiction to another. In some countries (such as
New Zealand) which operate under the accrual basis and have explicit agreements between the
government and its agencies specifying the goods and services to be produced, the funds received
under appropriation for the production of outputs may be accounted for as exchange revenue. In other
jurisdictions, the funds received under appropriation may be regarded as non-reciprocal revenues
(refer to the discussion of Non-reciprocal Revenues later in this Chapter).
522. Appropriations may be restricted or unrestricted. Where appropriations restrict the use of funds to a
particular purpose, the entity receiving the funds must consider the appropriate point of recognition.
Refer also to the discussion of Restricted Transfers later in this Chapter. The point of recognition is
also affected by the certainty of receiving and keeping the funds specified in the appropriation. This
will vary between jurisdictions. Revenues which have been authorized by appropriation but which
have not yet been received, may be recognized as revenue if they are more likely than not to be
received by the entity. Where there is some uncertainty regarding the receipt of the funds, recognition
may be deferred.
523. In general, unexpended appropriations are not be treated as revenue where they must be returned to
the parent government because there is not a legal entitlement to the resources. If agencies are
permitted to carry-over unexpended appropriations, or some portion of them, that amount may be
treated as revenue.
524. The United States views appropriations as a financing source recognized by the entity when the
appropriation is used, rather than when the related costs are incurred. Appropriations are recognized
as used to finance operations when an entity acquires goods and services, or when benefits and grants
are provided that are authorized to be paid by the appropriations. The remaining amount of
appropriations enacted into law, but not yet recognized as “appropriations used”, are reflected as
“unexpended appropriations” in the equity section of the entity’s Balance Sheet. (SFFAS No.7,
paragraphs 69 and 70)
525. An alternative treatment is that adopted in New Zealand. Parliament appropriates a variety of types of
expenses and expenditures, including the purchase of outputs from departments and other providers,
the funding of benefits and other unrequited transfers paid by departments on the government’s behalf,
and the purchase or development of capital assets. In the case of the purchase of outputs, the amounts
received by the provider pursuant to an appropriation are accounted for as revenue in accordance with
generally accepted accounting practice.

526. Some examples of accounting policies for revenues subject to appropriation are shown below.
Revenue
The Department derives revenue through the

provision of outputs to the Crown, for services to
third parties and interest on funds held in bank
accounts. Such revenue is recognised when
earned and is reported in the financial period to
which it relates.
Example 14.1
NOTE 5. NET FINANCING SOURCES

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Example 14.2
Notes to Principal Statements, page 72
Non-reciprocal Revenues
527. A non-reciprocal transfer is one in which the entity receives assets or services or has liabilities
extinguished without directly giving approximately equal value in exchange to the other party or
parties to the transfer. Taxation is the major source of such inflows of economic benefits. Some
jurisdictions use the term “non-exchange” transfer to refer to non-reciprocal transfers.
528. In addition to taxes, governments may also receive grants, donations and payments from other parties.
For example, national governments may receive aid or grants from other sovereign governments or
from supranational authorities. Entities which form part of a national government may receive
transfers from the parent government, which under some circumstances might be viewed as an
exchange relationship with the parent government (refer to the discussion of Reciprocal (Exchange)
Revenues later in this Chapter) but under other circumstances might be viewed as non-reciprocal
transfers.
529. A concept of revenue used in some jurisdictions, including the United States, proceeds from the
principle that the bottom line of the primary operating statement should be the net cost of government
activities carried on by the responsible government entity, i.e., costs of the particular programs
administered by the reporting entity less any exchange revenues derived from selling government
goods and services for a price. Under this approach, non-exchange revenues derived primarily from
accrued taxes are treated as a revenue of the whole of government except for taxes which are
dedicated to finance specific programs. However, whatever form of presentation is adopted, the gross
amount of revenues should be clearly disclosed.

Revenues Derived from the use of the Powers of Government
530. Governments may use their powers to collect a range of non-reciprocal revenues. These include a
variety of direct and indirect taxes, duties, fees and fines such as;
• income tax;
• fringe benefit tax;
• sales tax;
• value-added tax;
• payroll tax;
• property tax;
• capital gains tax;
• stamp, check and credit duties;
• death/estate duties;
• license tax;
• road-user charges and motor vehicle fees;
• levies; and
• fines.
531. Collections of taxes are generally viewed as part of the operating revenues of a government.
532. Taxes frequently make up the majority of a government’s revenues and are generally viewed as an
important component in assessing both the government’s financial performance during the period and,
in conjunction with borrowing levels, in assessing intergenerational equity. Because IAS 18, Revenue
focuses on exchange transactions, taxes and other non-reciprocal transactions are not covered in the
IAS. Although taxes are often the main source of revenues at a whole of government level, this may
or may not be so for other levels of government or for individual government entities. Some
government entities tax in their own right and may use the revenues collected for their operating costs.
Others merely collect such revenues on behalf of a higher level of government and have no right to
these revenues. In this case the collecting agency would account for the revenues collected as
custodial or agency receipts (refer to discussion later in this Chapter).
533. There are a number of possible recognition points for taxation revenue. In the case of income tax, the
following recognition points are possible:
• when the taxpayer earns the taxable income;
• at the end of the income year;
• when the tax returns are filed;
• when tax is assessed;
• when a tax liability is recognized by the taxpayer; or
• when payment is made.
534. Using the recognition criteria of probability and measurability, it is possible to specify points at which
taxation revenue, in any particular government under an accrual basis, is first able to be recognized.
Because of the differences in legislation and administrative systems across countries, it is possible that
different countries will have different recognition points for similar taxes.

535. Examples of recognition points for taxes used by various governments are shown below.
Revenue
Revenue levied through the Crown’s sovereign power
The Crown provides many services and benefits that do not give rise to revenue. Further,
payment of tax does not of itself entitle a taxpayer to an equivalent value of services or
benefits, as there is no direct relationship between paying tax and receiving Crown services
and transfers. Such revenue is received through the exercise of the Crown's sovereign power.
Where possible, revenue is recognised at the time the debt to the Crown arises.
Revenue Type Revenue Recognition Point

Source deductions (PAYE) When an individual earns income that is subject to PAYE
1
Residents’ withholding tax When an individual is paid interest or dividends subject to
deduction at source
Fringe benefit tax (FBT) When benefits are provided that give rise to FBT
Provisional tax Payment due date
Terminal tax Assessment filed date
Goods and services tax When the liability to the Crown is incurred
Excise duty When goods are subject to duty
Road user charges and motor vehicle When payment for the fee or charge is made
fees
Stamp, cheque and credit card duties When the liability to the Crown is incurred
Other indirect taxes When the debt to the Crown arises
1
Corresponds to withholding taxes on residents’ interest and dividend income in Note 1 to the
Financial Statements.
Example 14.3
Financial Statements of the New Zealand Government

State Taxation, Fines and Fees
State taxation is recognised as follows:
· Government-assessed revenues (primarily

land tax) are recognised at the time the
assessments are issued.
· Taxpayer-assessed revenues (including

payroll tax and stamp duty), are
recognised when the funds are received by
the revenue collecting agency. Additional
revenues are recognised for assessments
subsequently issued following review of
returns lodged by taxpayers.
· Revenue from traffic penalties is

accounted for on a cash basis according to
the amount collected in a financial year.
This may include penalties imposed in an
earlier financial year. Recipients of
penalty notices have a variety of options
available to them to dispose of the penalty.
The payment option is generally taken in
about 70% of cases. All other fines and
fees are also recognised when cash is
received.
Example 14.4

Taxation revenue
1.21 Revenues are recognised when the
Government gains control of the future
economic benefits that flow from taxes and
when those future economic benefits can be
measured reliably. The bases of recognition
for major types of taxation revenue are
summarised in Table 1.
Table 1: Taxation Revenue

Major type of Basis of revenue
taxation revenue recognition
Income Tax from recognised on earnings of
Individuals taxpayers during the
(PAYE, PPS, reporting period where
Provisional Tax) such amounts can be reliably
measured and are expected
to be collected
Company Tax & recognised on company
Superannuation income for the reporting
Fund tax period
Sales Tax & recognised on defined
Withholding Tax sales and other relevant
activities occurring during
the reporting period
Fringe Benefits recognised on fringe
Tax benefits provided to
employees during the
reporting period
Excise Duty recognised when goods are
distributed for home
consumption
Customs Duty recognised when imported
goods are distributed for
home consumption
Example 14.5
Notes to and forming part of the Financial Statements, pages 38 and 39
536. In many cases the amount of revenue and the timing of its recognition will be clear (e.g., where the
amounts are assessed and paid in the same reporting period or periodic installments have been made
and only the final installment and potential refunds have to be estimated). In cases where the amount
and timing of recognition is less clear, revenues are recognized if the amount of revenue in the
reporting period can be reliably determined.
537. Where information on future taxes is not complete or reliable, the point of recognition may be when
payment is received. For example, U.S. federal standards recognize that present U.S. administrative
processes for tax collection do not provide the information necessary for accrual at the point the
underlying event or transaction occurs. Additional tax accruals could be determined if necessary
systems were improved. As a result, U.S. standard setters characterize the recognition and
measurement standard for taxes as closer to the receipt of cash than to the point at which the taxable
income is earned.

538. Examples of taxes collected by national governments and a local government are shown below.
Statement of Financial Performance

Forecast Actual
$m $m Note $m $m
Revenue
Levied through the Crown’s

Sovereign Power
21,603 20,490 Direct taxation 1 20,289 21,260
12,095 11,866 Indirect taxation 2 11,867 11,722
33,698 32,356 Total taxation revenue 32,156 32,982
263 270 Compulsory fees, fines, penalties and levies 300 258
Total Revenue Levied through the
33,961 32,626 Crown’s Sovereign Power 32,456 33,240
Example 14.6
Statement of Financial Performance, page 26 (NZD)
REVENUES AND EXPENSES BY ECONOMIC TYPE

1
1997 1996
Note $m $m
Revenues
TAXATION
Income tax 4 90,416 83,738
Sales tax 13,365 13,107
Excise duty 13,276 12,949
Customs duty 3,261 3,167
Other taxes, fees and fines 5 6,326 5,336
Total taxation revenues 126,644 118,297
: : : : : :
1
Trial and unaudited
Example 14.7
Revenues and Expenses by Economic Type, page 23 (AUD)

1997/98 1997/9 1997/98 1996/97
Gross 8 Net Net
Expenditur Income Expenditure Expenditur
e £000 e
£000 £000 £000
: : : : : : : :
This was financed by
Council Tax income 0 224,540 -224,540 -211,680
Non-domestic rate income 0 203,107 -203,107 -213,553
Example 14.8
Consolidated Revenue Account, page 15 (GBP)
Other Non-Reciprocal Transfers
539. The various types of transfers made by governments are discussed in Chapter 15. When another
government is the recipient of these transfers they may meet the definition and recognition criteria for
revenues.
540. In addition to receiving non-reciprocal transfers from other governments or supranational authorities,
governments may also receive grants, contributions or donations from the private sector.
541. Although government transfers meet the definition of revenues, the main difference between these
revenues and other revenues is that there is no point of exchange which may be used as the point of
recognition. In the absence of a point of exchange, another suitable recognition point must be found.
542. The CICA Public Sector Accounting Recommendations consider the recognition of government
transfers.
Government transfers should be recognized in a government’s financial statements as expenditures

or revenues in the period that the events giving rise to the transfer occurred, as long as:
(a) the transfer is authorized;
(b) eligibility criteria, if any, have been met by the recipient; and
(c) a reasonable estimate of the amount can be made. (PSAR Section PS 3410, paragraph .07)
543. The PSAR recognizes that it might not always be possible to estimate the exact transfer to be paid or
received and that estimates may need considerable judgment. Estimates also may need to be
reappraised as more experience is acquired. However, “the basis for determining the amount
recognized for any particular transfer should be applied consistently from year to year” (PSAR Section
PS 3410, paragraph .07).
544. The general recognition criteria discussed in this section apply to all types of government transfers. In
relation to grants, recipient governments would recognize grants as revenues once the eligibility
criteria have been met, the donor government has confirmed that it will make the transfer, and the
amount which will be received can be reliably measured.
545. Where transfers represent a loan from another government or a supranational authority they represent
a liability to the recipient. However, if the transfer is a non-repayable loan, it would meet the
definition of revenues. Grants include savings in outflows of future economic benefits. One example
is the forgiveness of debt from another government or a supranational authority. Since the forgiveness
of debt owed by a national government will not represent a capital contribution by the controlling
entity, it should be recognized by the beneficiary as an item of revenue.
Restricted Transfers
546. Unrestricted grants meet recognition criteria as soon as they are received or receivable. Recognition
of restricted grants, however, may be more problematic.

547. Governments receive restricted grants to assist them in carrying out their responsibilities for providing
services. That benefit might not actually be obtained until a subsequent period because of the timing
of performance of necessary conditions. Since there is an obligation to meet the restrictions imposed,
the key issue is the timing of the recognition of the inflows as revenues.
548. Some possible alternatives for revenue recognition are:
• Matching revenues with expenses/expenditures to which they relate. Revenue recognition does
not occur until conditions have been fulfilled. Consistent with the accounting basis adopted, this
results in a deferral of revenues as liabilities if the conditions have not been met.
• Recognizing the inflows as revenues when received or receivable, but segregating them in the
financial statements as restricted in use.
• Recognizing the inflows as revenues when received or receivable, with disclosure of the
restrictions in the notes to the financial statements only. This approach ignores restrictions for
revenue recognition purposes.
549. In assessing the alternatives, it is useful to consider them in the context of different types of restricted-
use revenues. For example, some contributions are received under a specific agreement or program
and the purpose for which they are received is outlined in the terms of the agreement or related
legislation. There is a clear understanding that the funds are to be spent only for very specific
purposes. In other cases, the restriction may be related to a broad class of expenses/expenditures such
as “growth-related infrastructure”, which still allows the government some discretion in when the
resources are used and on which projects. It is restrictive only in the sense that the government does
not have the discretion to use the resources for unrelated purposes.
550. Debate exists on the appropriate timing of the recognition of contributions that are restricted in use.
For example, the Australian Public Sector Accounting Standards Board (PSASB) argues that revenue
recognition for contributions should be related to when the government obtains control over the
contributed assets (AAG 14). The PSASB considers that when the government can deploy the
resources to earn interest revenues, the government controls the assets because it can benefit from
them in pursuit of its objectives. The PSASB argues that restrictions on the use of an asset should
only influence the timing of revenue recognition if the restrictions affect the government’s capacity to
use the asset in pursuing its objectives. Although a government may be expected to use resources to
pursue service-delivery objectives, revenue recognition should not be deferred: a liability does not
exist unless the government is obliged to sacrifice future economic benefits directly to an external
party in return for their contributions. Fiduciary obligations to carry out certain activities and sacrifice
economic benefits in the future are not considered to be liabilities because such an approach could
arguably impose an unacceptably broad notion of liabilities and the responsibility is no different from
the fiduciary responsibilities of a government to use assets efficiently and effectively. If an entity
failed to meet the specific conditions attaching to a contribution of assets, and the amount of the
contribution is required to be repaid, a liability and an expense would need to be recognized for the
amount payable at that point. A similar approach has also been adopted in South Africa.
551. However, others believe that externally restricted inflows should be recognized as revenues only once
the resources have been used for the purpose or purposes specified, or when the related expenses are
recognized. It is argued that the government has an obligation to external parties until the resources
are used as stipulated, and that this obligation is best reflected by recording the unspent portion as
deferred revenue. It is also contended that this approach results in a more appropriate matching of the
recognition of expenses/expenditures with the revenues related to them. Under this view, disclosure
alone of the limitation on the government’s discretion to use resources other than as specified by the
external party is insufficient. This approach has been adopted in relation to both governments and
accounting by charities or not-for-profit organizations in Canada, and in Sweden.
552. The PSC intends to engage in further work on the recognition of non-reciprocal revenues in the future.
Whichever method is used, it is appropriate to disclose the accounting policy followed for externally
restricted inflows, a general description of the nature and source of the restrictions, the amount of
externally restricted inflows by major source, and the amount of contributions recognized as revenues
during the reporting period in respect of which the conditions specified by the contributor have not yet
been met as at the reporting date.

553. Examples of accounting policies for recognition of government grants and contributions are shown
below.
Commonwealth Grants
These are funds provided by the

Commonwealth to assist the States in meeting
their expenditure responsibilities. These
grants are for either general or specific
purposes. They are recognised when received.
Example 14.9
Grants and contributions
Apart from Revenue Support Grant, all other revenue grants are matched against expenditure to which they
relate. Capital grants and contributions are also matched to the cost of the relevant assets. This is achieved
through a Government Grant Deferred Account and Contributions Deferred Account. These hold grants and
contributions received and release them to revenue over the expected life of the asset to offset the depreciation
element of capital charges levied for the use of the asset.
Example 14.10
Accounting Policies, page 12
Reciprocal (Exchange) Revenues
554. Exchange revenues include revenues from sales of goods or services, dividends, interest, and net gains
arising from the sale of assets. They also include fees charged by the government for services
provided under a monopoly power. They derive their name from the fact that they are the result of
reciprocal transfers, or exchanges. Because they are derived from exchanges in a similar manner to
the private sector, the discussion in IAS 18, Revenue is relevant.
555. Where goods and services are provided at a subsidy, both the revenue from the purchaser and the
government subsidy are revenue of the sub-entity.
556. For the majority of exchange transactions undertaken by governments, the circumstances are similar to
those found in the private sector and usual criteria of probability and measurability can therefore be
applied. Recognition of transactions prior to time of payment or receipt may lead to the recognition of
unrealized gains or losses.
557. An excerpt showing the types of exchange revenues earned by the Commonwealth Government of
Australia is shown below.

1997 19961
Note $m $m
: : : : : :
NON-TAXATION
Sales of goods and services (incl user charges / fees) 28,535 25,207
Interest and dividends 6 4,140 3,489
Net foreign exchange gains 7 197 1,313
Net gains from sale of assets 14 - 15
Net gains from asset sales program 8 1,392 -
Other sources of non-taxation revenues 9 2,716 3,931
Total non-taxation revenues 36,980 33,955
: : : : : :
1
Trial and unaudited
Example 14.11
Net Gains on Sale of Assets
558. Net gains arising from the sale of assets are also exchange revenues and are generally separately
disclosed. The presentation of gains arising on sale of assets may vary across jurisdictions. Some
jurisdictions refer to the gross sale proceeds as revenue and the carrying amount as the expense. Other
jurisdictions refer to the net gain as the revenue item. However, in both cases it is common practice to
disclose the net gain as a single item on the face of the financial statements with details of gross
proceeds and book value being disclosed by way of note. The practice adopted by a particular
jurisdiction should be explained in the Statement of Accounting Policies.
Investment Revenues
559. Investment revenues include interest and dividend income. Interest and dividend revenues collected
by governments are accounted for in the same way as in the private sector. Interest is recognized when
it is due, even if it has not been received. The interest on certain financial investments is received at
the end of the contract. In these cases it is necessary to apportion the interest over the period of the
contract.
560. Interest earned on the proceeds of issuing currency is treated in the same way as other interest
revenues. Such interest is sometimes referred to as seigniorage. Dividends are often recognized when
they are declared, although they may not be received immediately.
561. Examples of an accounting policy and note disclosure of investment income are shown below.
Investment Revenue
Interest and other investment income is

recognised in the period in which it is earned.
Example 14.12
Consolidated Financial Statements of the NSW Public Sector 1996-97

Forecast Actual
$m $m $m $m
NOTE 3: Investment Income
Interest Income
Marketable securities, deposits, mortgages and cash
386 333 balances 343 390
Advances
245 222 Student loans 229 187
21 21 Contact Energy Limited 17 33
55 42 Other entities 41 36
707 618 Total Interest Income 630 646
Dividend Income
Dividends from State-owned enterprises
186 58 Electricity Corporation of New Zealand Limited 57 136
59 81 Trans Power New Zealand Limited 81 67
47 32 Television New Zealand Limited 102 21
18 13 New Zealand Post Limited 14 15
12 17 Government Property Services Limited 17 6
7 3 Land Corporation Limited 3 10
9 12 Other 8 18
116 122 Housing New Zealand 122 50
9 - Housing Corporation of New Zealand - 11
27 78 Other dividends 77 16
536 481 Total Dividend Income 546 398
Other Investment Income

- 54 Gains on marketable securities and deposits 13 110
- - Gain on incorporation of Public Trust Office reserves 86 -
1,421 Gain on sale of Contact Energy Limited 1,421 -
204 Gains on sale of Airport companies 204 -
- - Other 1 -
- 1,679 Total Other Investment Income 1,725 110
1,243 2,778 Total Investment Income 2,901 1,154
Example 14.13
Other Gains
562. Gains may arise from increases in the value of assets due to movements in market prices or currency
movements and increases due to natural accretion (e.g., growth of forests, livestock). They may also
include decreases in the value of liabilities due to currency movements. These gains may be realized
or unrealized. The treatment of realized net gains on the sale of assets has been discussed earlier in
this Chapter. The treatment of unrealized gains on assets due to changes in market value is discussed
below.
Other Gains – Changes in Market Value

563. Because the accrual basis recognizes events in the period in which they occur, preparers of financial
statements must decide whether to recognize unrealized gains as revenue. Practices regarding
revaluation of assets vary between countries.

564. The treatment of unrealized gains depends on the measurement base adopted. Under historical cost
accounting, the occurrence of a transaction (e.g., the sale of the asset) is normally required for an
increase in an asset’s value to be recognized. In contrast, under modified historical cost, increases in
an asset’s value may be recognized when the change in value occurs, if that class of assets is revalued
regularly. Such gains are normally taken directly to net assets/equity although there may be some
circumstances in which the gains are recognized as revenues.
565. IAS 16, Property, Plant and Equipment allows two different treatments for the valuation of assets.
Where property, plant or equipment is recorded at the lower of depreciated historic cost or recoverable
amount, increases in the value of assets are not normally recognized. However, a subsequent increase
in the recoverable amount may be written back in certain circumstances (paragraph 59). Where assets
are revalued regularly to fair value, revaluation increases should be taken directly to net assets/equity
unless the revaluation represents a reversal of a previous decline in value, in which case the
revaluation increase should be treated as income (paragraphs 39 and 40). Changes in the value of land
(unless held as an investment) are usually treated in the same way. The treatment of revaluations
varies between jurisdictions.
7
566. IAS 25, Accounting for Investments discusses the treatment of gains and losses arising from
revaluations of investment properties and some financial investments. Investment properties may be
accounted for as if they were property, plant and equipment, or as long-term investments
(paragraph 28). Under IAS 25 gains and losses on short-term investments may be accounted for as
income and expense, or they may be accounted for as long-term investments. Gains and losses on
long-term investments are taken to the revaluation reserve, subject to the proviso that the decrease
does not exceed the amount held in the revaluation reserve in respect of that same asset (paragraphs 31
and 32). Where alternative treatments are available the entity should follow a consistent policy. An
example of an accounting policy for gains resulting from the change in value of investments is shown
below.
Unrealised gains on investments other

than foreign exchange gains
1.22 Unrealised gains, other than foreign

exchange gains, arising from the changes in the
value of investments are treated as follows:
♦ the Reserve Bank of Australia takes

such gains to reserves where market
price is greater than cost; only realised
gains are available for distribution as
dividends;
♦ the Department of the Treasury except

in relation to the quota in the
International Monetary Fund, does not
recognise such gains except in the case
of a formal revaluation.
Example 14.14
7
The International Accounting Standards Committee has signaled its intention to withdraw IAS 25, Accounting for
Investments following the approval of IAS 40, Investment Property.

Other Gains – Foreign Exchange Gains
567. Foreign exchange gains or losses arise on foreign currency monetary items. Monetary items include
accounts receivable, accounts payable, and long-term liabilities or receivables. When there is a time
delay between time of recognition of the transaction and time of payment, a foreign exchange gain or
loss will occur. If the transaction is not completed by balance date the exchange difference resulting
from translation of balances at the closing rate is an unrealized gain or loss. IAS 21, The Effects of
Changes in Foreign Exchange Rates outlines the accounting treatment for both realized and
unrealized gains or losses arising from movements in foreign currency exchange rates.
568. IAS 21 requires that exchange differences be recognized as income or expense in the period in which
they arise (paragraph 15) with the exception of exchange differences arising on a monetary item that,
in substance, forms part of an entity’s net investment in a foreign entity, and exchange differences
arising on a foreign currency liability accounted for as a hedge of an entity’s net investment in a
foreign entity. Exchange differences arising in these situations are classified as net assets/equity until
the disposal of the net investment, at which time they should be recognized as income and expenses
(paragraphs 15,17 and 19). Exchange differences are also discussed in Chapter 15 of this Study. The
exchange differences on borrowings and monetary investments could be significant for many
governments.
569. Under a historical cost model, declines in the value of liabilities due to foreign currency movements
are recognized as revenue. However, declines in liabilities due to movements in interest rates are not
recognized until the liability is settled. The reverse applies to increases in the value of liabilities.
570. The disclosure of recognized gains and losses may occur in the Statement of Financial Performance,
or in the case of gains and losses which have been taken directly to reserves, in an additional
statement. For example, in the United Kingdom, Financial Reporting Standard 3 requires a statement
of total recognized gains and losses to show the extent to which shareholders’ funds have increased or
decreased from all the various gains and losses recognized in the period.

571. Examples of accounting policies for and disclosure of gains are shown below.
Gains
Realised gains arising from sales of assets or the early repurchase of liabilities are recognised
in the Statement of Financial Performance in the period in which the transaction occurs.
Unrealised foreign-exchange gains on monetary assets and liabilities, and unrealised gains
on marketable securities held for trading purposes, are recognised in the Statement of
Financial Performance.
Unrealised and realised gains related to hedging activity are recognised in the Statement of
Financial Performance in the same period in which gains on the underlying hedged position
are recognised.
Unrealised gains arising from changes in the value of physical assets (including State
highways) are recognised at balance date. To the extent that a gain reverses a loss
previously charged to the Statement of Financial Performance, the gain is credited to the
Statement of Financial Performance. Otherwise, gains are credited to an asset revaluation
reserve for that class of asset.
Unrealised gains arising from changes in the value of commercial forests are credited to the
Statement of Financial Performance.
Unrealised gains (excluding foreign-exchange gains) arising from changes in the value of
investments and marketable securities held for investment are recognised at balance date
only to the extent that they reverse a loss previously charged to the Statement of Financial
Performance. Gains effecting such a reversal are credited to the Statement of Financial
Performance.
Example 14.15
Statement of Accounting Policies, pages 59
NOTE 7. NET FOREIGN EXCHANGE GAINS/(LOSSES)

1997 19961
$m $m
FOREIGN EXCHANGE GAINS
Non-speculative 633 3,197

Total foreign exchange gains 633 3,197
less FOREIGN EXCHANGE LOSSES
Non speculative 436 1,884

Total foreign exchange losses 436 1,884
Net foreign exchange gains/(losses) 197 1,313

1
Example 14.16

Custodial/Agency Receipts
572. Custodial receipts include taxes collected as agent for another government, contributions towards
pension and welfare funds and other receipts collected as agent for another entity.
573. The responsibilities of a government agency may include the levying and/or collection of taxes, fines
or fees as agent of the government or another government organization, and employee contributions
towards pension and welfare funds. These items may be referred to as custodial receipts, agency
receipts or administered revenues. The definition of revenue refers to economic benefits in the form
of inflows that result in equity. Custodial receipts are economic benefits in the form of inflows, but
they normally do not belong to the collecting agency. If the collecting agency is unable to use for its
own purposes the proceeds of user charges, taxes, fines and fees without further authorization, the
revenues are not attributable to the collecting agency, and should be classified as custodial receipts
and not recorded on the face of the financial statements contained in governmental financial reports.
574. Accountability for custodial receipts may be demonstrated by disclosing information on these receipts
in a separate Statement or in the Notes to the Financial Statements. The only portion of custodial
receipts which should be recorded as revenue is any commission received for the collection or
handling of these flows. However, in practice some jurisdictions recognize custodial receipts in the
Statement of Financial Performance. An example of a statement of custodial flows is shown below.
575. Refer also to Chapters 12,13 and 15 for discussion of administered assets, liabilities and expenses.

Consolidated Statement of Custodial Activity
for the years ended September 30, 1998 and 1997
(dollars in thousands)
1998 1997
Collections on Behalf of the Federal Government

Mineral Lease Collections
Rents and Royalties $ 4,479,181 $ 4,891,647
Offshore Lease Sales 1,464,798 1,338,559
Other 155 48,588
Total Mineral Lease Collections 5,944,134 6,278,794

Earnings on Escrow Investments
Interest Earned - Federal Investments 52,356 40,181
Amortized Discount on Federal Investments (Note 3) 36,902 45,876
Total Earnings on Escrow Investments 89,258 86,057
Receivable Accrual Adjustment 32,731 -
Total Collections on Behalf of the Federal Government $ 6,066,123 $ 6,364,851
Disposition of Collections
Transferred to Others (Note 17)
Department of the Treasury $ 3,675,277 $ 3,820,661
National Park Service Conservation Funds 896,980 1,046,980
States 655,242 684,908
Bureau of Reclamation 422,871 442,985
Indian Tribes and Agencies 71,010 53,954
Minerals Management Service Offshore Program 71,675 41,000
Other Federal Agencies 27,304 29,553
Other Transfers 28,053 62,123
Total Transferred to Others 5,848,412 6,182,164
Increase in Collections Pending Transfer 217,711 182,687
Total Disposition of Collections $ 6,066,123 $ 6,364,851
The accompanying notes are an integral part of these financial statements.
Example 14.17
Annual Report Fiscal Year 1998, page 62 (USD)
Classification
576. Classification depends on users’ needs and on how they can best be met. The constraints identified in
the discussion of classification of assets (Chapter 12) apply here also.
577. Classifying revenues into various types helps users to determine how dependent the government is on
any particular source of revenues, and consequently, the sustainability of its fiscal position. For this
reason it may be useful to distinguish taxes (fiscal revenues) from non-fiscal revenues. Some broad
classifications which may be used are:
• Reciprocal (exchange) revenues and gains;
• Non-reciprocal revenues – revenues from the use of the powers of Government; and
• Non-reciprocal revenues – grants, contributions and donations.

578. The classification of user charges as reciprocal or non-reciprocal may vary between jurisdictions.
Where the user charge represents a service provided by the government and the price is set at the cost
of the service, or after allowing for a reasonable rate of return on costs, then the charge may be
classified as reciprocal. However, where there is an element of taxation in that the price exceeds costs
(and any allowance for a reasonable return) the charge, or part of the charge, may be regarded as non-
reciprocal.
579. Existing systems for classification of revenue include the System of National Accounts (SNA) and the
International Monetary Fund’s Government Finance Statistics (GFS). These are shown in Chapter 19.
580. The particular types of revenue, and the names attached to them, will vary between jurisdictions.
Different countries will also vary in the amount of detail they wish to provide and the extent to which
governmental financial reports follow other classifications such as GFS and the SNA.
581. A possible classification system for revenues and examples of classification by function and economic
type are shown below.
Non-reciprocal Revenues/Revenue from the use of the Powers of Government (depending on the
particular jurisdiction)
Taxes on income, profits and capital gains
Sales taxes
Property taxes
Payroll taxes
Poll taxes
Social security contributions
Taxes on specific services
Excises
Customs and import duties
License, registration and permit fees
Fines
Revenue from the issue of currency
Reciprocal (Exchange) Revenue and Gains

Sales
Dividends
Interest
Royalties
Net gains on assets sold

(with separate disclosure of any restrictions on use)
From other levels of government
From other governments
From supranational authorities
From the private sector
Other Gains (realized and unrealized)

Foreign exchange gains
Increases in market value of assets
Increases due to natural accretion (e.g., growth of forests or livestock)

REVENUES AND EXPENSES BY FUNCTION
19973 19961
Note $m $m
Revenues by source
Taxation 126,644 118,297
Non-taxation 36,980 33,955
Total revenues 163,624 152,252
Expenses by purpose2
General public services
Legislative and executive affairs 356 605
Financial and fiscal affairs 2,528 5,615
Foreign economic aid 1,956 1,748
General research 1,049 1,290
General services 1,191 2,409
Government superannuation benefit 4,132 3,985
Defence 11,758 9,004
Public order and safety 1,486 1,302
Education 3(a) 10,930 9,819
Health 3(b) 18,629
16,453
Social security and welfare 3(c) 48,201 45,632
Housing and community amenities 1,800 531
Recreation and culture 1,691 1,669
Fuel and energy 282 310
Agriculture, forestry and fishing 4,420 2,895
Mining, manufacturing and construction 2,384 1,606
Transport and communications 3(d) 21,010 18,411
Other economic affairs 3,722 4,717
Central banking 887 1,381
Other purposes
Public debt interest 8,499 9,917
General purpose inter-government
transactions 3(e) 19,130 17,110
Natural disaster relief 29 n/a
Asset sales 81 9
Total expenses 166,151 156,418
Operating result (2,527) (4,166)
1
2
Refer to the glossary for an explanation of terms.
3
Allocation of total expenses by government function are classified using estimates, based
upon cash related information.
Example 14.18
Revenues and Expenses by Function, page 22 (AUD)

1997 19961
Note $m $m
Revenues
TAXATION
Income tax 4 90,416 83,738
Sales tax 13,365 13,107
Excise duty 13,276 12,949
Customs duty 3,261 3,167
Other taxes, fees and fines 5 6,326 5,336
Total taxation revenues 126,644 118,297
NON-TAXATION
Sales of goods and services (incl user charges / fees) 28,535 25,207
Interest and dividends 6 4,140 3,489
Net foreign exchange gains 7 197 1,313
Net gains from sale of assets 14 - 15
Net gains from asset sales program 8 1,392 -
Other sources of non-taxation revenues 9 2,716 3,931
Total non-taxation revenues 36,980 33,955
Total revenues 163,624 152,252
Expenses
GOODS AND SERVICES
Employees 10 23,867 21,641
Suppliers 11 18,096 15,321
Depreciation and amortisation 12 5,305 5,726
Net write-down of assets 13 1,727 3,187
Net losses from sale of assets 14 119 -
Other goods and services expenses 15 1,092 397
Total cost of goods and services 50,206 46,272
SUBSIDIES, BENEFITS AND GRANTS

Subsidies 4,372 4,620
Personal benefits 57,578 53,826
Grants 16 41,317 39,700
Total subsidies, benefits and grants 103,267 98,146
INTEREST AND OTHER

Interest and other financing costs 17 12,678 11,755
Net losses from asset sales program 8 - 245
Total interest and other 12,678 12,000
Total expenses 166,151 156,418

Operating result 33 (2,527) (4,166)
1
Example 14.19

CHAPTER 15
ACCRUAL BASIS – EXPENSES
Introduction
582. The definition of expenses, and the application of this definition to expenses in the public sector have
previously been discussed in PSC Study 2 Elements of the Financial Statements of National
Governments and PSC Study 10 Definition and Recognition of Expenses/Expenditures.
583. Both studies considered the applicability of the IASC definition of expenses to government reporting
entities. In addition, Study 10 examined the applicability of the IASC expense recognition criteria to
government transactions and events.
584. This Chapter both summarizes and extends the work in the Studies 2 and 10. It describes various
types of government outflows and considers whether they meet the definition of an expense. It then
considers the application of recognition criteria to these transactions and events. It also provides
examples of expense disclosure and expense accounting policies from the financial statements of
government reporting entities.
Definition of Expenses
585. The IASC Framework for the Preparation and Presentation of Financial Statements defines the
element of expenses as follows:
Expenses are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants. (paragraph 70)
586. PSC Study 2 concluded that the IASC definition of expenses is appropriate for government reporting
entities which have adopted the accrual basis of accounting and which prepare an articulated set of
financial statements. However, the Study notes that the references to the term “equity” in the
definition may not be appropriate for government reporting entities as it is not commonly used in the
public sector. Instead, terms such as “net assets” or “net worth” may be used. This Study uses the
term “net assets/equity” to refer to this element. PSC Study 10 also acknowledged that the IASC
definition of expenses substantially applies to the accrual basis.
587. The definition of an expense does not apply to payments for operating items which relate to preceding
or subsequent accounting periods. Payments which relate to the preceding accounting period occur
when goods or services have been provided to the entity in the preceding accounting period but where
payment does not occur until the next period. Such transactions are recognized as both an expense
and a liability (accounts payable or creditors) in the preceding period. The payment of the liability is
not an expense, although a cash, or other, payment would be recorded. Payments which relate to
subsequent accounting periods occur when a prepayment is made (e.g., the payment of a portion of
employees’ salaries in advance). Such prepayments are recognized as an asset at the time of payment
and as an expense when the employee has earned the salary.
588. The definition of an expense does not apply to financing flows such as the repayment of debt, or
investment flows such as the purchase of financial or physical assets.
Recognition of Expenses
589. This section discusses the recognition criteria for an expense under accrual accounting. There is a
range of possible recognition points. Under accrual accounting, recognition may occur prior to
payment (as in the case of items which are purchased on credit), at the time of payment, or after
payment. The focus is on trying to determine when resources have been consumed by the entity.
590. The IASC Framework for the Preparation and Presentation of Financial Statements requires that, in
order to be recognized as an expense, a transaction or event must meet both the definition of an
expense and the recognition criteria of probability and measurability.
Governmental Financial Reporting Chapter 15: Accrual Basis – Expenses 149

591. The IASC Framework for the Preparation and Presentation of Financial Statements outlines the
following recognition principles:
Expenses are recognized in the income statement when a decrease in future economic benefits
related to a decrease in an asset or an increase of a liability has arisen that can be measured
reliably. This means, in effect, that recognition of expenses occurs simultaneously with the
recognition of an increase in liabilities or a decrease in assets (for example, the accrual of employee
entitlements or the depreciation of equipment). (paragraph 94)
Expenses are recognized in the income statement on the basis of a direct association between costs
incurred and the earning of specific items of income. This process, commonly referred to as the
matching of cost with revenues, involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other events; for example, the
various components of expense making up the cost of goods sold are recognized at the same time as
the income derived from the sale of the goods. However, the application of the matching concept
under this framework does not allow the recognition of items in the balance sheet which do not meet
the definition of assets or liabilities. (paragraph 95)
592. Expenses are recognized when they meet the definition of an expense and satisfy the recognition
criteria of measurability and probability. The presentation and disclosure of the accounting policies
adopted in relation to recognition of expenses is essential.
593. Many of the expenses incurred by governments and their sub-entities are similar to those recognized
in the private sector by businesses. They do not pose particular accounting or reporting issues for
government, and the IASC accounting standards provide useful guidance on recognition and
measurement.
594. Study 10 concluded that the IASC recognition criteria are adequate for some government transactions
or events. However, in the absence of a point of exchange, another suitable recognition point must be
found. Study 10 considered various recognition points for transactions and events with no point of
exchange.
EXPENSES
Expenses are recognised when incurred and are

reported in the financial year to which they relate.
Example 15.1
Types of Expenses
595. Public sector entities usually have some political or social welfare objectives. They are responsible
for providing health, safety, education, social and other services to their constituencies. In rendering
these services, public sector entities incur a range of different expenses, some of which, for reasons of
type or relative amount, are more significant than in the private sector. The types of expenses that
governments may report include:
• personnel expenses;
• cost of goods sold;
• cost of services provided;
• physical asset use (depreciation and loss of service potential);
• rental and leasing costs;
• maintenance and working expenses;
• interest;
• expenses relating to financial assets;
• government transfers;
• other losses;
150 Chapter 15: Accrual Basis – Expenses Governmental Financial Reporting

• changes in market value; and
• foreign exchange losses.
596. Most of these items are similar to expenses recognized by business enterprises, such as personnel
expenses, or interest on debt, but may be more material in the government context. Exchange
expenses that are similar to those identified in the private sector do not pose particular accounting or
reporting issues for government and are not discussed fully in this Study. Given the prevalence of
non-reciprocal transfers in the public sector, this Chapter focuses on the expenses associated with non-
reciprocal transfers. The Chapter also considers issues associated with depreciation, the activity of
transfer agencies and development expenses in the public sector.
597. The types of expenses incurred by particular government entities will depend on the type of activities
conducted by the entity. Entities providing mainly policy advice will spend a high proportion of their
budget on personnel. Entities providing operational services (e.g., operating penal institutions) will
incur a wider range of expenses. The following sections describe each category of expenses and
discuss recognition issues associated with these expenses.
Appropriations
598. Appropriations are an authorization to spend funds, often for a specified purpose. Although the nature
of appropriations varies across jurisdictions, they may fall into the following general categories:
• authorizations for services performed;
• authorizations for permanent increases to the resource base of a government entity; and
• authorizations for transfers to third parties.
599. Appropriations received in return for, or in expectation of, services performed meet the definition of
revenue under accrual accounting. Appropriations which result in permanent increases to the resource
base of an entity may be in the nature of a capital or equity contribution, where the government entity
is corporatized or where a purchaser-provider (or similar) model of government has been adopted.
The third category covers custodial or agency receipts and as such is not an element of the reporting
entity. Where the purpose of an appropriation is unclear, the appropriation may need to be allocated
across these categories, or the total amount recognized as revenue.
600. Depending on the legislative framework of a particular jurisdiction, the expenses resulting from the
transfer of funds under appropriation may be classified as exchange expenses or non-reciprocal
transfers.
Personnel Expenses (including Superannuation/Pension Expenses)

601. Personnel expenses include wages and salaries, all types of paid leave, recruitment and training costs
and superannuation/pension and other benefits paid to staff.
602. The current period’s portion of long-term superannuation/pension obligations is recorded as an
expense. To the extent that these expenses remain unpaid at the end of the reporting period, it is
necessary to recognize a liability in the Statement of Financial Position. Refer to Chapter 13 for a
discussion of superannuation/pension liabilities.
603. The recognition and measurement of personnel expenses is generally the same in both the public and
private sectors. Differences may arise in the area of superannuation/pension expenses. Government
superannuation/pension schemes are more likely to be defined benefit schemes than are private sector
schemes. In some jurisdictions public sector schemes operate on a pay-as-you-go basis, which is not
usually an option in the private sector.

604. Examples of accounting policies and disclosure of personnel expenses are shown below.
Employee Related Expenses

These expenses include all costs related to
employment such as salaries and wages,
superannuation, leave entitlements, fringe
benefits tax, workers’ compensation,
redundancies and other on-costs associated
with leave entitlements. Payroll tax (a State
tax) is eliminated on consolidation. Some
employee related expenses are included in
maintenance costs or capitalised as part of the
construction costs of certain non-current
physical assets.
Example 15.2
NOTE 10. EMPLOYEES

1997 19961
$m $m
Remuneration (for services provided)
Salaries and wages 15,257 14,503
Superannuation 5,448 5,095
Leave and other entitlements 673 1,190
Separations and redundancies 1,722 98
Workers compensation premiums 725 170
Other 42 585
Total employees 23,867 21,641
: : : : : :
1 Trial and unaudited
Example 15.3
Cost of Goods Sold and Cost of Services Provided
605. The costs associated with inventory, both purchased or internally created, sold or used during the
period are treated as an expense. However the costs associated with inventory still on hand at the end
of the accounting period, including work in progress, are treated as an asset.
Physical Assets’ Use (Depreciation and Loss of Service Potential)

606. Payments which relate to the acquisition of physical assets (e.g., land and buildings, vehicles, office
equipment) are recognized in the Statement of Financial Position as assets. They are not expenses
because they do not result in a decrease in the net assets/equity of the entity. However the
depreciation of those assets, as their service potential is consumed, is an expense in the periods in
which the asset is used. Long-term intangible assets are generally amortized.
607. The consumption of limited-life physical assets occurs in the public sector, and the requirements of
IAS 16, Property, Plant and Equipment may be applied to public sector assets. Sometimes the view is
taken that depreciation is not relevant for public sector assets such as infrastructure, heritage and
community assets, because their economic benefits are realized over an extended period of time.
However, if the asset has a finite life, the service potential or future economic benefits embodied in
the asset will be consumed or will expire and will therefore give rise to expenses. This section

discusses loss of service potential under three categories:
• loss of service potential associated with physical assets, generally known as depreciation;
• loss of service potential of infrastructure assets; and
• loss of service potential of intangible assets.
Depreciation – Physical Assets
608. The costs associated with physical assets include the initial cost of purchase, the cost of repairs (or
maintenance) and the restoration of service potential in the asset (capital expenditure).
609. Under accrual accounting, if the initial purchase cost and subsequent restoration of service potential in
the asset meet the definition and recognition criteria for an asset, then they are recognized as an asset,
not an expense. The loss of service potential in the asset as a result of time, use in production and
obsolescence is recognized as depreciation expense. The cost of repairs and maintenance is also
recognized as an expense at the time it occurs.
610. An asset can be said to be consumed if its service potential declines from its acquisition to its eventual
disposal, for example a bridge’s expected future life in use may decline with time, wear or for some
other reason. When it occurs, the loss of service potential of major assets from wear and obsolescence
is material to users of financial reports and the accurate reporting of such expense is one of the chief
benefits from using the accrual accounting in the public sector.
611. The required accounting treatments for depreciation are set out in IAS 16, Property, Plant and
Equipment. The standard applies only to those depreciable assets listed in the standard.
612. Depreciation is defined by IAS 16 as “the systematic allocation of the depreciable amount of the asset
over its useful life” and the depreciable amount is “the cost of an asset, or other amount substituted for
cost in the financial statements, less its residual value.” (paragraph 7) That is, depreciation is an
allocation of the cost of an asset to those accounting periods during which the asset is used. The cost
of an asset may be regarded as a prepayment which is expensed over the relevant period. The “useful
life” is measured in time, units of production or units of service.
613. The generally accepted accounting practice is to report the periodic loss of service potential as a
period expense (depreciation expense) and as an addition to the cumulative depreciation provision
deducted from the gross value of the asset.
614. The main purpose of depreciation is to allocate the cost of a fixed asset over a period so that accurate
measurement of expenses (i.e., consumption of service potential) is achieved. Depreciation is then the
allocation of that fixed asset cost to each of the particular years the asset is used. The written down
(or book) value of the assets as shown in the financial statements therefore represents the cost of the
asset yet to be allocated to future years.
615. The allocation of depreciation gives a more accurate assessment of the net surplus or deficit and
thereby prevents net assets/equity from being overstated. This is particularly important for
governments monitoring specific fiscal goals such as a specified target level of net assets/equity.

616. Examples of depreciation policies are shown below.
Depreciation
Depreciation of fixed assets other than freehold land,

furniture and fittings and capital work in progress, is
provided on a straight line basis so as to allocate the cost
(or valuation) of assets, less any estimated residual
value, over their estimated useful lives. Revalued fixed
assets are depreciated on their revalued amount on a
straight line basis over their remaining useful lives. The
estimated economic useful lives are:
Buildings 50 years
Specialist Military Equipment 5 – 50 years
Plant and Equipment 5 – 50 years
Office and Computer Equipment 5 – 20 years
Example 15.4
Capital Assets
14. Depreciation, on a straight line basis, has been provided for in the accounts for all short lived
assets (vehicles, plant and equipment) over a period of five years, unless a significantly different
life is anticipated. Depreciation for infrastructure assets has been provided over the estimated
useful life of the infrastructure, ranging from seven years for minor highways works to 40 years
for bridge reconstruction.
15. Property assets are not depreciated as the Authority can demonstrate that the remaining life of the
existing assets is in general, in excess of 20 years, and that the level of repairs and maintenance
undertaken extends the life of the properties sufficiently for any depreciation not to be material.
The charging of repairs and maintenance to revenue thus replaces the provision of depreciation.
Land, non-operational properties and community assets are not depreciated.
Example 15.5
Accounting Policies, page 9

Depreciation
Depreciation across the State Public Sector is Sydney Water Corporation's depreciation of
generally calculated at rates determined on a infrastructure assets is currently based on the
straight line basis to allocate the cost or assumption of normal wear and tear rather than
valuation of an asset, less any estimated residual condition-based. However, the Corporation is
value, over its estimated useful life to the entity. undertaking a revaluation project which will
involve revaluation of assets on a segmented
School buildings are depreciated at a rate of 1% basis and condition-based assessments of asset
per annum based on an estimated life lives. When implemented, this may impact on
expectancy of one hundred years. However, over asset values and depreciation charges for some
a 100 year cycle, school buildings would classes of assets.
normally be subject to a number of major
refurbishments in order to achieve their The Roads and Traffic Authority recognises
estimated service potential. This element has not depreciation of roads based on condition-based
been taken into account in assessing the assessment. The annual depreciation charge
depreciation charges and the carrying value of reflects the changes in the road condition during
school buildings. the year from normal wear, tear and
deterioration. It is calculated by comparing the
Depreciation of residential properties controlled written down replacement value of the roads at
by the NSW Land and Housing Corporation has the end of the year (reflecting current condition)
been calculated using the straight line method with the value at the beginning of the year.
with the economic useful life being estimated as Depreciation is not based on the useful life of
50 years, with nil salvage value. The roads because the useful life cannot be reliably
depreciation method relies on representative determined.
sample historical costs by building type and year
of completion and average costs of construction
extrapolated to the total number of properties in
stock.
Example 15.6
Loss of Service Potential – Infrastructure Assets

617. The accepted practice of allocating the acquisition cost of a physical asset over its estimated life on an
arithmetical basis (i.e., depreciation) may not be sufficiently accurate for financial reporting of
complex, multi-component assets, such as infrastructure assets. The depreciation of infrastructure
assets reflects their loss of service potential over time. Expenditures on renewal and expansion which
extend the service potential of an asset beyond its originally estimated useful life may be capitalized if
they meet the definition and recognition for an asset.
618. The determination of depreciation of infrastructure assets is complicated by the number of
components which make up a network and the fact that the service potential of different components is
consumed at different rates. Networks such as roads, water supply and drainage have very long lives
and are composed of many separate components that contribute to the operation of the network. In
practical administration, it is necessary to group the component assets for financial recording and
management. As this is done, the concept of “useful life” becomes more difficult to apply to the
groups of assets. If the lives are long, and the system extensive, then it is probable that any single
predetermined “life” or depreciation rate will be inappropriate for the system as a whole, and possibly
for some material groups of components.
619. Financial reporting practices for infrastructure assets have been diverse and there is currently no
consensus on an accounting technique for infrastructure assets (Rowles 1992). Various jurisdictions
have formed their own approach to accounting for accounting for and valuing infrastructure assets.
Alternatives include full depreciation accounting, renewals accounting and condition-based
depreciation.
620. Full depreciation accounting for infrastructure assets has been discussed above. Some preparers

consider that a condition-based method of depreciation is more appropriate for infrastructure assets
due to the long or indeterminate life of such assets. The long life of such assets generally means that
some factors have a greater impact upon the condition and therefore the value of infrastructure assets,
than shorter-lived assets. For example, the following factors are likely to affect the condition of a road
over time and therefore its remaining service potential:
• the quality of the original asset e.g., the materials, methods and skills used in the construction of
the road;
• wear and tear e.g., changes in traffic density and the environment in which the road is operated
or constructed can significantly affect its service potential;
• reactive soils, extremes of climate etc; and
• the maintenance provided to the asset — the regularity and consistency of asset maintenance to
an optimum level will significantly affect the life of the road or the run-down of its service
potential.
621. Renewals accounting takes many forms. One form of renewals accounting is described as follows:
• infrastructure assets of a similar nature are treated as a single asset;
• replacements are expensed and no depreciation is charged provided overall service potential is
being maintained; and
• additions which enhance the service potential of the network or system are capitalized.
622. Renewals accounting is accepted in some, but not all, jurisdictions as being acceptable for external
financial reporting. However, preparers should note that, even in these jurisdictions, renewals
accounting will normally only be accepted for external financial reporting if the entity has a formal
asset management plan that enables an assessment of any change in service potential to be assessed
and the infrastructure asset network is demonstrably in a steady state. This requires detailed
information on the condition of all components of the system.
623. For an example of an accounting policy for infrastructural assets, including roads, which refers to
condition-based depreciation see Example 15.6 above.
Maintenance – Infrastructure Assets

624. Where the amount of maintenance performed is less than the amount required to maintain an
infrastructure asset at its current level of activity and condition, then deferred maintenance may
accumulate. Deferred maintenance may be recognized in a variety of ways. Although it may result in
a future outflow of resources, it does not meet the definition of a liability as there is no obligation to a
third party. In some jurisdictions deferred maintenance is recognized by acknowledging that the
deferred maintenance has reduced the value of the asset and devaluing the asset accordingly.
Regardless of how deferred maintenance is acknowledged in the financial statements, governments
should have information on the collective amount of deferred maintenance, as it represents an internal
claim on future resources.
625. There is a link between the method and rate of depreciation applied to infrastructure assets and the
maintenance expense. Some entities may choose to perform less maintenance and anticipate a shorter
working life for an asset.
Loss of Service Potential – Intangible Assets

626. The use or consumption of intangible assets is referred to as amortization. Intangible assets may be
amortized over the expected useful life of the benefits accruing from those assets, or the loss of service
potential may be assessed in relation to changes in market value of the intangible asset. IAS 9,
Research and Development Costs (paragraphs 21–24) discusses the amortization of development costs
recognized as an asset.

Interest
627. The principles used to determine interest and financing costs in the private sector are equally
applicable to the public sector. An example of the types of interest and financing costs recognized by
a government is shown below.
NOTE 17. INTEREST AND OTHER FINANCING COSTS

1997 19961
$m $m
INTEREST ON DEBT
Government securities 8,102 9,046
Loans 1,388 1,237
Swaps 1,079 702
Taxation overpayments 660 299
Exchange settlement funds 407 -
Deposits 144 110
Leases 18 24
Other 23 163
Total interest on debt 11,821 11,581
OTHER FINANCING COSTS 857 174
Total interest and other financing costs 12,678 11,755

1
Trial and unaudited
Example 15.7
Expenses Relating to Financial Assets

628. Expenses associated with financial assets are discussed under the following sub-headings:
• forgiveness or writing down of loans;
• discounting of future expected revenues; and
• expenses relating to equity investments.
Forgiveness or Writing Down of Loans
629. The making of a loan which is repayable (and collectable) does not meet the definition of an expense
as it does not result in a reduction of net assets/equity. Such loans meet the definition of an asset and
would be recognized as an investment in the Statement of Financial Position (refer to the discussion of
investments in Chapter 12). However, concessionary or suspensory loans which may be written off
over time may meet the definition of an expense as the amount expected to be repaid declines. A
corresponding amount would be deducted from the investment balance. The forgiving of loans would
also meet the definition of an expense. The amount forgiven is normally recognized as an expense by
the forgiving entity at the time it is forgiven.
Discounting of Future Expected Revenues

630. As with private sector entities, government entities may sometimes discount future revenues by
entering into agreements to obtain cash now in return for transferring the rights to future revenues to
another party. The fee implicit in such arrangements represents a financing expense.
Expenses Relating to Equity Investments

631. Two types of expenses may arise in relation to equity investments (including investments in
government-owned entities). When the value at which the investment is recorded in the financial
statements is written down, this will normally result in a loss. Refer to Chapter 12 for a discussion of
financial investments and to the discussion of other losses later in this Chapter.

632. In addition, expenses may be incurred when a government makes a capital contribution directly to
another entity. Normally a capital contribution would result in an increase in the carrying value of the
investment. However a capital contribution may give rise to an expense when the capital contribution
is not recoverable (e.g., when an equity contribution is made to a government agency in financial
distress to prevent its collapse or to ensure that creditors of that agency do not suffer a loss).
Contributions required because of obligations under guarantees and indemnities would also fall into
this category.
Government Transfers
633. One definition of government transfers comes from IAS 20, Accounting for Government Grants and
Disclosure of Government Assistance. This definition focuses on transfers of resources from the
government to enterprises.
Government grants are assistance by government in the form of transfers of resources to an

enterprise in return for past or future compliance with certain conditions relating to the operating
activities of the enterprise. (paragraph 3)
634. An alternative definition, which also encompasses transfers to individuals and inter-governmental
transfers, comes from Public Sector Accounting Recommendation (PSAR) Section PS 3410,
Government Transfers, of the Canadian Institute of Chartered Accountants (CICA).
…government transfers are transfers of money from a government to an individual, an organization

or another government for which the government making the transfer does not:
(a) receive any goods or services directly in return, as would occur in a purchase/sale transaction;
(b) expect to be repaid in the future, as would be expected in a loan; or
(c) expect a financial return, as would be expected in an investment. (paragraph .03)
635. The PSAR identifies three major types of transfers: entitlements, transfers under shared cost
agreements and grants. These categories are based on a concept of a spectrum in the degree of
discretion the government has in making a transfer. Further discussion of each of these transfers is
given below. Not all countries make this distinction between types of transfers.
636. Transfers, as discussed in this section, specifically exclude capital contributions made by a
government in its capacity as owner. Capital contributions are not expenses. They are recognized as
an investment by the entity making the contribution, and as part of the net assets/equity section of the
statement of financial position by the entity receiving the contribution.
637. Although government transfers meet the definition of an expense, the main difference between these
expenses and other expenses is that there is no point of exchange which may be used as the point of
recognition. In the absence of a point of exchange, another suitable recognition point must be found.
The application of liability recognition criteria to government transfers is discussed in Chapter 13.
This discussion is directly applicable to the recognition of expenses. Where a government department
makes transfers on behalf of a higher level of government, the department also needs to decide
whether to account for the transfer as an expense or a custodial payment. Custodial payments are
discussed later in this Chapter.
638. PSAR Section 3410 considers the recognition of government transfers. It states that:
Government transfers should be recognized in a government’s financial statements as expenditures

or revenues in the period that the events giving rise to the transfer occurred, as long as:
(a) the transfer is authorized;
(b) eligibility criteria, if any, have been met by the recipient; and
(c) a reasonable estimate of the amount can be made. (paragraph .07)
In the context of the accrual basis, the term expenditure should be read as referring to expenses.

639. Government transfers may have characteristics of more than one type of transfer. In deciding when to
recognize the specific type of transfer, the following criteria may be applied:
• Has the event giving rise to a transfer occurred? An event could be described as a “happening of
consequence to an entity” and can be classified either as government related or government
acknowledged.
• Has the transfer been authorized? In many countries, transfers cannot be made without the
approval of government or the legislature. Therefore, even though the other criteria have been
met, without the proper authorization the transfer might not be recognized by the governing
legislation.
• Has the recipient met the eligibility criteria?
• Can the amount be reasonably estimated? In many cases, this seems to be a serious impediment
to recognizing a transfer. Judgment is required in such cases.
640. In summary, government transfers would be recognized in the financial statements of the government
making the transfer as an expense in the period that the events giving rise to the transfer occurred, as
long as:
• the transfer is authorized;
• eligibility criteria, if any, have been met by the recipient; and
• a reasonable estimate of the amount can be made.
641. The PSAR recognizes that it might not always be possible to estimate the exact transfer to be paid or
received and that estimates may need considerable judgment. Estimates also may need to be
reappraised as more experience is acquired. However, “the basis for determining the amount
recognized for any particular transfer should be applied consistently from year to year” (PSAR
Section PS 3410, paragraph .07).
642. The presentation and disclosure of the adopted accounting policies is essential: “In addition, disclosing
a description of the accounting policies regarding government transfers and information on the major
kinds of transfers made or received is useful in understanding the sources and types of revenues a
government receives and in understanding the programs and activities it undertakes” (PSAR Section
PS 3410, paragraph .55).
Entitlements
643. Entitlements are defined as “transfers that a government must make if the recipient meets specified
eligibility criteria. Such transfers are non-discretionary in the sense that both:
(i) “who” is eligible to receive the transfer; and
(ii) “how much” is transferred are prescribed in legislation and/or regulations. (PSAR Section PS
3410, paragraph .04)
644. This definition is consistent with the one used by the FASAB, which describes an entitlement program
as “a program in which the government becomes automatically obligated to provide benefits to
members of a specific group who meet the requirements established by the law.” (FASAB, SFFAS
No. 5, Appendix B, Glossary)
645. Government transfers which may be classified as entitlements include welfare benefits, old age
benefits, family allowances and unemployment benefits. Entitlements are unique to government
although they share some characteristics with donations made in the private sector. Entitlements are
typically paid to individuals although they may also be paid to private enterprises or governmental
institutions.
646. A number of significant inter-governmental transfers are entitlements. Entitlements received by one
government from another include formula-based equalization transfers and per capita transfers from
provincial governments to local governments. Some transfers to institutions are also entitlements.

647. The governing legislation or regulations for these transfers set out the bases for determining the
amount of the entitlement. Some, such as federal/provincial equalization, are based on complex
formulas. Others may be calculated on a per capita or other unit basis.
648. The general recognition criteria discussed above apply to these entitlements. Entitlements “should be
recognized by the transferring government for estimated unpaid entitlements due at the end of the
accounting period to those individuals who had met eligibility criteria.” (PSAR Section PS 3410
paragraph 19). However, it is also necessary to determine “cut off points” both for the initial
recognition of entitlements and the measurement of the amount to be incorporated in the current
649. One option for the initial recognition of an entitlement is to use the acceptance of an application for
the entitlement as the point of recognition. Where entitlements are paid to institutions or other
governments, estimation of the expense and associated liability may be more complex. For example,
the necessary data for the calculation of an entitlement might not be available for a considerable time
period, or the accounting period of the two entities could be different. When determining the amount
of the expense and any associated liability to be accrued in the current financial statements for those
receiving entitlements in this period, only those amounts already owed, but not yet paid, should be
recognized.
650. Another issue is whether potential obligations arising from an existing policy, but relying on a future
event (e.g., a person becoming or remaining unemployed next year) constitute an expense (and thus, a
liability of the current year). In some jurisdictions, the assessment underlying the treatment in the
financial statements is that such potential future obligations are not present liabilities because
Government policies do not create a legal claim. In Australia, for example, “the making of election
promises or the formulation of a budget will not, under normal circumstances, mean that the
commitments included therein would meet the definition of a liability. This is because governments
normally have discretion to avoid the sacrifice of future economic benefits that may be associated with
the election promises or budget. Similarly, a government does not have a present obligation to
sacrifice future economic benefits for social welfare payments that might arise in future reporting
periods.” (AARF, AAS 31, paragraph 12.1.2)
651. In other jurisdictions, legal obligations to continue benefit programs may be such that they do
represent liabilities, and increases in these liabilities would be recorded each year as an expense. The
treatment in a particular country will depend on the institutional arrangements of that country. Even
in those cases where an expense/liability should be recognized, the reliability of the measurement can
prevent the recognition of that expense/liability. In the absence of a clear legal responsibility, the
existence of an obligation for which the government may have a liability must be assessed on the basis
of available evidence. In situations such as these, estimates may be necessary in determining not only
the amount to be paid in settlement of an obligation, but also the expectation that payment will be
made. This issue is also discussed in Chapter 13.
Transfers under Shared Cost Agreements

652. Transfers under shared cost agreements are defined as “reimbursement of eligible expenditures
pursuant to an agreement between the transferring government and the recipient.” (PSAR Section
PS 3410, paragraph 04)
653. These transfers are similar to entitlements in that the recipient has the right to a transfer after incurring
eligible expenditures. They are different from other entitlements, however, because the recipient must
spend money to be entitled to any reimbursement. In addition, the terms of specific shared cost
agreements are usually negotiated and agreed upon in a signed contract.
Transfers under shared cost agreements should be recognized as revenue when the recipient incurs
eligible expenditures because, under the agreement, the government must reimburse the recipient
for the specified percentage of those eligible expenditures. Liabilities should be recognized by the
transferring government at the end of the accounting period for the estimated, unpaid portion of
incurred eligible expenditures owed to recipients pursuant to a shared cost agreement. (PSAR
Section PS 3410, paragraphs .31, .32)

654. Grants, contributions and donations are transfers made by a government, other than entitlements and
transfers under shared cost agreements. The transfer may take the form of cash, services, transfer of
an asset, or reduction of a liability. “The government making the transfer has discretion as to whether
or not to make a transfer, the conditions to be complied with, if any, how much will be transferred and
to whom.” (PSAR Section PS 3410, paragraph .04)
655. Conditions may or may not attach to the grant. In most cases, recipients have to apply for the money
or meet some eligibility criteria; however, in contrast to entitlements, applying or meeting eligibility
criteria does not guarantee that the recipient will receive the money. The government still has
discretion to decide whether or not to make the transfer. There is usually a ceiling on the total amount
that may be transferred under a particular grant program and some grant recipients are subject to
performance or reporting requirements. As long as the grant is discretionary, the expense is incurred
in the financial statements at the time of authorization, rather than at the time the application is made.
(PSAR Section PS 3410, paragraph .38)
656. The accounting policy in the Financial Statements of the New Zealand Government for the recognition
of grants and subsidies includes a requirement to give notice to the Crown.
Where grants and subsidies are discretionary until payment, the expense is recognised when the
payment is made. Otherwise, the expense is recognised when the specified criteria have been
fulfilled and notice has been given to the Crown. (Financial Statements of the Government of New
Zealand for the year ended 30 June 1999, page 60)
657. In addition to the transfer of grants to individuals or private sector enterprises, governments
commonly use the term grants to refer to a wide range of transfers to government departments and
government organizations. As these transfers are often made under appropriation, refer also to the
discussion of appropriations earlier in this Chapter.
658. Grants include such transfers as: cultural grants, scholarships, research grants and regional
development grants. Examples of accounting policies for and disclosure of government transfers are
shown below.

Grants
1.24 In these consolidated financial
statements grants which fall under
Commonwealth/State funding arrangements
are recognised as an expense in the reporting
period in which goods and services are
delivered by the grantee to intended
beneficiaries.
1.25 Legislative obligations for education

include amounts specified in the States Grants
(Schools Assistance) Act and State Grants
(Primary and Secondary Assistance) Act,
Higher Education Funding Act and Vocational
Education and Training Act.
1.26 Legislative obligations for health are

similar in principle to the above obligations
and include State Grants in relation to the
Medicare arrangements and capital payments
in relation to nursing homes and child care
facilities.
Example 15.8

Forecast Actual
$m $m $m $m
NOTE 5: Expenses by Input Type

: : : : : : : : : : : :
Analysis of Subsidies and Transfer

Payments
Social Assistance Grants
5,173 5,071 New Zealand superannuation 5,064 5,106
1,529 1,451 Domestic purposes benefit 1,451 1,501
1,470 1,486 Community wage 1,487 -
358 369 Unemployment benefit 369 1,436
947 921 Family support 915 881
844 843 Accommodation supplement 843 793
656 630 Invalids benefit 631 599
107 97 Sickness benefit 97 400
393 392 Student allowances 378 344
224 204 Disability allowance 204 198
90 126 Accident compensation for non-earners 126 129
22 22 Training benefit 22 98
951 982 Other social assistance grants 978 848
149 133 Subsidies 110 164
Other Transfer Payments
204 204 Official development assistance 204 195
13 13 Other 13 12
13,130 12,944 Total Subsidies and Transfer Payments 12,892 12,704
Example 15.9
Other Losses
659. Other losses may arise from declines in the value of assets, or increases in the value of liabilities due
to movements in market prices or currency movements.
Other Losses – Changes in Carrying Amount

660. IAS 16, Property, Plant and Equipment allows two different treatments for the valuation of assets.
Property, plant or equipment may be recorded at the lower of depreciated historic cost or recoverable
amount. Decreases in the recoverable amount are recognized as an expense (paragraph 56).
661. Alternatively, assets may be revalued regularly to fair value. IAS 16, Property, Plant and Equipment
requires that a revaluation decrease be charged directly against any revaluation surplus to the extent
that the decrease does not exceed the amount held in the revaluation reserve in respect of that same
asset (paragraph 40). Changes in the value of land (unless held as an investment) are usually treated
in the same way.
662. An example of an accounting policy for the valuation of forests, which may result in other gains or
losses being recognized is shown below.

Commercial forests
Commercial forests are recorded at estimated net current value. This takes into account age,
quality of timber and the forest management plan.
Example 15.10
8
663. IAS 25 , Accounting for Investments discusses the treatment of gains and losses arising from
revaluations of investment properties and some financial investments. Investment properties may be
accounted for as if they were property, plant and equipment, or as long-term investments
(paragraph 28). Gains and losses on short-term investments may be accounted for as income and
expense, or they may be accounted for as long-term investments. IAS 25 requires that gains and
losses on long-term investments be taken to the revaluation reserve, subject to the proviso that any
decrease does not exceed the amount held in the revaluation reserve in respect of that class of assets
(paragraphs 31 and 32).
664. Where alternative treatments are available the entity should follow a consistent policy.
Other Losses – Foreign Exchange Losses

665. Gains or losses arising from movements in foreign currency are discussed in IAS 21, The Effects of
Changes in Foreign Exchange Rates. IAS 21 requires that exchange differences be recognized as
income or expense in the period in which they arise (paragraph 15) with the exception of exchange
differences arising on a monetary item that, in substance, forms part of an entity’s net investment in a
foreign entity; or exchange differences arising on a foreign currency liability accounted for as a hedge
of an entity’s net investment in a foreign entity. Exchange differences arising in these situations are
classified as net assets/equity until the disposal of the net investment, at which time they are
recognized as income and expenses (paragraphs 15, 17 and 19).
666. Increases in the value of liabilities due to foreign currency movements are recognized as expenses.
However, where investments are recorded at face value, increases in liabilities due to movements in
interest rates are not recognized until the liability is settled.
Custodial Payments – Administered Transactions

667. Custodial payments (also referred to as administered transactions) are payments made by a
government reporting entity on behalf of another organization. They may include payments of grants
or benefits made by a government department or agency to other organizations or individuals on
behalf of a national or state government.
668. It may sometimes be difficult to distinguish whether a payment made by a government entity is a
custodial payment or an expense of the administering entity. If the entity handling the payment also
has discretion to distribute those funds within broad parameters established by the entity providing the
funding, then the entity may be said to have control over the distribution of the funds.
669. The classification of such payments as custodial payments or as an expense depends on whether it is
the principal or the agent who has ownership rights to the resources involved and makes key decisions
such as:
• the identity of (class of) recipients, or criteria for their selection;
• the conditions of entitlement of third party recipients;
• refund of unexpended funds by the agent;
• any right of recovery of unfunded expenditure by that agent; and
• separate reimbursement of the agent’s expenses.
8
The International Accounting Standards Committee has signalled its intention to withdraw IAS 25, Accounting for
Investments following the approval of IAS 40, Investment Property.

670. If an item meets the definition of an expense it is recognized within the financial statements of the
administering entity. Both the receipt of funds for the payment, and the subsequent payment would be
recorded in the financial statements of the administering entity.
671. Where an item does not meet the definition of an expense, it is usually because the administering
entity does not have control over the cash flows. In that case, the items are not recognized as an
expense in the financial statements. Instead accountability for the management of custodial payments
may be demonstrated by disclosing details of such payments in a separate Statement or in the Notes to
the Financial Statements. Any expenses associated with the handling of these payments would
normally be recognized as an expense by the reporting entity making the payment. Because the
administrative arrangements relating to custodial payments may differ between jurisdictions, the
manner in which these transactions are displayed in the financial report may also vary. Items which
are classified as custodial payments in one jurisdiction may be treated as expenses within another
jurisdiction. In some cases it is appropriate for the entity making the payments to recognize both an
asset and revenue when control of the funds to be transferred is obtained, and to recognize a liability
and an expense when decisions on the transfer or the identification of a clear entitlement to those
funds occurs.
672. Refer also to Chapters 12, 13 and 14 for a discussion of assets and liabilities administered on behalf of
others, and revenues collected on behalf of others.
Classification
673. Classification depends on users’ needs and on how they can best be met. The constraints identified in
relation to the classification of assets (refer to Chapter 12) apply here also.
674. The major classification systems for expenses are:
• by function or program;
• by outputs;
• by organization; and
• by object of expense (input).
675. In a well designed system, multiple classifications can be incorporated within the system. The
sections below describe each of these classification systems.
Classification by Function or Program

676. A classification by function or program provides useful information on the purposes or objectives of
the activities giving rise to the expenses. It helps broad allocative decision making and the review by
the legislative and executive branches of government. This information provides data which could be
used to calculate expenditures per unit of activity. Most government outlays can be assigned to a
specific function or broad sector of the government. Some, however, require judgment. For example,
military colleges are usually classified as “defense” rather than “education”.
677. Existing functional classification systems include the United Nations’ System of National Accounts
(SNA) and the International Monetary Fund’s Government Finance Statistics (GFS). These are
discussed in Chapter 19. For examples of functional classifications refer to Example 14.18 in
Chapter 14 and the financial statements of the New Zealand Government (Appendix 2).
Classification by Output
678. Classification of expenses by outputs is essential for efficiency evaluation. Such a system of
classification requires both a clear specification of the outputs produced by government and robust
cost allocation systems.
679. Reporting which relates expenses to outputs provides a basis for the assessment of performance. It
enables a comparison of actual efficiency against expectations, changes in efficiency between periods,
and in some cases, a comparison with non-government suppliers. Such reporting is particularly useful
for accountability purposes.

680. Output groupings are more useful at the sub-entity than at the whole of government level. Examples
of groupings of outputs used by the New Zealand Treasury are shown below.
Expenses by Output Grouping

Customer oriented: Outputs with identifiable individual customers who voluntarily
consume a service for their benefit.
Transactions: Large scale processing of identical transactions (e.g., assessment
of claims for income support payments).
Professional/Managerial: Outputs characterised by a mixture of ongoing service and
projects (e.g., policy advice).
Investigations: Public good outputs where considerations of risk, due process,
legal compliance and quality of judgement are most important.
Behavioural: Involve outputs which try to change individual attitudes and
behaviours such as counselling.
Control: These outputs involve the use of coercive powers either to keep
individuals within a controlled environment or preventing entry to
an area.
Emergency Services: These outputs involve the purchase of a planned level of response
to emergencies.
Contingent Military Capabilities: These outputs involve the purchase of specified levels of military
capability.
(The Treasury, April 1995)
681. An example of a cost accounting model using Activity Based Costing is provided below. Activity
Based Costing is only one method of cost allocation. Other methods, including allocations based on
the number of staff in an area, or the amount of floor space used, although simple, may provide similar
measurement results at a much lower cost.

Cost Attribution
The NZDF uses the Costing, Budgeting, Management and

Reporting Systems (MARS) to derive the costs of outputs
in the statements in this report. This system attributes
costs in a two-stage process. The first stage assigns
support unit costs to a force element cost centre. The
second stage allocates force element costs to outputs.
The costing model:
• traces the direct costs of a force element (for

example, a squadron, a frigate, a battalion) directly to
a force element cost centre;
• attributes support units costs to force elements and
other support “customer” cost centres using drivers
reflecting the resources required to support the
“customer’s” level of expected activity in the medium
term, e.g. five year activity cycle;
• attributes overhead costs to force elements’ cost
centres using as a default the percentage of that
force element’s consolidated (i.e., including its direct
support units) gross operating budget (exclusive of
capital charge) to the total gross consolidated budget
(exclusive of capital charge) for all force elements,
unless a more meaningful driver is identified that will
produce a material difference in output cost;
• attributes force element fully absorbed costs to
outputs on a direct or “many to one” basis; and
• attributes costs for specific services, e.g.
hydrography, on an agreed basis that best represents
the manner in which the costs are incurred.
The basis for allocation of support units’ and
headquarters’ costs to force elements and of fully
absorbed cost of force elements to outputs are set for the
year. The allocation rules will be reviewed if there is
significant infrastructural change that is likely to alter the
continued appropriateness of these rules.
Example 15.11
Classification by Organization
682. Expenses can also be divided into separate sections for each ministry, department or agency. These
organizations can then be held responsible for their expenses (e.g., Ministry of Agriculture, Ministry
of Health). Such a classification is tailored to the particular structure of the government. Within each
spending organization, the expenses can be further classified by object of expense.

Classification by Object of Expense (Input)
683. Expenses may be classified by the object of the expense, also referred to as input types. The object
classification enables an entity to exercise control at various levels of management. Possible object
classifications are shown below:
• personnel expenses;
• cost of goods sold;
• cost of services provided;
• physical asset use (depreciation and loss of service potential);
• rental and leasing costs;
• maintenance and working expenses;
• interest;
• expenses relating to financial assets;
• government transfers;
• other losses
• changes in market value; and
• foreign exchange losses.
684. In addition to disclosing functional classifications, the Notes to the Financial Statements of the
Government of New Zealand display expenses by input type. They also disclose an analysis of
subsidies and transfer payments, and operating expenses.
Forecast Actual
$m $m $m $m
NOTE 5: Expenses by Input Type
15,421 15,718 Operating expenses

(see analysis below) 15,681 14,654
13,130 12,944 Subsidies and transfer payments
(see analysis below) 12,892 12,704
2,564 2,520 Finance costs (see analysis below) 2,516 2,804
Personnel
Personnel expenses1 (excluding pension
2,483 2,564 expenses) 2,541 2,500
690 690 GSF Pension expenses 703 727
48 (217) Movement in GSF unfunded pension liability 429 (233)
35 50 Other pension expenses 50 43
Depreciation
749 698 Physical assets 684 657
71 81 State highways 81 80
251 261 Rental and leasing costs 269 261
- 205 Net foreign-exchange losses/(gains) on liabilities (22) 1,621
- (256) Net foreign-exchange (gains)/losses on assets (25) (1,608)
- (2) Loss/(gain) on sale of assets 26 1
290 - Provision for future initiatives - -
100 - Contingency expense provision - -
35,832 35,256 Total Expenses 35,825 34,211
Example 15.12

CHAPTER 16
ACCRUAL BASIS – EXTERNAL REPORTING
Introduction
685. This Chapter considers the types of governmental financial reports commonly prepared by
government financial reporting entities using the accrual basis of accounting. Government financial
reporting entities may be governments, departments or ministries of government, or other public
sector entities that carry out the functions of government.
Financial Statements
686. Under accrual accounting the following financial statements are usually prepared:
• Statement of Financial Position;
• Statement of Financial Performance; and
9
• Statement of Cash Flows .
687. These Statements provide users with information about the resources controlled by the entity, and the
net results of its operations (or the cost of providing its services). They also provide information
useful in assessing financial position and changes in it, and in assessing whether the reporting entity is
operating economically and efficiently. An additional statement, the Statement of Movements in Net
Assets/Equity is also prepared in some jurisdictions.
688. Other notes to the Financial Statements are also prepared including:
• Accounting Policies;
• Commitments; and
• Contingencies.
689. Commitments and contingencies may be presented either as notes or as additional statements. Notes
to the Financial Statements or supplementary schedules may also report summary information about
such matters as compliance with spending mandates and relevant performance indicators.
Statement of Financial Position

690. The Statement of Financial Position includes details of all recognized assets and liabilities. In the
public sector, the balance of assets less liabilities is referred to by a variety of terms including net
assets, taxpayers’ funds, owners’ equity, public equity, or net financial position. This Study refers to
this balance as “net assets/equity”. For a discussion of the benefits of information on assets, liabilities
and net assets/equity refer to Chapter 11.
691. Examples of Statements of Financial Position are included in Appendix 2.

692. The Statement of Financial Performance includes details of all recognized revenues and expenses.
The Statement shows the surplus (or deficit) of revenue over expenses. This is a useful measure of
whether a government has managed to meet current expenses from current revenue, and whether its
net resource position has increased or decreased. For a discussion of the benefits of information on
revenue and expenses refer to Chapter 11.
693. Examples of Statements of Financial Performance are included in Appendix 2.
Statements of Movements in Net Assets/Equity

694. Some jurisdictions prepare a statement which links the Statement of Financial Performance to the
9
These statements may be referred to by a variety of names both within and across jurisdictions. The Statement of
Financial Position may also be referred to as a balance sheet or statement of assets and liabilities. The Statement of
Financial Performance may also be referred to as a statement of revenues and expenses, an income statement, an
operating statement, or a statement of net costs.
Governmental Financial Reporting Chapter 16: Accrual Basis – External Reporting 169
Statement of Financial Position and explains movements in opening and closing balances. Such
Statements include Statements of Net Assets/Equity or Movements in Net Assets/Equity, Statements
of Total Recognized Gains and Losses, and Statements of Activities (as required by FASB 117).
695. IAS 1, Presentation of Financial Statements requires that entities prepare a statement showing
changes in equity. (paragraph 86) However, different jurisdictions have varying national requirements
regarding the production of such statements. Where such statements are not prepared, it is usual to
disclose movements in components of equity by way of note disclosure.
696. Financial Reporting Standard 3 (FRS 3) of the Accounting Standards Board in the United Kingdom
requires the preparation of a Statement of Total Recognised Gains and Losses to show the extent to
which shareholders’ funds have increased or decreased from all various gains and losses recognized in
the period. FRS 3 also requires a separate Reconciliation of Movements in Shareholders’ Funds to
highlight other changes in shareholders’ funds.
697. FASB 117 Financial Statements of Not for Profit Organizations requires a Statement of Activities
which must show the change in unrestricted net assets/equity, temporarily restricted net assets,
permanently restricted net assets/equity and total net assets/equity. The standard makes the
distinctions between these classes of net assets/equity to highlight the impact of donor imposed
conditions or restrictions on the availability of net assets/equity for various purposes.
698. Examples of statements showing movements in net assets/equity are included in Appendix 2.
Statement of Cash Flows

699. Accrual accounting systems record both the elements recognized under accrual accounting (assets,
liabilities, revenue, expenses and net assets/equity) and details of cash flows. Accrual accounting
provides additional information — it does not supplant any of the information which would be
available under a cash-based system. A Statement of Cash Flows is produced under accrual
accounting. The Statement of Cash Flows provides a summary of cash receipts and cash payments
during the year, classified under various sub-headings (operating, investing and financing) and
reconciles opening and closing cash balances. The Statement may include a reconciliation between
operating cash flows and the accrued deficit or surplus shown in the Statement of Financial
Performance.
700. The purpose of the Statement is to help users to assess the entity’s ability to generate cash flows and to
assess the entity’s financial performance and financial position. It can inform users, such as creditors
and investors, of the effects of operating, financing and investing activities on the cash resources of
the entity. In combination with other financial information, the Statement of Cash Flows may help
users to:
(a) estimate the entity’s future net cash flows and especially to assess the entity’s ability to
generate positive cash flows from operating activities;
(b) assess the entity’s ability to meet its obligations and to assess its need for external financing;
(c) assess the entity’s ability to meet fiscal targets;
(d) compare the entity’s surplus (deficit) on an accruals basis with the cash flows from operating
activities;
(e) assess possible liquidity problems;
(f) assess financial flexibility, that is, the entity’s ability to optimize cash resources and to respond
to unexpected adversity or opportunities; and
(g) project future cash flows by providing a better understanding of the cash flow effects of the
variables described in the entity’s Statement of Financial Position and Statement of Financial
Performance.
701. The Statement of Cash Flows, in conjunction with the Statement of Financial Position, can provide a
comprehensive set of information in relation to net debt. Taken together these statements show the
total amount of net debt, movements during the year, and how the current year’s cash requirements
have been financed.
170 Chapter 16: Accrual Basis – External Reporting Governmental Financial Reporting
702. Examples of Statements of Cash Flows are included in Appendix 2.
Notes to the Financial Statements and Statement of Accounting Policies

703. The Notes to the Financial Statements are regarded as an integral part of the financial statements.
They provide more detailed disclosure (e.g., of the amounts of specific taxes raised), than is possible
or desirable in the face of the main statements.
704. The Notes to the Financial Statements include a Statement of Accounting Policies. It is fundamental
to the understanding and interpretation of governmental financial reports that those who use them are
aware of the accounting policies on which they are based. IAS 1, Presentation of Financial
Statements discusses the selection and disclosure of accounting policies.
Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an
enterprise in preparing and presenting financial statements. (paragraph 21)
705. IAS 1 requires disclosure of all significant accounting policies, which is normally made by way of a
Statement of Accounting Policies. Accounting policies typically contain a description of the reporting
entity, any legislative requirements under which the financial statements are prepared, the basis of
accounting, the measurement base and the detailed accounting policies used. The detailed accounting
policies include a description of recognition and measurement decisions applied in respect of various
types of revenue, expenses, assets and liabilities. Where consolidated financial statements are
prepared, all reporting entities being consolidated must generally have the same accounting policies.
Where different entities within the reporting entity have different policies or operate on different bases
of accounting (e.g., GBEs may use accrual accounting and the remainder of the entity may use a
modified form of accrual accounting), then various options are available to the reporting entity. These
options include making adjustments to bring the financial statements onto the same basis, or
disclosure of the effect that use of different bases has on the statements. The use of different bases
makes it difficult to interpret the financial statements. Examples of Statements of Accounting Policies
are included in Appendix 2.
706. Under the accrual basis of accounting, disclosure of contingencies and commitments is required. The
distinction between contingencies and commitments is discussed in Chapter 13.
707. A range of additional information may be disclosed in the Notes to the Financial Statements. Its
purpose may be to provide further information to readers in respect of financial elements recognized
in the statements, (e.g., a physical description of particular assets) or to provide information on the
nature and possible value of items not recognized as financial elements in the financial statements
(e.g., assets not recognized because they did not meet the recognition criteria). This section briefly
outlines some of the additional disclosures which may be found in financial statements.
708. Additional statements or note disclosures under accrual accounting could include:
• resources (lists of physical assets and investments);
• borrowings;
• related party transactions;
• unappropriated items;
• tax expenditures; and
• forecast information.
709. Although all assets and liabilities which meet definition and recognition criteria are recognized in the
accrual financial statements, some assets and liabilities may not meet these criteria, or additional
information concerning the composition of assets and liabilities may be useful to readers. Such
statements may be particularly useful during the transition to accrual accounting when the recognition
of classes of assets and liabilities may occur over time. For example, a government which has not yet
recognized physical assets within its financial statements may collect and report such information by
way of note. For further discussion of additional disclosures made in these circumstances refer to
Chapter 17.
710. A Statement of Resources may be used to disclose further details of physical assets, including heritage
assets. Where the historical cost measurement base is used in the financial statements, additional note
disclosure of market values of assets and liabilities may be appropriate.
711. Examples of Statements of Borrowings are shown in Appendix 2. Such Statements may include an
analysis of borrowings by book value, nominal value and market value. They may also include a
maturity profile for borrowings, movements during the year, and an analysis of domestic and foreign
currency debt.
712. “Stewardship Information” is a term used by the U.S. federal government to describe a range of
specified additional disclosures in the financial statements. The views of the U.S. federal government
on the type of information which should be included in stewardship information are discussed below.
713. In some situations the government contributes significantly to the national wealth, the benefits of
which do not reside with the federal government. The U.S. requires the reporting of costs incurred to
aid research and development, to provide education and other enhancements to the human capital of
the nation, or to assist state and local governments to build infrastructure, as stewardship information.
The stewardship information shows the costs incurred under these investment programs for the most
recent five years and the related outputs and outcomes.
714. An alternative approach is to provide forward-looking information on the expected effects of spending
under current policy settings in the Budget documents. Detailed information on specific programs
may also be presented in special purpose financial reports such as the Estimates.
715. Like other countries, the U.S. has benefit and social insurance programs which citizens expect will be
continued. The strengths of the various obligations differ from program to program. For contributory
social insurance programs, many citizens believe that long-term benefits are “owed” to those who
have made contributions; but only amounts due and currently payable are required to be recognized as
liabilities. However, extensive future-oriented stewardship information is required to facilitate an
understanding of the financial health of those programs and to assist users in assessing their potential
effects on the future deficit, and on related taxes and program benefits.
716. Similarly, in New Zealand the financial statements include extensive disclosure of the government’s
obligations under the accident compensation scheme and the superannuation/pension scheme for
government employees.
717. Disclosure of related party transactions provides further information on transactions between the entity
and parties such as controlled entities, senior management and Ministers (or equivalents). These
transactions have already been recorded within the financial statements. Further information on such
transactions is provided because parties that are related to the reporting entity are in a position to
influence the terms and conditions on which transactions with the entity take place. Separate
disclosure allows readers to gauge the nature and extent of these transactions and their possible impact
upon the financial position and financial performance of the entity. IAS 24, Related Parties provides
a description of related parties and requires certain disclosures to be made in relation to these parties
and transactions. Examples of transactions which are typically disclosed include loans from the entity
to related parties, remuneration of senior management, and sales of goods and services or the transfer
of assets between the parties. Various jurisdictions have national or federal standards which address
these issues. An example of disclosure of related party transactions within the United States context
follows.
Note 1.L. Related Party Transactions
Federal Reserve Banks Federal banks are paid to the FRBs, typically Government
(FRBs), which are not part of Government and are securities. Federal Reserve
the reporting entity, serve as recognized as non-exchange notes are backed by the full
the Federal Government’s revenue. Those earnings faith and credit of the U.S.
depositary and fiscal agent. totaled $24.6 billion for the Government.
They process Federal year ended September 30, The Government does not
payments and deposits to 1998. The primary source of guarantee payment of the
Treasury’s account and service these earnings is from interest liabilities of Government-
Federal debt securities. FRBs earned on Federal debt sponsored enterprises such as
owned $477.9 billion of securities held by the FRBs. the Federal National Mortgage
Federal debt securities held by FRBs issue Federal Reserve Association or the Federal
the public as of September 30, Notes, the circulating currency Home Loan Mortgage
1998. FRB earnings that of the United States. These Corporation. These enterprises
exceed statutory amounts of notes are collateralized by also are excluded from the
surplus established for the specific assets owned by the reporting entity.
Example 16.1
718. As discussed in Chapter 2, compliance reporting may form part of the end of year governmental
financial reports, or the budget statements for the following year. An extract from a Statement
highlighting use of resources in excess of appropriations (on the accrual basis) subject to later
validation is shown below. An example of compliance reporting is also found in Chapter 2.
Statement of Unappropriated Expenditure, Expenses or Liabilities
as at 30 June 1999
An appropriation is a statutory authorisation by Parliament for the expenditure of public money or the incurring
of expenses or liabilities. This statement reports expenditure, expenses or liabilities spent or incurred in
excess of or without appropriation by Parliament.
Section 12(1) of the Public Finance Act 1989 authorises the Minister of Finance to approve limited amounts of
expenditure, expenses or liabilities in excess of, or without appropriation. Unappropriated amounts spent or
incurred in terms of such an approval are shown separately in this statement.
Unappropriated expenditure, expenses or liabilities in excess of the limits which the Minister of Finance can
approve require validating legislation.
Amounts in this statement are expressed in thousands of dollars, reflecting the level at which appropriations
are made.
Unappropriated Unappropriated
expenditure, expenditure,
expenses or expenses or
liabilities liabilities
approved by amount
Department the Minister of requiring
Vote - Finance under validating Amount
Appropriation section 12 legislation Appropriated
($000) ($000) ($000)
Ministry of Agriculture and Forestry

Agriculture and Forestry –
Outputs supplied by the Department
Verification services 977 - 30,193
Contestable quality management services 74 - -
Biosecurity –
Border inspection 594 - 29,924
: : : : : : : :
Example 16.2
Statement of Unappropriated Expenditure, Expenses and Liabilities, page 49 (NZD)
Tax Expenditures
Tax expenditures are estimates of the revenue foregone because of preferential provisions of the tax
structure. They are due to special exclusions, exemptions, deductions, credits, deferrals, and tax
rates that depart from a ‘baseline’. These exceptions are generally intended to achieve public policy
objectives by providing benefits to qualifying individuals or entities or by encouraging particular
activities. They also may be intended to improve tax equity or offset imperfections in other parts of
the tax structure. Tax expenditures are not revenue. They are not inflows of resources to the
reporting entity. (SFFAS No. 7, page 75)
719. The U.S. standards allow entities to disclose tax expenditure information that is relevant to the
performance of the entity’s programs but caution that this information should be appropriately
qualified and explained to help the reader assess the possible impact of the specific tax expenditures
on the success of the related programs. In addition, with similar cautionary language, they permit the
disclosure of the cost to state and local governments and to citizens of federal laws which mandate
them to make expenditures or incur other types of costs, such as costs related to federal regulations
that establish the characteristics of a product or the methods of production (also referred to as directed
flows of resources or unfunded mandates). (SFFAS No. 7, page 28)
720. Tax expenditures represent taxation revenue foregone by the government (and may also be referred to
as taxes foregone). Although tax expenditures result in less taxation revenue being collected than
would otherwise be the case, no government currently recognizes tax expenditures as an expense. It is
not accepted practice to recognize opportunity costs. However, governments may wish to disclose
estimates of tax expenditures as supplementary information.
Forecast Information
721. Governments which collect taxes (including property taxes) usually prepare statements outlining
forecasts of taxes or rates and if appropriate, details of the appropriations or legislative authorities for
which approval is sought. This information may be presented in conjunction with external financial
reports, but it is more commonly published as a separate document. The type of information presented
in budget documents is determined by the nature of appropriations. A full discussion of forecast
information is outside the scope of this Study.
CHAPTER 17
MODIFICATIONS TO THE ACCRUAL BASIS
Introduction
722. This Chapter describes some of the common modifications to the accrual basis, with particular
emphasis upon the rationale underlying an approach currently used by the Government of Canada
referred to by them as “modified accrual accounting”.
723. Examples of the variations on accrual accounting which may be found in practice include:
• recognition of all assets apart from infrastructure, defense and cultural/heritage assets which are
expensed at time of acquisition or construction;
• recognition of most assets and liabilities in accordance with the accrual basis, but with the
recognition of revenues being on a cash basis or some modification to the cash basis;
• recognition of short-term financial assets and liabilities only; and
• recognition of all liabilities with the exception of certain liabilities such as pension liabilities.
724. The non-recognition of certain classes of assets or liabilities is one of the most common variations to
accrual accounting. One variation which has been adopted by most governments within Canada, and
by some governments within the United States, involves the expensing of all non-financial assets at
the time of purchase. This variation has been referred to in previous PSC publications as the modified
accrual basis of accounting. It may also be referred to in some jurisdictions as the expenditure
method. The rationale underlying the method adopted in Canada is discussed further below under the
heading Focus on Net Debt/Net Financial Assets.
725. Another government which currently uses a modification of the accrual basis for central state entities
and for local authorities is Spain. It recognizes some non-financial assets in accordance with the
accrual basis but recognizes expenditures on defense, infrastructure and cultural assets at the time of
acquisition or construction.
Assets
726. In relation to assets, the main modification to the accrual basis of accounting is that certain classes of
assets are not recognized in the statement of financial position. Instead the class of assets is expensed
at the time of acquisition. Sometimes this treatment is adopted because of the practical difficulties of,
and cost associated with, identifying or valuing such assets. Heritage assets and infrastructure assets
may not be recognized for this reason. In other cases, a jurisdiction may argue that there is a
theoretical basis for adopting this treatment for certain classes of assets e.g., Canada has chosen to
expense all non-financial assets as part of its focus upon the net debt position of a government.
727. Where a jurisdiction recognizes only non-financial assets, its definition of financial assets may be
broader than the definition given in IAS 32, Financial Instruments: Disclosure and Presentation.
IAS 32 defines financial assets as follows:
A financial asset is any asset that is:

(i) cash;
(ii) a contractual right to receive cash or another financial asset from another enterprise;
(iii) a contractual right to exchange financial instruments with another enterprise under conditions
that are potentially favorable; or
(iv) an equity instrument of another enterprise. (paragraph 5)
728. Some jurisdictions recognize all assets which can be considered to be available for financing payments
of existing liabilities and operations in the immediate future, other than readily saleable physical
assets. The IAS 32 definition may therefore be broadened to include any asset which is convertible
into cash and not intended for consumption in the ordinary course of operations. Financial assets
could therefore include inventories held for sale in the ordinary course of operations and land held for
resale, both of which are not normally classified as financial assets under accrual accounting.
Governmental Financial Reporting Chapter 17: Modifications to the Accrual Basis 177
729. This definition of financial assets also differs from the definition of financial assets under the SNA
and the GFS. The definition of financial assets under these two systems is similar to the IAS 32
definition, although the IAS definition may exclude gold held by governments and the SNA definition
specifically includes it. Land held for resale is not recognized as a financial asset under the IAS 32
definition.
Liabilities
730. Some jurisdictions choose not to recognize certain liabilities, such as pension liabilities, which meet
the definition and recognition criteria under accrual accounting. This may be for pragmatic reasons
such as the time and expense involved in measuring the liability, or it may be the result of a policy
decision to specifically exclude this liability from the published financial statements. It should be
noted that where a class of liability has not been recognized because it is not able to be reliably
measured, this is not a departure from accrual accounting — it is only where a liability could be
reliably measured, but the jurisdiction has chosen not to, that a departure occurs.
731. An interesting liability recognition issue may arise when a liability exists and where a government has
agreed to settle the liability by the transfer of an asset rather than by cash e.g., land transfers arising
from indigenous land claims. If that asset itself has not been recognized in the financial statements,
e.g., heritage land, the question is whether the liability can be recognized. Some jurisdictions
recognize such liabilities by first recognizing the asset in question. Other jurisdictions do not
recognize these liabilities or the settlement of them.
Revenues
732. The recognition of revenues will depend on the modification which has been adopted by the
jurisdiction. The most common difference arises when a class of assets has been expensed at the time
of acquisition or construction. In that case revenues will include the total proceeds from sale of
physical assets. Such revenues are usually separately disclosed to highlight their non-recurring nature.
Another difference is that where a class of assets or liabilities is not recognized, receipts of donated
assets or payment by a third party of a liability would not be recognized as revenue.
733. An example illustrating the recognition of proceeds from the disposal of assets as revenue by the
Government of Canada is shown below.
178 Chapter 17: Modifications to the Accrual Basis Governmental Financial Reporting
TABLE 3.3
REVENUES FROM ALL SOURCES

Less Less revenues netted Less Less

revenues of against expenditures deferred tax
consolidated revenues credits
Gross Crown External Internal netted against and Net
revenues corporations revenues revenues expenditures repayments revenues
External transactions.................................................. 167,543 1,498 2,302 3 8,069 155,671
Internal transactions by main classification—

Excise taxes and duties ................................
Return on investments.................................. 27 27
Privileges, licences and permits ................... 5 5
Refunds of previous years’
expenditures.............................................. 59 59
Service fees.................................................. 3,113 3,103 10
Proceeds from sales...................................... 277 277
Proceeds from the disposal of surplus
Crown assets ............................................. 11 11
Miscellaneous non-tax revenues .................. 1,482 1,444 38
Total internal transactions.......................................... 4,974 4,824 150
Total revenues............................................................ 172,517 1,498 2,302 4,824 3 8,069 155,821
Example 17.1
Public Accounts of Canada 1999, Volume 1
Section 3 (CAD)
Expenses
734. Under the accrual method, the cost of all non-current physical assets is capitalized in the Statement of
Financial Position, and recognized in the Statement of Financial Performance as depreciation or
amortization over the life of the assets. Under certain modifications to accrual accounting, expenses
would include the cost of acquisition or construction of any asset which has not been recognized in the
statement of financial position. Expenses under such modified forms of accrual accounting are
sometimes referred to as expenditures, and the cost of assets which have been expensed may be
referred to as capital expenditures.
735. If certain classes of physical or intangible assets are expensed, depreciation and amortization of those
assets no longer occurs. In addition, losses may only be recognized in relation to assets and liabilities
which have been recognized on the Statement of Financial Position.
736. The following example from Canada illustrates the reporting of expenditures on the construction and
purchases of assets.
TABLE 3.10
TOTAL EXPENDITURES BY STANDARD OBJECT

Less:
Internal
revenues Total
Total Internal netted against external
expenditures expenditures expenditures expenditures
: : : : : : : : :
Purchased repair and maintenance ................................ 1,780 11 267 1,502
Utilities, materials and supplies .................................... 2,791 4 87 2,700
Construction or acquisition
of land, buildings and works .................................. 1,191 18 430 743
Construction or acquisition
of machinery and equipment.................................. 2,335 1 22 2,312
: : : : : : : : :
:
Example 17.2
Public Accounts of Canada 1999, Volume 1
Section 3 (CAD)
External Reporting
737. Generally the same types of statements are prepared under the various modifications to the accrual
basis as under the accrual basis itself. The main difference is that where significant classes of assets
are treated as expenditures, the Statement of Financial Performance may be referred to as a Statement
of Revenues and Expenditures.
738. Governments which do not recognize certain classes of assets or liabilities may nevertheless choose to
provide supplementary information on these assets. Where additional disclosure of such items is
made, additional record keeping costs will be incurred. These costs will be largely the same as the
costs normally borne by entities maintaining details of such items as part of an accrual accounting
system. The prior collection of information on these assets and/or liabilities would be helpful if the
entity subsequently decides to recognize these items, and would reduce implementation costs at that
point. Where additional information on items is collected, care must be taken to ensure that such
information is reliable and complete. For example, it may be sensible to concentrate on collating
information on one class of assets at a time. Incomplete or inaccurate records are of little value and
may be misleading.
Focus on Net Debt/Net Financial Assets

739. The federal and all the provincial governments in Canada presently report in accordance with the
expenditure basis of modified accrual accounting as set out in standards issued by the Public Sector
Accounting and Auditing Board of the Canadian Institute of Chartered Accountants. However, the
Government of Canada has announced its intention to adopt full accrual accounting and to move
towards full recognition of physical assets (Canada, 1995 Official Budget Papers, The Budget Plan,
Chapter 4).
740. In Canada, the method of accounting which has been adopted has been heavily influenced by the
stated objective of evaluating the government’s financial position and changes therein during the
reporting period. This focus on financial position has led public sector standard setters in Canada to
the conclusion that the financial statements should report cash and other resources which are on hand
and which are available to finance the government’s activities and meet its liabilities and
commitments. Thus “future economic benefits” or “service potential” of assets is defined as being
related to the financing of activities or the repayment of liabilities.
741. Under the Canadian model all liabilities and financial assets are recognized on the Statement of
Financial Position. Financial assets constitute those assets that are available to a government as at the
reporting date for conversion into cash (or other exchangeable resources) to finance future activities,
or to settle liabilities and commitments. Information about the nature and terms of a government’s
financial assets and the method of valuation is necessary to understand and assess the financial
resources available to discharge existing liabilities or finance future operations. Non-financial assets
are expensed immediately on acquisition regardless of the length of their economic lives.
742. The financial statements under this model provide information that will describe the government’s
financial position in terms of its liabilities and financial assets at the end of the accounting period.
This information includes indicators that can be used to determine whether the government’s financial
position has improved or deteriorated. One important indicator of financial position is the difference
between a government’s liabilities and financial assets — often referred to as net debt or net financial
assets. When liabilities are greater than financial assets, the residual amount is negative and
represents a measure of the future revenues required to meet the effects of past events. When
liabilities are smaller than financial assets, the residual amount represents the financial assets available
to finance future operations. Net debt is a key indicator because it is a measure of either the future
revenue required to pay for past transactions or the financial assets on hand which can provide
resources for future operations. The annual surplus or deficit under this method represents the change
in net debt.
743. The exclusion of capital asset costs and consumption information from this model is considered
appropriate as proponents of this model consider that such information has most relevance for internal
management purposes. For external accountability purposes, net debt is a key performance indicator
of how well a government is managing its finances. The focus of this model is on providing
information on whether a government has been able to finance its activities and meet its liabilities and
commitments. It uses net debt and changes therein as a prime measurement indicator of financial
position and performance.
744. Under this model the Statement of Financial Performance accounts for the difference between a
government’s revenues and expenditures of the accounting period, adjusted for changes in valuation
allowances in the accounting period. That difference provides a measure of the extent to which
revenues raised in the period were sufficient to meet expenditures of that period. It is an important
measure because it shows whether a government has met its expenditures by raising revenues or by
incurring liabilities and, therefore, helps users understand and assess the results of a government’s
financial activities and the demands on future revenues.
PART IV – MEASUREMENT BASES
CHAPTER 18
MEASUREMENT BASES
Introduction
745. A number of different measurement bases may be used in recording transactions and events. The
measurement base is influenced by the basis of accounting.
746. Choosing a measurement system for use in preparing financial reports has two aspects:
• selecting the measurement base, that is, the dimension(s) or attribute(s) of elements that are to
be measured; and
• selecting the monetary unit in which the measurements are to be expressed.
747. Initial recognition of a financial element most commonly occurs as a result of a transaction (e.g., the
purchase of an asset). The measurement method for the first recognition, therefore, will often be a
cost-based method. Elements related to the purchase of an asset are normally recorded initially at the
transaction cost (assuming that cost records have been kept). There may be a further recognition stage
which is referred to as remeasurement. Remeasurement involves changing the monetary amount at
which an asset or liability is recorded when the recognition criteria for a change are met. Such a
change will usually be attributable to events other than transactions, for example, the passing of time
giving rise to the need for depreciation, the diminution in value of an amount owed by a debtor to
allow for the possibility of a bad debt, or a change in value of a marketable security from that used in
the initial transaction. Remeasurement is generally only applied to assets and liabilities, although
under conditions of hyperinflation it may also be applied to other elements.
748. The issues concerning choice of measurement base, acceptability of remeasurement and accounting
for changes in the purchasing power of the monetary unit are not unique to the public sector. These
issues are also relevant for the private sector, and generally accepted accounting principles have
evolved to deal with them.
Cash Basis and Modifications to the Cash Basis

749. The elements that are recognized under the cash basis of accounting are cash receipts, cash payments
and cash balances. These elements are normally recognized at historical cost. Historical cost is the
amount of cash paid or the amount of cash received at the time the payment or receipt occurred.
750. This usually provides an accurate view of the significance of items recognized. Only under
hyperinflationary conditions will the historical cost basis of measurement affect users’ understanding
of the reported transactions and balances.
751. Historical cost is also the measurement system used in conjunction with modifications to the cash
basis of accounting.
Accrual Basis and Modifications to the Accrual Basis

752. The IASC Framework for the Preparation and Presentation of Financial Statements (paragraph 99
onwards), which assumes the use of accrual accounting, states:
Measurement is the process of determining the monetary amounts at which elements of the financial
statements are to be recognized and carried in the balance sheet and income statement. This
involves the selection of the particular basis of measurement.
A number of different measurement bases are employed to different degrees and in varying
combinations in financial statements. They include the following:
(a) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair
value of the consideration given to acquire them at the time of their acquisition. Liabilities are
Governmental Financial Reporting Chapter 18: Measurement Bases 183

recorded at the amount of proceeds received in exchange for the obligation, or in some
circumstances (for example, income taxes), at the amounts of cash or cash equivalents
expected to be paid to satisfy the liability in the normal course of business.
(b) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to
be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the
undiscounted amount of cash or cash equivalents that would be required to settle the
obligation currently.
(c) Realizable (settlement) value. Assets are carried at the amount of cash or cash equivalents that
could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried
at their settlement values; that is, the undiscounted amounts of cash or cash equivalents
expected to be paid to satisfy the liabilities in the normal course of business.
(d) Present value. Assets are carried at the present discounted value of the future net cash inflows
that the item is expected to generate in the normal course of business. Liabilities are carried at
the present discounted value of the future net cash outflows that are expected to be required to
settle the liabilities in the normal course of business.
753. In addition to these measurement bases, the concept of deprival value is sometimes used to justify the
selection of a particular measurement base when an entity is deprived of an asset. Different
measurement bases may be selected depending upon whether the assets can be replaced and/or would
be replaced. By way of illustration, the current market (buying) price of a similar asset may be used
where a similar asset can be purchased but present value may be used where the asset would not be
replaced.
754. The IASC Framework for the Preparation and Presentation of Financial Statements has been prepared
specifically for business undertakings. As with business enterprises, the historical cost basis, together
with the remeasurement of certain assets, is commonly used by public sector entities. The
remeasurement of certain elements, particularly non-current assets, is a response to the criticism that
the historical cost basis of measurement is not relevant to various users. An IASC review of the
recognition and measurement of financial assets and financial liabilities has resulted in the publication
of both a Discussion Paper on Financial Assets and Financial Liabilities (March 1997) and IAS 39,
Financial Instruments: Recognition and Measurement.
755. It has become accepted measurement practice to modify historical cost records where:
• inventories’ realizable value is considered to be less than the cost of acquisition or
manufacture;
• revenue receivable and other receivables are estimated to realize less than the amount
invoiced;
• repayment of a loan or part of a loan is doubtful;
• plant, buildings or other fixed assets do not meet the “recoverable amount test”;
• the recognized cost of work in progress where the forecast completion cost of work in progress
is estimated to be in excess of its future completed “net current value”; and
• any asset has a permanent diminution in value below the cost of acquisition.
756. Such reductions of historical cost amounts can appropriately be applied in the public sector where
such assets are recognized; the only exception may be the “recoverable amount test” for fixed assets
where these assets do not generate economic benefits in the form of cash flows.
757. Valuation practices for financial reporting in general have developed with an emphasis on market
prices as a basis for valuation. However there are significant assets for which there are no active
markets; such assets (e.g., road systems) are usually important in size, scope and value. An alternative
valuation practice is to value such assets on the basis of replacement cost depreciated for loss of the
asset’s service potential since acquisition and adjusted for any technical obsolescence or redundant
capacity, that is, the so-called “optimized depreciated replacement cost” basis. Examples of the
measurement bases used by particular jurisdictions for various assets are illustrated in Chapter 12.
184 Chapter 18: Measurement Bases Governmental Financial Reporting

758. The existing private sector practice of modifying recognized historical cost values downward is
widely accepted internationally. There is more disagreement on whether modification of historical
cost asset values should encompass an increase in recognized asset values. A compromise position
called modified historical cost reporting accepts periodic revaluation of some or all non-current
physical (fixed) assets.
759. This debate is relevant to the public sector. The periodic expense reported for loss of service potential
of a long-lived asset will usually be materially different depending on whether the asset is recognized
at acquisition cost or at a current value. Users of financial reports are likely to be better informed if
they have access to information on the current values of long-lived assets.
760. The SNA requires that all assets and liabilities be valued at market value. When actual market prices
are unavailable, an attempt should be made to estimate what the price would be if the asset were
acquired in the market on the date to which the Balance Sheet relates. Where assets have delayed
returns or returns spread over lengthy periods, present value may be appropriate. Financial assets and
liabilities are also required to be valued at market value, but, where these are not traded, the amount of
principal outstanding, or the face value, may be used as a default. (IMF 1996, page 80)
761. Where financial statements are prepared using one measurement system e.g. historical cost, preparers
may choose to disclose additional information on asset values under another measurement system e.g.,
revalued amounts, or inflation adjusted amounts. Although such information is often prepared for
internal management purposes it may also be of interest to external users of the financial statements.
Monetary Unit
762. The elements in financial statements are usually expressed in the domestic currency of the reporting
entity.
Historical Cost and Changing Prices

763. Financial statements prepared under the historical cost basis of accounting do not take account of
changes in the general level of prices or of changes in the specific prices of assets held, except to the
extent that property, plant and equipment may have been revalued, or inventories or other current
assets reduced to net realizable value. Entities wishing to show the impact of changing prices on their
operations may adopt either a general purchasing power approach, a current cost approach or a
mixture of these two approaches. IAS 15, Information Reflecting the Effects of Changing Prices,
outlines the ways in which these approaches may be used to prepare supplementary financial
statements for enterprises using accrual accounting. Where hyperinflation is present, IAS 29,
Financial Reporting in Hyperinflationary Economies requires the restatement of the primary financial
statements in terms of the measuring unit current at period end.
764. An example of the application of inflation accounting to government entities is the pilot study within
the United Kingdom where some central government departments are implementing “real terms
accounting” i.e., financial capital maintenance (FCM) accounting which recognizes holding losses
arising from general price inflation.
Conclusion
765. It is unlikely that any single measurement basis can cater for every need or would be sufficiently
reliable for financial reporting in all circumstances. Hence it is desirable to choose the measurement
base most appropriate to the circumstances.
766. This Study does not attempt to give definitive advice on the measurement of financial elements. The
measurement bases adopted by a government will depend in part on generally accepted accounting
principles in that jurisdiction.
Governmental Financial Reporting Chapter 18: Measurement Bases 185

186 Chapter 18: Measurement Bases Governmental Financial Reporting
PART V – SYSTEM OF NATIONAL ACCOUNTS AND
GOVERNMENT FINANCE STATISTICS
CHAPTER 19
SYSTEM OF NATIONAL ACCOUNTS AND
GOVERNMENT FINANCE STATISTICS
Introduction
767. In addition to governmental financial reports, most governments produce financial information in
accordance with two other accounting frameworks: the System of National Accounts (SNA) and the
International Monetary Fund’s (IMF) Government Finance Statistics (GFS). An overall understanding
of the objectives of these frameworks is essential for preparers of this information.
768. This Chapter outlines the objectives of the SNA and GFS and shows some of the classifications used
within each framework. It also discusses the ability of government reporting entities using different
bases of accounting for financial reporting purposes to collect the information required by the SNA
and GFS. The GFS system is currently under revision. The discussion of GFS in this Chapter is
based on the draft material for IMF, A Manual on Government Finance Statistics (forthcoming), as
appearing on the IMF website (http://www.imf.org) as of December 1999.
Objectives of the System of National Accounts and Government Finance Statistics

769. Although the SNA and GFS are largely based on the same principles, they have quite different
objectives and focus on different reporting entities. The two systems have been designed for different
purposes and have evolved over time to meet the needs of particular groups of users.
10
770. The SNA compiles aggregate statistics, particularly measures of national income and net worth , for
the whole economy — of which general government is just one sector. The reporting entity for the
purposes of the SNA is a nation. GFS is a specialized system designed for fiscal analysis of the
general government sector rather than a whole nation. It uses the same underlying framework as the
SNA, but the reporting entity for the purposes of GFS is the general government sector within a
country, or levels of government within that country.
771. Governmental financial reports prepared in respect of a particular government reporting entity will
usually have an even narrower focus than GFS statements prepared for the general government sector.
Reporting entities could be individual government departments, state or federal governments, or local
governments and national governments. However, consolidated governmental financial reports will
include all GBEs and other trading entities controlled by that government. GFS statistics for the
general government sector do not include corporations and quasi-corporations. However, these are
included in GFS statistics compiled for the public sector.
772. The following diagram provides a stylized illustration of the relationship between the three reporting
systems. Governmental financial reporting occurs within each government entity. The general
government sector for GFS reporting may include a number of government reporting entities. In turn,
the general government sector forms part of the national economy.
10
Elsewhere in this document, the term “net assets/equity” has been used to describe the balance of assets less
liabilities. This Chapter uses “net worth” because this is the term used in the SNA, ESA and GFS.
Governmental Financial Reporting Chapter 19: SNA and GFS 187

General
Purpose
Financial
Reporting
PUBLIC
SECTOR
FINANCIAL
GFS
INFORMATION
PRIVATE
SECTOR SNA
FINANCIAL
INFORMATION
773. The GFS system is closely linked with the SNA so that analysts may assess general government sector
developments within a broad economic framework. Ideally, government reporting entities would be
able to establish financial information systems which can be used to compile all three sets of
information and minimize duplication of information and time spent making adjustments to data.
However, the extent to which this is possible may be constrained by the basis of accounting used for
financial reporting purposes. Governments may use the cash or accrual bases of accounting, or
various modifications to those bases when preparing financial reports. The SNA is an accrual-based
system. GFS is currently cash-based but the revised GFS will be on an accrual basis.
774. The different measurement objectives of the SNA and GFS require separate classification categories
for standard presentational purposes. The GFS classification system, however, will provide additional
detail to enable compilers to generate SNA data for the general government sector.
775. Their asset classifications are almost identical, although the GFS classifications also distinguish
between financial assets acquired for policy purposes and those acquired for liquidity management
purposes and they separate financial assets and liabilities into “domestic” and “abroad”.
776. The SNA is concerned with measuring production, accumulation, and net worth of the economy. A
standard set of accounts is compiled for each of the five institutional sectors of the economy, including
the general government sector. The revised GFS will not focus on production. Its main purpose is to
identify the resource flows that are useful in analyzing the fiscal performance of governments.
Harmonization of GFS with SNA and the adoption of the accrual method of recording will allow GFS
to produce several balancing items that coincide with those in SNA, net worth being one.
777. The GFS statement of government operations will present the current and capital components of flows
that generate a financing requirement, and show the components of net lending or borrowing that are
used to finance government operations of the period. The GFS integrated statements of stocks and
flows will correspond to the SNA accumulation accounts and Balance Sheets. In addition, the GFS
system will provide a cash flow statement of government operations that has no equivalent in SNA.
778. For example, the Consolidated Financial Statements of the Commonwealth Government of Australia
is a governmental financial report which also includes information using GFS classifications and by
GFS sub-sectors.
188 Chapter 19: SNA and GFS Governmental Financial Reporting

System of National Accounts
779. The international standard for national accounts is the System of National Accounts. National
accounts differ from governmental accounts in that the reporting entity for the purposes of national
accounts is typically a nation or a region within a nation. The reporting entity for governmental
accounts may be any level of government within a nation, or any entity within a particular level of
government. The SNA is a comprehensive accounting framework which uses consistent accounting
definitions and concepts to summarize economic transactions occurring within the economy into a
coherent picture of aggregate economic activity. It is an accounting system which allows nations to
monitor their financial position, track trends in national development and to compare one nation’s
development with that of another. However, national income is primarily an economic measure.
780. Most countries prepare national accounts based on the SNA. However, there are still differences
between countries in technologies, institutions and statistical methods. The range of national accounts
produced by each country also varies, with some countries producing a more comprehensive set than
others. The reliability of national accounts varies from country to country depending on the
availability of data. A variety of sources of data is used to compile national accounts. Where data are
unavailable, estimates may be used.
781. When the SNA was first introduced in 1953, its emphasis was mainly on quantifying the production of
goods and services in the economy, the sources and distribution of income, and capital accumulation.
The most recent developments place more emphasis on the analysis of financial flows and balances,
and their links to the production process.
782. National accounts based on the SNA attempt to allow international comparisons to be made and
provide users with information which is useful for:
• current economic analysis;
• short- and medium-term forecasting;
• model building;
• structural analysis of the economy; and
• the analysis of social and demographic information.
783. Gross domestic product and gross national income are two of the balancing items derived from the
national accounts. These concepts provide a means of appraising the performance of the economy as
a whole. They make it possible to compare one year’s level of output with another year’s level or to
measure changes in the distribution of income and product among different groups or sectors. The
best known use of those statistics is for public policy purposes (e.g., to estimate the effect of an
increase in government spending on national income).
784. Statistics of national output can be presented in a number of different ways. These include:
• by final expenditure (consumption, investment and export);
• by industry (manufacturing, construction, wholesale and retail trade, etc);
• by type of income (wages and salaries, interest, rents, profits, etc.); and
• by economic sector (general government, corporations, households).
785. The national accounts framework is used by economic analysts for measuring activity in all sectors of
the economy. It also allows data to be aggregated by economic sector. For each sector of the
economy, including the general government sector, it is possible to prepare:
• a Production Account showing the sources and disposal of income;
• Income Accounts showing the nature and financing of consumption and saving;
• a Capital Account showing the use of saving;
• a Financial Account showing the direction and method of lending between sectors; and
• a Balance Sheet giving details of assets, liabilities, and net worth.
786. Although none of the national accounts’ tables are directly comparable to the statements within
governmental financial reports, an analysis of such statements under the national accounts framework
is possible. For example, the Crown Accounts published by Statistics New Zealand (1996) are a

restatement of the Financial Statements of the Government of New Zealand. Production, Income and
Outlay, and Capital Finance accounts are produced in this analysis. The government’s financial
transactions with other sectors of the economy, such as private enterprises, households, local
government and GBEs, can also be identified and recorded.
787. The classifications shown below have been taken from the System of National Accounts (1993). Only
the main categories are shown.
SNA Asset Classifications

Non-financial assets
Produced assets
Fixed Assets (Tangible and Intangible)
Inventories
Valuables
Non-produced assets
Tangible non-produced assets
Intangible non-produced assets
Financial assets
Monetary gold and SDRs
Currency and deposits
Securities other than shares
Loans
Shares and other equity
Insurance technical reserves
Other accounts receivable (SNA 1993, pages 588-589)
SNA Liability Classifications

Loans
11
Insurance technical reserves
Other accounts payable (SNA 1993, page 589)
788. Because the SNA is designed to record transactions across the entire economy it does not contain
revenue classifications as such. Instead it classifies transactions and flows as follows:
• transactions in goods and services;
• distributive transactions;
• transactions in financial instruments; and
• other accumulation entries.
789. Other accumulation entries include consumption of fixed capital and acquisitions and disposals of
assets.
European System of Accounts (ESA 1995)

790. Some jurisdictions are required to comply with regional forms of statistical reporting. The European
12
System of National and Regional Accounts (ESA 95) is one such system. It is a statistical system
developed within the European Union which is intended to provide member countries with a set of
harmonized and reliable statistics. These statistics are required for a number of purposes, including
achieving the objectives of the Treaty on European Union and the Economic and Monetary Union.
The ESA 95 has statutory backing in the form of a Regulation issued by the Council of the European
Union.
11
Equities are considered liabilities in the SNA to avoid overstating national wealth.
12
The material in this section has been drawn from the “European System of Accounts ESA 1995, Luxembourg: Office
for Official Publications of the European Communities, 1996”. Readers are referred to this publication for a
comprehensive description of ESA 95.

791. The concepts within the ESA 95 are harmonized with other international systems such as the SNA, the
IMF Balance of Payments Manual, the GFS and the OECD Revenue Statistics.
792. The ESA 95 is consistent with the SNA with respect to definitions, accounting rules and
classifications used. However there are some differences between the two systems to take account of
its use within the European Union, both in relation to presentation of information and also the use of
more precise definitions and accounting rules.
793. The differences in presentation include:
• a different structure to the discussion of transactions. The ESA organizes the discussion by
transactions in products, distributive transactions and financial transactions. The SNA organizes
the comparable discussion by type of account;
• the ESA provides a definition of a concept and examples of items which are included or
excluded from that concept. In contrast the SNA provides more general discussion of concepts
and the rationale underlying concepts;
• the ESA contains additional discussion of regional accounts and quarterly accounts which is not
found in the SNA; and
• the SNA contains a chapter on satellite accounts which is not provided in the ESA.
794. The differences which result from more precise defintions of concepts and terms include:
• the ESA has introduced further clarification on the classification of output by sector;
• the ESA specifies concrete recording thresholds;
• the ESA does not require the recording of certain categories of household production goods
which are not relevant to member countries;
• the ESA makes explicit reference to specific institutional arrangements in the European Union
such as the INTRASTAT system;
• the ESA contains European Union specific classifications; and
• the ESA contains an additional classification for all external transactions: they are required to be
divided into transactions between residents of the European Union and those with residents
outside the European Union.
795. Within the ESA accounts are grouped in three categories:

• current accounts (including both production accounts and distribution and use of income
accounts);
• accumulation accounts; and
• balance sheets.
796. Current accounts concern the generation, distribution and redistribution of income and its use in the
form of final consumption. They also permit the calculation of saving within the economy.
Accumulation accounts analyze the various components of changes in the assets and liabilities of
various units and enable changes in net worth to be recorded. Balance sheets show the total assets and
liabilities of the various units at the beginning and the end of the accounting period, together with their
net worth.
797. The accounts are prepared in three forms:
• integrated economic accounts showing the accounts for all institutional sectors, the total
economy and the rest of the world in a single table;
• a sequence of accounts giving more detailed information; and
• matrices in which the account is represented by a row/column pair.

798. General government is one of the sectors within the ESA. General government is divided into the
following sub-sectors:
• Central government;
• State government;
• Local government; and
• Social security funds.
799. The sub-sector central government includes all administrative departments of the State and other
central agencies whose competence extends normally over the whole economic territory, except for
the administration of social security funds.
800. The sub-sector state government consists of state governments, which are separate institutional units
exercising some of the functions of government at a level below that of central government and above
that of the governmental institutional units existing at a lower level, except for the administration of
social security funds.
801. The sub-sector local government includes those types of public administration whose competence
extends to only a local part of the economic territory, apart from local agencies of social security
funds.
802. The sub-sector social security funds includes all central, state and local institutional units whose
principal activity is to provide social benefits and which fulfil each of the following two criteria:
• by law or by regulation certain groups of the population are obliged to participate in the scheme
or to pay contributions; and
• general government is responsible for the management of the institution in respect of the
settlement or approval of the contributions and benefits independently from its role as a
supervisory body or employer.
Government Finance Statistics

803. “The government finance statistics system (GFS system) is a set of economic and statistical concepts,
accounting rules, and classification guidelines for organizing data on general government sector
operations in a systematic manner.” (IMF 1996, page 3)
804. The GFS system is a specialized system designed to meet the needs of fiscal analysis. It provides
information relating to the operations of the central, state, and local government subsectors of the
general government sector. It was designed by the International Monetary Fund with the intention of
encouraging governments to produce comparable financial information.
805. To the extent possible, the revised GFS will be harmonized with the following systems:
• system of national accounts;
• balance of payments; and
• monetary and financial statistics.
806. It is expected that harmonization with the SNA will make the compilation of GFS an intermediate
stage in the compilation of national accounts statistics.
807. The revised GFS system will have a sequence of financial statements which link the opening and
closing Balance Sheets with the transactions and other flows of the general government sector. Data
from the system can be used to:
• develop a series of summary measures;
• analyze the operations of a specific level of government;
• analyze transactions between levels of government;
• analyze specific government operations (e.g., expenditure on social services); and
• analyze the net wealth of the general government sector.

808. The revised system would require the preparation of comprehensive Balance Sheets which include all
financial and non-financial assets and liabilities. As with the SNA, changes in assets and liabilities
resulting from factors other than transactions (e.g., changes in prices or exchange rates) will be
included to permit reconciliation of opening and closing balances. However, the analytical framework
of the revised GFS will distinguish between changes in net worth that result from transactions and
those that arise from valuation changes or other changes in the volume of assets. Transactions in kind
would also be accounted for. While the 1986 GFS manual focused on the overall deficit or surplus
measured on a cash basis, the revised manual proposes several balancing items measured on an
accrual basis.
809. The classifications shown below have been taken from the revised GFS manual (IMF 1999). Only the
main categories are shown.
GFS Asset Classification
Non-financial assets
Fixed assets
Inventories
Valuables
Land
Subsoil assets
Noncultivated biological resources
Water resources
Intangible non-produced assets (IMF 1999, page 10.4)
Financial assets
Acquired for policy purposes (classified as either Domestic or Abroad)
Loans
Financial derivatives
Other financial assets
Acquired for liquidity management purposes (classified as either Domestic or Abroad)
Monetary gold and SDRs
Loans
Other financial assets (IMF 1999, page 8.7)
GFS Liability Classification

Classified as Domestic or Abroad
Loans
Other liabilities (IMF 1999, page 8.7)

810. Examples of the proposed classification of expenses under the revised GFS are shown below.
01. General public services 06. Housing and community amenities

01.1 Executive and legislative organs, financial and 06.1 Housing development
fiscal affairs, external affairs 06.2 Community development
01.2 Foreign economic aid 06.3 Water supply
01.3 General services 06.4 Street lighting
01.4 Basic research 06.5 R&D Housing and community amenities
01.5 R&D General public services 06.6 Housing and community amenities n.e.c.
01.6 General public services n.e.c. 07. Health
01.7 Public debt transactions 07.1 Medical products, appliances and equipment
01.8 Transfers of a general character between levels 07.2 Out-patient services
of government 07.3 Hospital services
02. Defence 07.4 Public health services
02.1 Military defence 07.5 R&D Health
02.2 Civil defence 07.6 Health n.e.c.
02.3 Foreign military aid 08. Recreation, culture and religion
02.4 R&D Defence 08.1 Recreational and sporting services
02.5 Defence n.e.c. 08.2 Cultural services
03. Public order and safety 08.3 Broadcasting and publishing services
03.1 Police services 08.4 Religious and other community services
03.2 Fire-protection services 08.5 R&D Recreation, culture and religion
03.3 Law courts 09. Education
03.4 Prisons 09.1 Pre-primary and primary education
03.5 R&D Public order and safety Recreation, culture 09.2 Secondary education
and religion n.e.c. 09.3 Post-secondary non-tertiary education
03.6 Public order and safety n.e.c. 09.4 Tertiary education
04 Economic affairs 09.5 Education not definable by level
04.1 General economic, commercial and labour 09.6 Subsidiary services to education
affairs 09.7 R&D Education
04.2 Agriculture, forestry, fishing and hunting 09.8 Education n.e.c.
04.3 Fuel and energy 10. Social protection
04.4 Mining, manufacturing and construction 10.1 Sickness and disability
04.5 Transport 10.2 Old age
04.6 Communication 10.3 Survivors
04.7 Other industries 10.4 Family and children
04.8 R&D Economic affairs 10.5 Unemployment
04.9 Economic affairs n.e.c. 10.6 Housing
05. Environmental protection 10.7 Social exclusion n.e.c.
05.1 Waste management 10.8 R&D Social protection
05.2 Waste water management 10.9 Social protection n.e.c.
05.3 Pollution abatement
05.4 Protection of biodiversity and landscape
05.5 Environmental protection n.e.c.
05.6 R&D Environmental protection
(IMF 1999, Draft Manual of Government Finance Statistics Table 6.1: Classification of Expense by
Function of Government)

10000 Expense
11000 Compensation of employees

11100 Wages and salaries
11110 Wages and salaries in cash
11120 Wages and salaries in kind
11200 Social contributions
11210 Actual social contributions
11220 Imputed social contributions
12000 Use of goods and services
13000 Consumption of fixed capital
14000 Property expense
14100 Interest
14110 To other levels of national government
14120 To other residents
14130 To nonresidents
14200 Rent
15000 Subsidies
15100 To public nonfinancial corporations
15200 To private financial corporations
15300 To public financial corporations
15400 To other enterprises
16000 Grants
16100 To foreign governments
16110 Current
16120 Capital
16200 To international organizations
16210 Current
16220 Capital
16300 To other units of the general government sector
16310 Current
16320 Capital
17000 Social benefits
17100 Social security benefits
17200 Social assistance benefits
17300 Government employee social benefits
18000 Other expense
18100 Current expense
18200 Capital transfers
(IMF 1999, Draft Manual of Government Finance Statistics

Table 6.2: Economic Classification of Expense)
Issues facing Compilers using the Cash Basis or Modifications to the Cash Basis of Accounting
811. The main issue facing compilers of GFS, SNA and ESA statistics who use the cash or modifications to
the cash basis of accounting is the need to make adjustments to their cash-based information to
prepare the GFS, SNA and ESA reports. SNA is an accrual-based system and it is proposed that the
GFS system also move to the accrual basis. However, many governments using the cash basis of
accounting prepare national accounts by estimating adjustment entries to the extent possible.
812. Although it is proposed that the GFS system move to an accrual basis of accounting, countries are not
expected to introduce an accrual system of accounting immediately, but to move progressively
towards implementation of the GFS recommendations by either operating an accrual-based system or
estimating a number of items. As stated in the draft GFS manual:
It is recognized that the implementation of the fully integrated GFS system presented in this manual
will take some time and will need to progress at a pace determine by the differing needs and
circumstances of the country involved. In particular, many countries will need to revise their
underlying accounting systmes to reflect the accrual accounting principles and revised
classifications of the GFS system. (IMF 1999, page 1.4)
813. Compilers using modifications to the cash basis of accounting would face similar issues to compilers
using cash accounting. However, they would have slightly more information available regarding
short-term financial assets and liabilities.

814. The IMF envisages that a handbook which addresses practical compilation issues for different groups
of compilers will be prepared.
Issues facing Compilers using the Accrual Basis or Modifications to the Accrual Basis
815. Those governments using the accrual basis of accounting to prepare their financial reports will have
most of the information required for the preparation of national accounts and GFS statistics readily
available. The main differences between accrual governmental financial reports prepared for external
financial reporting purposes and national accounts or the proposed GFS reports are discussed in this
section.
816. Differences include the concept of capital and the use of imputed figures for some items. The SNA
differs from accrual-based external financial reporting in that it includes some items which are not
transactions or events normally recognized in the governmental financial reports.
817. The proposed GFS reports also have a different focus from the governmental financial reports. As
well as showing what would normally be termed operating revenue and expenses, the GFS also
includes a full reconciliation of opening and closing net worth. Current, capital and financing flows
are all included. Non-financial asset sales and purchases are classified as capital flows, and increases
and decreases in financial assets and liabilities as financing flows.
818. Although GFS statements and the governmental financial reports may differ in their treatment of some
assets, the coverage of assets is similar. GFS coverage includes only those assets which can be used in
economic activity, are subject to ownership rights, and which can be expressed in monetary terms.
One difference between GFS and governmental financial reports is that, in common with the SNA,
GFS does not recognize certain military assets. The SNA distinguishes between defense assets which
are used in combat and other defense assets. Under the SNA, expenditures by the military on weapons
of destruction and the equipment needed to deliver them (rockets, missiles, warheads) are treated as
intermediate consumption (i.e., they are expensed) rather than as fixed assets. However, assets with a
dual military/civil use (e.g., some aircraft and hospitals) are recorded as capital expenditure in the
national accounts.
819. Another difference between the various systems is the classification of monetary gold. Although the
SNA/GFS and IAS definitions of assets are functionally equivalent, the IAS definition of a financial
asset excludes monetary gold held by governments, which is specifically included in the SNA
definition of financial assets. However, monetary gold is still recognized as an asset under the IAS
definition of an asset — it is merely the classification which is different.
820. A major difference between GFS and governmental financial reports relates to the valuation of assets
and liabilities. In governmental financial reports, depending on the country, assets are valued either at
historical cost, less accumulated depreciation or in the case of certain assets (e.g., land and buildings)
they may be revalued periodically. When an asset is sold or transferred there is usually some
difference between the transaction price and the recorded book value. This difference is shown as a
gain or loss on sale. In governmental financial reports liabilities are recorded at the amount of the
proceeds received in exchange for the obligation or at the amount of cash or cash equivalent required
to satisfy the liability. Gains and losses on settlement of liabilities are not common but may occur
occasionally. In contrast, GFS requires that all assets and liabilities be revalued to current prices every
year. As a result, in GFS statements, changes in value from one period to the next are treated as other
economic flows and no gain or loss is recognized when an asset is disposed of or a liability is
liquidated in a transaction. In order to facilitate the preparation of GFS statistics, it is helpful if all
gains and losses recorded on the disposal of assets and liabilities are separately identified.
821. Under the accrual basis or modifications to that basis, a bad debt expense for actual or expected bad
debts may be recorded. In general, GFS does not write down the asset until the claim is formally
canceled. Under GFS if the cancellation is by mutual agreement, it is a transaction; if the government
unilaterally writes off the asset, it is an other economic flow. In order to facilitate preparation of GFS
statistics, bad debt expense and any associated bad debt provision should be separately identified.
822. This Chapter has identified some of the differences which may occur in the treatment of items
between GFS and governmental financial reports. In order to assist users who wish to use both types
of information, it is helpful if governments prepare a reconciliation between the reported surplus under

governmental financial reports and GFS. This allows readers to understand the differences between
the reported figures.
All Compilers
823. GFS requires that expenses be classified using both the economic and functional classifications.
Compilers should therefore ensure that information for governmental financial reports is recorded
using both these categories, in addition to any other classifications which the entity may use. This
would allow individual entities to prepare GFS statistics more easily and would reduce the need for
adjustments when combining the reports of different entities for GFS purposes.

APPENDIX 1
GLOSSARY OF TERMS
This glossary contains definitions of some terms used in this Study. While these terms may be used
interchangeably in other publications, the intended definitions in this publication are as given below.
Accrual basis: means a basis of accounting under which transactions and other events are recognized when
they occur (and not as cash or its equivalent is received or paid) and are recorded in the accounting records
and reported in the financial statements of the periods to which they relate.
Appropriation: refers to an authorization by the legislature to expend or commit funds. The nature of
appropriations varies between jurisdictions.
Basis of accounting: refers to the body of accounting principles that determine when the effects of
transactions or events should be recognized for financial reporting purposes. It relates to the timing of the
measurements made, regardless of the nature of the measurement. Common bases of accounting are the
cash basis of accounting (i.e., effects of transactions or events are recognized when cash is paid or received)
and the (full) accrual basis of accounting (i.e., effects of transactions or events are recognized when they
take place). There are many variations of both bases.
Capital contributions: refers to future economic benefits that have been contributed to the entity by parties
external to the entity, other than those which result in liabilities of the entity, that establish a financial
interest in the net assets/equity of the entity which:
• conveys entitlement both to distributions of future economic benefits by the entity during its life, such
distributions being at the discretion of the ownership group or its representatives, and to distributions of
any excess of assets over liabilities in the event of the entity being wound up; and/or
• can be sold, transferred or redeemed.
Carrying amount: is the amount at which an asset is included in the financial statements after deducting
any accumulated depreciation thereon.
Cash basis: means a basis of accounting under which transactions and other events are recognized when
cash is received or paid. It measures financial results for a period as the difference between cash receipts
and cash payments.
Closing rate: is the spot exchange rate at the reporting date.
Commitment: refers to a government’s responsibility for a future liability, based on an existing contractual
agreement. Under the accrual basis of accounting the term commitment usually refers to amounts
committed under leases or, under contract, for capital expenditure. Under the cash basis of accounting, the
term may refer to amounts within an operating or capital budget where a contractual obligation has been
entered into, but a cash payment has not yet been made.
Consolidated financial statements: the financial statements of a group presented as those of a single
reporting entity.
Custodial activities: means the making of transactions or the management of assets or liabilities by a
government reporting entity on behalf of another organization.
Distributions to the controlling entity or owners: refers to future economic benefits distributed by the
entity to all or part of its ownership group, either as a return on investment or as a return of investment.
Elements of financial statements: the types or classes of items that are reported in the financial
statements, including notes thereto and related schedules.
Exchange difference: is the difference resulting from reporting the same number of units of a foreign
currency in the reporting currency at different exchange rates.
Exchange rate: is the ratio for exchange of two currencies.
Fair value: is the amount for which an asset could be exchanged between knowledgeable, willing parties,
in an arm’s length transaction.
Governmental Financial Reporting Appendix 1 Glossary 199

Financial condition: refers to a government’s health as measured by sustainability, vulnerability and
flexibility, looked at in the context of the overall economic and financial environment.
Financial instrument: refers to any contract that gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity.
Financial position: refers to the financial status of a government at a given point in time, as shown in the
Financial reporting: refers to the communication of financial information by an entity to interested parties.
It encompasses all reports that contain financial information based on data generally found in the financial
accounting and reporting system. It includes financial statements as well as financial information presented
in budgets, fiscal plans and estimates of expenditure or reports on the performance of individual programs
or activities.
Financial reports: the general purpose financial reports (referred to in this Study as governmental financial
reports), that are designed to meet the common information needs of users outside the reporting entity.
Those external users rely on the reports as an important source of financial information because they have
limited authority, ability, or resources to obtain additional information. While financial statements
comprise the core of the financial reports, other financial information, such as performance measures or
budget information, might also be included.
Financial statements: the accounting statements prepared by a reporting entity to communicate
information about its financial performance and position. They include those notes and schedules that are
needed to clarify or further explain items in the statements. For business-oriented enterprises, financial
statements normally include a Balance Sheet, Income Statement, Statement of Retained Earnings, and
Statement of Cash Flows. Governments and governmental units may have a similar set of statements or
may have lists of assets and liabilities, revenue and expenses. The statements similar to the Balance Sheet
and Income Statement are commonly referred to as Statement of Financial Position and Statement of
Financial Performance in the public sector.
Flexibility: the degree to which a government can increase its financial resources to respond to rising
commitments, by either expanding its revenues or increasing its debt burden.
Foreign currency: is a currency other than the reporting currency of the entity.
Foreign entity: is a foreign operation, the activities of which are not an integral part of those of the
reporting entity.
Fund accounting: is an accounting system structured to treat restricted assets as a separate accounting, and
in many cases a separate financial reporting, entity. On this basis, funds represent a pool of resources set
aside for the carrying on of specific activities or attaining certain objectives in accordance with legislative
or other regulatory restrictions placed on the use of those resources.
Government: refers to government, government agencies and similar bodies whether local, national or
international.
Government Business Enterprises: refers to businesses which operate within the public sector ordinarily
to meet a political or social interest objective. They are ordinarily required to operate commercially, that is,
to make profits or to recoup, through user charges, a substantial proportion of their operating costs.
Governmental financial reports: refers to financial reports which are intended to meet the needs of
external users who are unable to require, or contract for, the preparation of special reports to meet their
specific information needs.
Heritage asset: assets earmarked by the government for preservation because of their unique historical,
geographical, cultural or environmental attributes.
Intergenerational (or interperiod) equity: refers to the concept that current generations should pay for
services received and that these costs should not be passed on to future generations.
Investment property: refers to an investment in land or buildings that are not occupied substantially for
use by, or in the operations of, the investing entity, or another entity in the same group as the investing
entity.
200 Appendix 1 Glossary Governmental Financial Reporting

Measurement focus: refers to the messages and information portrayed in the financial statements. A
particular measurement focus is accomplished by considering not only when the effects of transactions and
events involving those resources are recognized (i.e., the basis of accounting), but also what resources are
measured. For example, the financial statements of business enterprises are designed to measure profit or
loss and changes in shareholders’ funds. Government financial statements could be designed to express,
for example, the flow of economic resources, the flow of total financial resources or the flow of current
financial resources.
Modifications to the accrual basis: common modifications to the accrual basis of accounting include the
recognition of some, but not all assets, particularly physical assets, and the recognition of some, but not all
liabilities, particularly pension liabilities.
Modifications to the cash basis: a common modification to the cash basis of accounting involves holding
the books open for around a month after year end (the specified period). Receipts and payments which
occur during the specified period but originate in the previous reporting period are recognized as receipts
and payments of the previous reporting period. Cash flows at the beginning of the reporting period which
have already been accounted for in the previous reporting period are deducted from the current period. The
primary financial statement is the Cash Flow Statement.
Monetary financial assets and liabilities: refers to financial assets and liabilities to be received or paid in
fixed or determinable amounts of money.
Non-reciprocal transactions: are transactions in which an entity receives assets (including cash) or has
liabilities extinguished without directly giving approximately equal value in exchange to the other party or
parties to the transfer. Taxation is a common form of a non-reciprocal transaction.
Outcomes: refers to benefits sought by a Government.
Outputs: refers to goods and services produced by departments.
Parent: refers to an entity that has one or more subsidiaries.
Programs: refers to a group of outputs, services or activities intended to contribute to some government
policy outcome.
Reciprocal transactions: refers to a transaction in which an entity receives assets (including cash) or has
liabilities extinguished and gives approximately equal value in exchange to the other party or parties to the
transfer.
Recognition: refers to the process of incorporating in the financial statements an item that meets the
definition of an element and satisfies the criteria for recognition. It involves the depiction of that item in
words and by a monetary amount and the inclusion of that amount in the financial statement totals.
Recoverable amount: is the amount which the entity expects to recover from the future use of an asset,
including its residual value on disposal.
Reporting date: refers to the end of the reporting period to which the financial report relates.
Reporting entity: those entities in respect of which it is reasonable to expect the existence of users
dependent upon financial reports for information which will be useful to them for accountability and
decision making purposes. The term may refer to departments or ministries of government, or other entities
that are part of government.
Reporting model: refers to the configuration and presentation of financial statements; in particular, what
statements are included in the set of financial statements, how they interrelate, and how key measures are
displayed in them.
Resource accounting: covers a set of accruals accounting techniques for reporting on the expenditure of
the United Kingdom central government, comprising departments and their executive agencies including
Trading Funds, and a framework for analyzing expenditure by departmental objective, relating this to
outputs where-ever possible.
Sub-entity: refers to a reporting entity such as a government department.
Governmental Financial Reporting Appendix 1 Glossary 201

Sustainability: the degree to which a government can maintain existing programs and meet existing
creditor requirements without increasing the debt burden on the economy.
Vulnerability: the degree to which a government becomes dependent on, and therefore vulnerable to,
sources of funding outside its control or influence, both domestic and international.
202 Appendix 1 Glossary Governmental Financial Reporting

APPENDIX 2
EXAMPLES OF FINANCIAL STATEMENTS
CASH BASIS
Report of the Director of Audit on the Accounts of the Government of the Hong Kong Special
Administrative Region for the year ended 31 March 1999
Report on the Accounts and Finance for the year 1997, Parliament of Fiji
MODIFICATIONS TO THE CASH BASIS

Public Accounts of Ontario, 1992–93 (Canada)
ACCRUAL BASIS
Agencia Estatal De La Administración Tributaria (the Spanish Tax Agency) for the year ended
December 31, 1997
Financial Statements of the Government of New Zealand for the year ended 30 June 1999
Annual Report and Financial Accounts 1997–98, West Sussex County Council (United Kingdom)
MODIFICATIONS TO THE ACCRUAL BASIS

Public Accounts of Canada 1999
Compte Général de L’Administration Des Finances (CGAF) for 1996 (France)
The examples in this Appendix illustrate current practice. The examples are intended to
facilitate understanding and to put the examples used throughout the Study into context.
They have also been selected to illustrate the variety of accounting treatments and forms
of presentation used by different jurisdictions.
For reasons of space, only the main financial statements, or in some cases selected
financial statements, are reproduced in this Appendix. Although the notes to the financial
statements have not been included they are an integral part of the financial statements and
are treated as such by an auditor when forming an opinion on the financial statements.
Readers are therefore encouraged to refer to the complete financial statements (including
the notes and the auditor’s report). Website references for downloading or ordering
documents of the selected governments are provided in Appendix 3.
Governmental Financial Reporting Appendix 2: Examples of Financial Statements 203

R eport of
the D irector of A udit
on the Accounts of the
Hong Kong Government
for the year ended
31 March 1999
October 1999
204 Appendix 2: Examples of Financial Statements Governmental Financial Reporting

GENERAL REVENUE ACCOUNT
STATEMENT OF RECEIPTS AND PAYMENTS
FOR THE YEAR ENDED 31 MARCH 1999
1999 1998
Note $'000 $'000
Cash and bank balances at 1 April 1998 2,330,994 2,680,644
Revenue (Schedule 1) 179,143,145 228,676,125
Expenditure (Schedule 2) (194,693,918) (165,180,619)
(Deficit)/Surplus for the year (15,550,773) 63,495,506
1
Other cash movements 15,586,716 (63,845,156)
Cash and bank balances at 31 March 1999 2,366,937 2,330,994
Note :
1. These transactions arise from increases and decreases in assets (other than cash and bank balances) and
liabilities.
THE TREASURY, SHUM Man-to

Hong Kong, 16 June 1999 Director of Accounting

General Revenue Account
REPORT OF THE DIRECTOR OF AUDIT
TO THE PRESIDFNT OF THE
LEGISLATIVE COUNCIL
I have examined and audited the financial statements

on pages 9 to 25 which have been prepared under
the accounting policies set out on page 12.
Respective responsibilities of the Director of

Accounting Services and the Director of Audit
The Director of Accounting Services is responsible

for the compilation and supervision of the accounts
of the Government of the Hong Kong Special
Administrative Region in accordance with section
16(1) of the Public Finance Ordinance (Cap. 2).
It is my responsibility to form an independent

opinion, based on my audit, on the financial
statements and to report my opinion to you.
Basis of opinion
I certify that I have examined and audited the

financial statements referred to above in accordance
with section 12(1) of the Audit Ordinance
(Cap. 122) and the Audit Commission auditing
standards. An audit includes examination, on a test

basis, of evidence relevant to the, amounts and
disclosures in the financial statem ents. It also includes
an assessm ent of the judgem ents m ade by the D irector
of A ccounting S ervices in the preparation of the
financial statem ents, and of w hether the accounting
policies are appropriate to the circum stances of the
G eneral R evenue A ccount, consistently applied and
adequately disclosed.
I planned and performed my audit so as to obtain all

the information and explanations which I considered
necessary in order to provide me with sufficient
evidence, to give reasonable assurance as to whether
the financial statements are free from material
rnisstatement. In forming my opinion 1 also
evaluated the overall adequacy of the presentation of
information in the financial statements. I believe, that
my audit provides a reasonable basis for my opinion.
Opinion
In my opinion the financial statements properly

present the assets avid liabilities of the General
Revenue Account as at 31 March 1999 and the
receipts and payments for the year then ended and
have been properly prepared in accordance with the
Public Finance Ordinance and section 11(1) of the
Audit Ordinance.
Dominic Y T Chan
Director of Audit
Audit Commission
Hong Kong
11 October 1999

CAPITAL WORKS RESERVE FUND
STATEMENT OF RECEIPTS AND PAYMENTS
FOR THE YEAR ENDED 31 MARCH 1999
1999 1998
Note $'000 $'000
Cash and bank balances at 1 April 1998 23,047 484,675
Revenue (Schedule 1) 25,685,731 57,184,335
Expenditure (Schedule 2) (40,016,774) (77,915,410)
Deficit for the year (14,331,043) (20,731,075)
1
Other cash movements 14,340,753 20,269,447
Cash and bank balances at 31 March 1999 32,757 23,047
Note :
1: These transactions arise from increases and decreases in assets (other than cash and bank balances) and
liabilities.
THE TREASURY, SHUM Man-to

Hong Kong, 16 June 1999 Director of Accounting

Capital Works Reserve Fund
REPORT OF THF, DIRECTOR OF AUDIT
TO THE PRESIDENT OF THE
LEGISLATIVE COUNCIL
I have examined and audited the financial statements

on pages 29 to 37 which have been prepared under
the accounting policv set out on page 31.
Respective responsibilities of the Director of

Accounting Services and the Director of Audit
The Director of Accounting Services is responsible

for the compilation and supervision of the accounts
of the Government of the Hong Kong Special
Administrative Region in accordance with section
16(1) of the Public Finance Ordinance (Cap. 2).
It is my responsibility to form an independent

opinion. based on my audit, on the financial
statements and to report my opinion to you.
Basis of opinion
I certify that I have examined and audited the financial
statements referred to above in accordance with section
12(1) of the Audit Ordinance (Cap. 122) and the Audit
Commission auditing standards. An audit includes
examination, on a test basis of evidence relevant to

the amounts and disclosures in the financial statement.
It also includes an assessment of the judgements made
by the Director of Accounting Services in the
Preparation of the financial statements, and of
whether the accounting policy is appropriate to the
circumstances of the Capital Works Reserve Fund,
consistently applied and adequately disclosed.
I planned and performed my audit so as to obtain all the

information and explanations which I considered
necessary in order to provide me with sufficient
evidence to give reasonable assurance as to whether
the financial statements are free from material
misstaternent. In forming my opinion I also evaluated
the overall adequacy of the presentation of information
in the financial statements. I believe that my audit
provides a reasonable basis for my opinion.
Opinion
In my opinion the financial statements properly present
the assets and liabilities of the Capital Works Reserve
Fund as at 31 March 1999 and the receipts and
payments for the year then ended and have been
properly prepared in accordance with the Public
Finance Ordinance and section 11(1) of the Audit
Ordinance.
Dominic Y T Chan
Director of Audit
Audit Commission
Hong Kong
11 October 1999

Report on
THE ACCOUNTS AND FINANCE
For the Year 1997
PARLIAMENT OF FIJI
PARLIAMENTARY PAPER NO. 39 OF 1998

APPENDIX 2
Consolidated Fund
STATEMENT OF BALANCES FOR THE YEAR ENDED
31 DECEMBER 1997
Previous Year Current Year
$ $
139,761,120 Operating Fund Account ……………………………………….. 141,715,132
20,232,908 Borrowing Fund Account ………………………………………. 40,527,802
(283,291) Lending Fund Account …………………………………………. 1,279,210
(11,223,353) Revolving Fund Account ……………………………………….. (15,508,484)
..... Special Fund Account …………………………………………... .....

2,000,000 Contingencies Fund Account …………………………………… 1,500,000
150,487,384 Total Consolidated Fund ……………………………………….. 169,513,660
Represented By :
5,932,605 Cash at Bank ...…………………………………………… 12,372,957
155,752,425 Investment in Shares and Equities ...……………………... 170,415,528
161,685,030 182,788,485
11,197,646 Less: Amount Held for Consolidated Trust Fund …...……. 13,274,825
150,487,384 169,513,660
Ministry of Finance S Narube

Suva, Fiji Permanent Secretary of Finance
30 June 1998

APPENDIX 4

STATEMENT OF RECEIPTS AND EXPENDITURE FOR THE
YEAR ENDED 31 DECEMBER 1997
Previous Year Current Year
$ $ $ $
RECEIPTS
545,177,522 Operating Revenue ………………………… 588,686,798
8,679,620 Capital Revenue ……………………………. 6,584,394
182,186,863 736,044,005 Value Added Tax ………………………….. 204,208,997 799,480,189
210,538,306 Transferred from Borrowing Fund Account… 270,965,421

7,509,141 Transferred from Lending Fund Account ….. 3,979,857
20,000 Investment in Shares ……………………….. 14,663,103
954,111,452 1,089,088,570
EXPENDITURE
558,676,041 Operating Expenditure……………………… 590,143,681
203,771,757 Capital Expenditure ………………………… 262,314,207
34,891,311 797,339,109 Value Added Tax …………………………... 49,395,453 901,853,341
151,253,076 Transferred to Borrowing Fund Account…… 180,157,337

13,100,000 Transferred to Lending Fund Account …...… 5,123,880
961,692,185 1,087,134,558
(7,580,733) (Deficit)/Surplus for the year ………………. 1,954,012

147,341,853 Add: The Balance at 1 January of ……..… 139,761,120
139,761,120 Leaving A Balance at 31 December of …….. 141,715,132
Ministry of Finance S Narube

Suva, Fiji Permanent
30 June 1998 Secretary for
Finance

APPENDIX 5

ABSTRACT OF GENERAL AND CAPITAL REVENUE FOR THE YEAR 1997
Actual
Heads of Revenue Estimate Revenue Increase Decrease
$ $ $ $
GENERAL REVENUE
1. Customs …………………………………. 208,398,000 219,561,599.47 11,163,599.47 ....
2. Port and Harbour Dues, etc. ……………. 336,500 520,103.10 183,603.10 ....
3. Licences ………………………………… 13,638,500 12,935,501.10 .... 702,998.90
4. Inland Revenue …………………………. 423,575,000 445,202,163.76 21,627,163.76 ....
5. Internal Revenue not Otherwise
Classified ……………………………….. 6,800,000 6,396,820.17 .... 403,179.83
6. Fees, Royalties, Sales and
Reimbursements ………………………… 43,758,900 50,898,246.90 7,139,346.90 ....
7. Posts and Telecommunications …………. 5,494,700 117,379.91 .... 5,377,320.09
8. Rent of Government Property…………… 5,622,000 6,843,586.17 1,221,586.17 ....
9. Interest
Public Account…………………… 350,000 263,189.99 .... 86,810.01
Transferred from Lending Fund
Account ………………………….. 550,300 243,719.51 .... 306,580.49
10. Miscellaneous…………………………… 28,208,200 51,107,856.43 22,899,656.43 ....
11. New Revenue Measures ………………… 6,059,200 .... .... 6,059,200.00
General Revenue Total…………… 742,791,300 794,090,166.51 64,234,955.83 12,936,089.32
CAPITAL REVENUE
12. Grant Aid ……………………………….. 8,135,700 4,945,111.96 .... 3,190,588.04
13. Contributions for Capital Projects ……… 20,000 345,556.22 325,556.22 ....
14. Transferred from Lending Fund Account . 2,600,000 2,785,485.97 185,485.97 ....
Miscellaneous…………………………… 650,000 1,293,725.57 643,725.57 ....
Capital Revenue Total 11,405,700 9,369,879.72 1,154,767.76 3,190,588.04
TRANSFERRED FROM
BORROWING FUND
ACCOUNT
15. Overseas Loans …………………………. 18,300,000 8,653,769.41 .... 9,646,230.59
16. Domestic Loans…………………………. 263,852,200 262,311,651.40 .... 1,540,548.60
Total……………………………… 282,152,200 270,965,420.81 .... 11,186,779.19
Capital Revenue Total …………… 293,557,900 280,335,300.53 1,154,767.76 14,377,367.23
Grand Total ……………………… 1,036,349,200 1,074,425,467.04 65,389,723.59 27,313,456.55

APPENDIX 7

FOR THE YEAR 1997
Revised
$ $ $ $
GENERAL
ADMINISTRATION
OFFICE OF THE PRESIDENT
Operating………………………….. 774,000 852,724.78 78,724.78 ....
VAT……………………………….. 77,400 26,726.16 .... 50,673.84
CABINET OFFICE
Operating………………………….. 3,150,658 3,105,567.49 .... 45,090.51
VAT……………………………….. 294,300 310,928.76 16,628.76 ....
PUBLIC SERVICE COMMISSION
Operating…………………………. 4,962,750 4,555,764.87 .... 406,985.13
Capital…………………………….. 1,878,450 1,269,010.03 .... 609,439.97
VAT……………………………….. 375,800 384,643.95 8,843.95 ....
DISCIPLINARY APPEAL BOARD
Operating………………………….. 600 .... .... 600.00
VAT.................................................. 100 .... .... 100.00
NATIONAL ARCHIVES OF FIJI
Operating.......................................... 253,442 254,687.83 1,245.83 ....
VAT….............................................. 22,400 32,380.81 9,980.81 ....
OFFICE OF THE ATTORNEY-GENERAL
& MINISTER FOR JUSTICE
Operating.......................................... 2,967,100 2,918,111.51 .... 48,988.49
VAT.................................................. 274,800 272,874.37 .... 1,925.63
MINISTRY OF FINANCE AND
ECONOMIC DEVELOPMENT
Operating.......................................... 8,664,469 7,997,144.58 .... 667,324.42
Capital............................................... 2,117,800 887,458.15 .... 1,230,341.85
VAT……………………………….. 403,100 340,348.22 .... 62,751.78
INLAND REVENUE
Operating………………………….. 4,729,368 4,657,860.37 .... 71,507.63
VAT……………………………….. 432,400 425,000.51 .... 7,399.49
CUSTOMS AND EXCISE
Operating………………………….. 4,286,400 4,629,982.87 343,582.87 ....
VAT……………………………….. 428,600 427,384.49 .... 1,215.51
PRINTING AND STATIONERY
Operating………………………….. 1,608,050 1,592,706.73 .... 15,343.27
Capital.............................................. 366,150 363,474.12 .... 2,675.88
VAT……………………………….. 176,400 156,021.11 .... 20,378.89

APPENDIX 7 (continued)

FOR THE YEAR 1997
Revised
$ $ $ $
SUPPLIES
Operating………………………….. 4,361,807 4,687,721.79 325,914.79 ....
Capital…………………………….. 559,493 559,492.43 .... 0.57
VAT……………………………….. 506,500 505,836.61 .... 663.39
INFORMATION, TECHNOLOGY
AND COMPUTING SERVICES
Operating………………………….. 2,185,342 2,098,724.92 86,617.08
Capital…………………………….. 378,000 367,389.44 .... 10,610.56
VAT……………………………….. 253,300 253,075.04 .... 224.96
BUREAU OF STATISTICS
Operating………………………….. 1,616,021 1,609,860.79 .... 6,160.21
VAT……………………………….. 177,000 174,612.40 .... 2,387.60
CENTRAL PLANNING OFFICE
Operating………………………….. 999,200 679,173.40 .... 320,026.60
VAT……………………………….. 96,500 59,132.47 .... 37,367.53
MINISTRY OF FIJIAN AFFAIRS,
REGIONAL DEVELOPMENT AND
MULTI-ETHNIC AFFAIRS
Operating………………………….. 12,746,200 12,360,462.75 .... 385,737.25
Capital…………………………….. 150,000 103,464.73 .... 46,535.27
VAT……………………………….. 106,600 (2,839.52) .... 109,439.52
MINISTRY OF HOME AFFAIRS
AND IMMIGRATION
Operating.......................................... 1,945,265 1,942,662.81 .... 2,602.19
Capital…………………………….. 15,108 15,030.12 .... 77.88
VAT……………………………….. 196,365 195,864.15 .... 500.85
FIJI MILITARY FORCES
Operating………………………….. 43,997,185 44,696,549.95 699,364.95 ....
Capital…………………………….. 300,000 238,545.52 .... 61,454.48
VAT……………………………….. 4,210,700 3,682,305.85 .... 528,394.15
PRISONS
Operating………………………….. 5,843,177 6,738,733.90 895,556.90 ....
VAT……………………………….. 587,200 612,737.84 25,537.84 ....
FIJI POLICE
Operating………………………….. 28,044,800 29,918,598.17 1,873,798.17 ....
Capital…………………………….. 1,585,000 1,566,356.84 .... 18,643.16
VAT……………………………….. 2,786,000 2,899,458.71 113,458.71 ....
MINISTRY OF LABOUR
AND INDUSTRIAL RELATIONS
Operating………………………….. 2,058,900 2,155,815.78 96,915.78 ....
VAT……………………………….. 179,500 201,761.41 22,261.41 ....


FOR THE YEAR 1997
Revised
$ $ $ $
MINISTRY OF FOREIGN AFFAIRS
Operating………………………….. 9,248,600 8,986,230.14 .... 262,369.86
Capital............................................... 98,000 215,404.50 117,404.50 ....
VAT……………………………….. 990,800 664,557.65 .... 326,242.35
OFFICE OF THE AUDITOR-
GENERAL
Operating………………………….. 1,097,500 998,425.74 .... 99,074.26
VAT……………………………….. 109,400 85,740.93 .... 23,659.07
ELECTIONS OFFICE
Operating………………………….. 385,600 362,242.00 .... 23,358.00
Capital............................................... 52,600 52,580 .... 20.00
VAT……………………………….. 43,800 33,006.55 .... 10,793.45
JUDICIAL
Operating………………………….. 4,629,900 4,484,084.58 .... 145,815.42
VAT……………………………….. 462,700 449,332.61 .... 13,367.39
LEGISLATURE
Operating………………………….. 5,923,600 5,435,325.14 .... 488,274.86
VAT……………………………….. 591,400 635,674.76 44,274.76 ....
OFFICE OF THE OMBUDSMAN
Operating………………………….. 229,000 230,485.44 1,485.44 ....
VAT……………………………….. 22,800 17,044.10 .... 5,755.90
OFFICE OF THE DIRECTOR OF PUBLIC
PROSECUTIONS
Operating………………………….. 656,300 655,805.26 .... 494.74
VAT……………………………….. 65,600 62,820.68 .... 2,779.32
DEPARTMENT OF REGIONAL
DEVELOPMENT
Operating…………………………. 8,781,900 8,323,745.53 .... 458,154.47
Capital…………………………….. 5,110,000 5,557,087.70 447,087.70 ....
VAT……………………………….. 1,003,400 969,449.46 .... 33,950.54
MINISTRY OF INFORMATION,
BROADCASTING, TELEVISION
AND TELECOMMUNICATIONS
Operating………………………….. 1,674,000 1,539,914.08 .... 134,085.92
VAT……………………………….. 153,700 126,520.10 .... 27,179.90
DEPARTMENT OF WOMEN AND
CULTURE
Operating………………………….. 797,400 794,303.52 .... 3,096.48
Capital…………………………….. 225,100 48,467.93 .... 176,632.07
VAT……………………………….. 59,000 48,036.22 .... 10,963.78


FOR THE YEAR 1997
Revised
$ $ $ $
DEPARTMENT OF MULTI-ETHNIC
AFFAIRS
Operating..………………………… 1,006,600 974,264.90 .... 32,335.10
Capital............................................... 1,000,000 998,544.95 .... 1,455.05
VAT.................................................. 27,200 23,997.09 .... 3,202.91
Operating-Total………………… 169,625,134 170,237,681.62 4,316,589.51 3,704,041.89
Capital-Total…………………… 13,835,701 12,242,306.46 564,492.20 2,157,886.74
VAT-Total……………………… 15,114,765 14,074,433.49 240,986.24 1,281,317.75
General Administration-Total….. 198,575,600 196,554,421.57 5,122,067.95 7,143,246.38
Net Decrease…………… .... .... .... 2,021,178.43
SOCIAL SERVICES
MINISTRY OF EDUCATION,
WOMEN AND CULTURE
Operating………………………….. 133,069,869 132,709,952.66 .... 359,916.34
Capital…………………………….. 2,562,000 2,536,567.08 .... 25,432.92
VAT……………………………….. 11,422,931 11,330,569.50 .... 92,361.50
UNIVERSITY OF THE SOUTH PACIFIC
Operating…………………………. 21,104,900 21,097,245.78 .... 7,654.22
MINISTRY OF HEALTH AND
SOCIAL WELFARE
Operating………………………….. 70,524,763 71,801,136.55 1,276,373.55 ....
Capital…………………….……….. 8,340,500 6,227,514.68 .... 2,112,985.32
VAT……………………………….. 7,927,237 6,567,031.50 .... 1,360,205.50
MINISTRY OF URBAN DEVELOPMENT
HOUSING AND ENVIRONMENT
Operating………………………….. 2,888,200 2,828,646.39 .... 59,553.61
Capital…………………………….. 948,200 845,907.02 .... 102,292.98
VAT……………………………….. 173,400 162,153.01 .... 11,246.99
DEPARTMENT OF SOCIAL WELFARE
Operating………………………….. 6,265,550 6,196,902.18 .... 68,647.82
Capital……………………………... 1,125,650 586,646.00 .... 539,004.00
VAT……………………………….. 152,800 151,392.46 .... 1,407.54
FIJI INSTITUTE OF TECHNOLOGY
Operating………………………….. 4,487,800 4,840,300.00 352,500.00 ....
Capital……………………………... 1,410,000 1,057,500.00 .... 352,500.00
VAT……………………………….. 418,700 418,700.00 .... ....


FOR THE YEAR 1997
Revised
$ $ $ $
MINISTRY OF YOUTH, EMPLOYMENT
OPPORTUNITIES AND SPORTS
Operating………………………….. 4,179,300 4,110,853.07 .... 68,446.93
Capital............................................... 88,800 88,400.00 .... 400.00
VAT……………………………….. 330,100 296,635.27 .... 33,464.73
Operating-Total ……………… 242,520,382 243,585,036.63 1,628,873.55 564,218.92

Capital -Total ……………….. 14,475,150 11,342,534.78 .... 3,132,615.22
VAT-Total …………………… 20,425,168 18,926,481.74 .... 1,498,686.26
Social Services-Total… …….. 277,420,700 273,854,053.15 1,628,873.55 5,195,520.40
Net Decrease…........….. .... .... .... 3,566,646.85
ECONOMIC SERVICES
MINISTRY OF AGRICULTURE,
FISHERIES AND FORESTS
Operating………………………….. 18,509,100 19,448,678.55 939,578.55 ....
Capital…………………………….. 20,887,600 18,144,286.24 .... 2,743,313.76
VAT……………………………….. 3,169,700 2,844,031.88 .... 325,668.12
AGRICULTURAL TRIBUNAL
Operating………………………….. 149,200 143,420.87 .... 5,779.13
VAT……………………………….. 14,900 10,523.09 .... 4,376.91
DEPARTMENT OF FORESTS
Operating………………………….. 5,166,100 5,044,410.28 .... 121,689.72
Capital…………………………….. 2,039,000 2,038,998.78 .... 1.22
VAT……………………………….. 589,500 410,435.32 .... 179,064.68
MINISTRY OF LANDS, MINING
AND ENERGY
Operating………………………….. 20,678,900 18,683,227.75 .... 1,995,672.25
Capital…………………………….. 2,415,500 1,860,938.75 .... 554,561.25
VAT……………………………….. 2,225,700 1,912,648.91 .... 313,051.09
MINISTRY OF COMMERCE, TRADE,
INDUSTRY AND PUBLIC ENTERPRISES
Operating………………………….. 4,439,000 4,119,150.60 .... 319,849.40
Capital…………………………….. 1,300,000 497,007.69 .... 802,992.31
VAT……………………………….. 510,400 181,584.09 .... 328,815.91
DEPARTMENT OF CO-
OPERATIVES
Operating…………………………. 1,595,500 1,595,384.40 .... 115.60
VAT………………………………. 159,700 158,300.00 .... 1,400.00
MINISTRY OF TOURISM AND
CIVIL AVIATION
Operating………………………….. 3,028,700 2,960,075.62 .... 68,624.38

FOR THE YEAR 1997
Revised
$ $ $ $
Capital…………………………….. 4,500,000 4,500,000.00 .... ....
VAT……………………………….. 137,100 111,794.10 .... 25,305.90
DEPARTMENT OF ENERGY
Operating........................................... 422,200 359,674.67 .... 62,525.33
Capital............................................... 1,514,200 1,446,752.85 .... 67,447.15
VAT................................................... 93,600 93,600.00 .... ....
Operating-Total ........................ 53,988,700 52,354,022.74 939,578.55 2,574,255.81
Capital-Total............................. 32,656,300 28,487,984.31 .... 4,168,315.69
VAT-Total................................ 6,900,600 5,722,917.39 .... 1,177,682.61
Economic Services-Total.......... 93,545,600 86,564,924.44 939,578.55 7,920,254.11
Net Decrease ................. .... .... .... 6,980,675.56
INFRASTRUCTURE
DEPARTMENT OF CIVIL
AVIATION
Operating .......................................... 3,894,700 3,504,755.67 .... 389,944.33
Capital............................................... 985,400 800,000.00 .... 185,400.00
VAT................................................... 71,500 2,750.90 .... 68,749.10
DEPARTMENT OF METEOROLOGICAL
SERVICES
Operating .......................................... 1,978,800 1,943,374.30 .... 35,425.70
Capital............................................... 98,400 96,712.82 .... 1,687.18
VAT................................................... 380,500 335,802.48 .... 44,697.52
MINISTRY OF PUBLIC WORKS,
INFRASTRUCTURE AND TRANSPORT
Operating ........................................... 46,727,500 49,098,452.45 2,370,952.45 ....
Capital................................................ 56,708,000 58,592,698.00 1,884,698.00 ....
VAT................................................... 10,376,900 8,616,863.89 .... 1,760,036.11
DEPARTMENT OF MARINE
Operating .......................................... 7,138,000 6,859,740.22 .... 278,259.78
Capital............................................... 200,000 171,004.15 .... 28,995.85
VAT................................................... 726,200 606,834.77 .... 119,365.23


FOR THE YEAR 1997
Revised
$ $ $ $
DEPARTMENT OF ROAD TRANSPORT
Operating.......................................... 2,263,000 2,248,501.30 .... 14,498.70
Capital............................................... 555,000 552,182.81 .... 2,817.19
VAT.................................................. 313,000 311,975.38 .... 1,024.62
Operating-Total ........................ 62,002,000 63,654,823.94 2,370,952.45 718,128.51
Capital-Total............................. 58,546,800 60,212,597.78 1,884,698.00 218,900.22
VAT-Total................................ 11,868,100 9,874,227.42 .... 1,993,872.58
Infrastructure-Total................ 132,416,900 133,741,649.14 4,255,650.45 2,930,901.31
Net Decrease.......................... .... .... 1,324,749.14 ....
UNALLOCABLE
MISCELLANEOUS SERVICES
Operating.......................................... 40,487,802 37,949,092.85 .... 2,538,709.15
Capital............................................... 153,864,118 150,028,783.73 .... 3,835,334.28
VAT.................................................. 2,546,300 797,392.70 .... 1,748,907.30
PENSIONS, GRATUITIES AND

COMPASSIONATE ALLOWANCES
Operating.......................................... 22,561,000 22,363,023.50 .... 197,976.50
TRANSFERRED TO BORROWING
FUND ACCOUNT
CHARGES ON ACCOUNT OF PUBLIC
DEBT
Operating.......................................... 167,239,300 180,157,336.87 12,918,036.87 ....
Operating-Total................... 230,288,102 240,469,453.22 12,918,036.87 2,736,685.65
Capital-Total........................ 153,864,118 150,028,783.73 .... 3,835,334.27
VAT-Total........................... 2,546,300 797,392.70 .... 1,748,907.30
Unallocable-Total................ 386,698,520 391,295,629.65 12,918,036.87 8,320,927.22
Net Increase .................... .... .... 4,597,109.65 ....
Operating-Total................... 758,424,318 770,301,018.15 22,174,030.93 10,297,330.78
Capital-Total....................... 273,378,069 262,314,207.06 2,449,190.20 13,513,052.14
VAT-Total .......................... 56,854,933 49,395,452.74 240,986.24 7,700,466.50
Grand-Total ........................ 1,088,657,320 1,082,010,677.95 24,864,207.37 31,510,849.42
Net Decrease.................... .... .... .... 6,646,642.05

APPENDIX 7 (concluded)

FOR THE YEAR 1997
Revised
1. Established Staff........................... 310,404,326 312,770,025.52 2,365,699.52 ....

2. Unestablished Staff....................... 41,867,907 42,121,657.61 253,750.61 ....
3. Travel and Communications ........ 13,331,465 14,455,054.71 1,123,589.71 ....
4. Maintenance and Operations......... 23,764,777 24,947,381.57 1,182,604.57 ....
5. Purchase of Goods and Services ... 60,592,793 60,157,179.51 .... 435,613.49
6. Operating Grants and Transfers .... 94,777,331 92,732,852.21 .... 2,044,478.79
7. Special Expenditures .................... 23,885,419 20,596,506.65 .... 3,288,912.35
8. Capital Construction ..................... 79,230,040 77,975,043.70 .... 1,254,996.30
9. Capital Purchase ........................... 11,992,203 9,467,641.87 .... 2,524,561.13
10. Capital Grants and Transfers ....... 182,155,826 174,871,521.49 .... 7,284,304.51
11. Pensions, Gratuities and
Compassionate Allowances ........ 22,561,000 22,363,023.50 .... 197,976.50
12. Charges on Account of Public 167,239,300 180,157,336.87 12,918,036.87 ....
Debt..............................................
13. Value Added Tax......................... 56,854,933 49,395,452.74 .... 7,459,480.26
Total .................................................. 1,088,657,320 1,082,010,677.95 17,843,681.28 24,490,323.33

Net Decrease............................. .... .... .... 6,646,642.05

Ministry of
Finance

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PUBLIC ACCOUNTS, 1992-93
Statement of Revenue
Province of Ontario
For the year ended March 31, 1993 Budget Actual Actual
1993 1992
($millions) 1993
Taxation
Personal Income Tax 13,880 13,543 13,712
Retail Sales Tax 7,865 7,316 7,487
Corporations Tax 3,270 2,713 3,184
Employer Health Tax 2,745 2,592 2,648
Gasoline Tax 1,850 1,834 1,618
Tobacco Tax 985 969 1,028
Fuel Tax 450 439 379
Land Transfer Tax 445 356 415
Commercial Concentration Tax 113 111 111
Race Tracks Tax 98 82 82
Other Taxation 65 86 74
31,766 30,041 30,738
Other
Vehicle Registration Fees 675 665 652
Liquor Control Board Of Ontario Profits 685 615 675
Other Fees And Licenses 630 584 513
Ontario Lottery Corporation Revenues 470 538 455
Sales And Rentals (note 2) 1,202 512 94
Liquor Licensing Board Of Ontario Revenues 650 511 483
Royalties 210 191 191
Utility Service Charges 160 167 160
Fines And Penalties 155 152 142
Miscellaneous 212 277 326
5,049 4,212 3,691
Government of Canada
Established Programs Financing 3,692 4,316 3,542
Canada Assistance Plan 2,250 2,283 2,159
Fiscal Stabilization 1,190 300 -
National Training Act 105 104 113
Vocational Rehabilitation 63 75 50
Bilungualism Development 72 70 72
Young Offenders Act 60 60 63
Other 361 346 343
7,730 7,554 6,324
Total Revenue 44,545 41,807 40,753
See accompanying Notes to the Financial Statements.

Statement of Expenditure
Province of Ontario
($millions) 1993 1993 1992
Ministry
Agriculture and Food 573 573 612

Attorney General 745 752 693
Board of Internal Economy 148 133 140
Citizenship 64 67 62
Colleges and Universities 3,277 3,396 3,296
Community and Social Services 9,548 9,413 8,314
Consumer and Commercial Relations 179 173 175
Correctional Services 579 583 591
Culture and Communications 311 335 328
Education 6,124 6,197 6,414
Energy 54 48 57
Environment 629 620 659
Executive Offices 16 14 14
Financial Institutions 63 56 63
Government Services 728 681 779
Health 17,186 16,973 16,834
Housing 1,005 999 848
Industry, Trade and Technology 352 282 199
Technology Fund 81 80 82
Intergovernmental Affairs 8 9 7
Labour 274 262 236
Management Board 100 72 65
Municipal Affairs 1,082 1,077 1,077
Ontario Native Affairs Secretariat 42 33 31
Natural Resources 651 658 710
Northern Development And Mines 308 341 357
Office for Disability Issues 11 9 7
Office for The Greater Toronto Area 3 2 2
Office of Francophone Affairs 4 4 4
Office for Seniors’ Issues 7 6 8
Office Responsible for Women’s Issues 25 24 23
Revenue 749 774 894
Skills Development 394 350 252
Solicitor General 581 593 613
Tourism and Recreation 191 192 211
Transportation 2,564 2,575 2,738
Treasury and Economics 45 46 45
Economic Development Projects 26 12 47
Interest on Debt Issued for Provincial Purposes (note 3) 5,275 5,293 4,196
Jobs Ontario Capital Fund (note 4) 500 - -
Expenditure Savings and Constraints (note 4) (400) - -
Contingency Fund (note 4) 365 - -
Total Expenditure (note 3) 54,467 53,707 51,683

Statement of Changes in Financial Position

Province of Ontario
($millions) 1993
1993 1992
Deficit for the year 9,922 11,900 10,930

Loans Receivable and Investments Activities
Loans Receivable 23 328 (12)
Water Treatment and Waste Control Facilities 75 (20) 17
Cash used in loans and investments activities 98 308 5
Total Financing Requirements 10,020 12,208 10,935
Financing Activities, net

Debt issued for Provincial Purposes
Non-Public
Canada Pension Plan (536) 164 489
Teachers’ Pensions (506) (506) (44)
Public Service Pensions (124) (62) (87)
Public
Debentures and Notes 9,992 14,866 8,887
Treasury Bills 600 1,031 1,381
Other (10) (10) (10)
9,416 15,483 10,616
Province of Ontario Savings Office 210 28 145
Other Liabilities 44 13 65
Cash Provided by financing activities 9,670 15,524 10,826
Change in cash and temporary investments
(Decreases) Increases (350) 3,316 (109)
Cash and temporary investments
at beginning of period 2,498 2,607
Cash and temporary investments
at end of period 5,814 2,498


Province of Ontario
For the year ended March 31, 1993 1992
1993
($millions)
Financial Assets
Cash and Temporary Investments (note 5) 5,814 2,498
Loans receivable (note 6) 1,015 687
Investments in Water Treatment and Waste Control Facilities (at cost
less recoveries) (note 7) 510 530
7,339 3,715
Advances to Ontario Hydro, secured by Bonds (note 8) 6,717 6,933
Total Financial Assets 14,056 10,648
Accumulated Deficit 61,268 49,368
75,324 60,016
Liabilities
Debt Issued for Provincial Purposes (note 9) 66,101 50,618
Deposits with the Province of Ontario Savings Office (note 10) 2,068 2,040
Other Liabilities (note 11) 438 425
Total Liabilities for Provincial Purposes 68,607 53,083
Debt Incurred for Ontario Hydro (note 9) 6,717 6,933
75,324 60,016
Contingent Liabilities (note 12) — —
The accompanying March 31, 1993 financial statements of the Province of Ontario’s Consolidated Revenue
Fund, including the notes are the responsibility of the Office of the Controller and have been prepared in
accordance with the accounting policies as described in the Summary of Significant Accounting policies.
In the opinion of the Office of the Controller, these financial statements have been properly prepared,
include all material items, and contain all information available up to July 23, 1993.
ELEANOR CLITHEROE, Deputy Minister of Finance
JIM EVANS, Controller

Notes to the Financial Statements

(all tables in millions of dollars)
1. Statement of Significant Accounting Policies

Reporting entity
The financial statements, prepared using the concept of a Consolidated Revenue Fund, are designed to provide an
accounting of the financial resources appropriated by the Ontario Legislature. The accounting policies and
practices followed by the Province are designed to report the financial transactions of Government ministries as
Consolidated Revenue Fund cash inflows and outflows. Activities of agencies of Government of Ontario are
reported only to the extent to which their operations have been financed from, or have contributed to, the
Consolidated Revenue Fund.
5
Basis of accounting
The cash basis of accounting used by the province is modified to allow for an additional thirty days to pay for
goods and services received during the fiscal year just ended and for certain non-cash transactions. Cash inflows,
however, are closed at March 31 for cash received.
Capital costs are charged to expenditure when paid.
(Other Accounting Policies not reproduced here)
13
This Province has since changed its basis of accounting. The latest financial statements of the Province may be
viewed at http://www.gov.on.ca/fin/

Auditor’s Report
To the Legislative Assembly of the

Province of Ontario
I have audited the statement of financial position of the Province of Ontario’s Consolidated Revenue Fund as at
March 31, 1993 and the statements of revenue, expenditure, accumulated deficit and changes in financial position for
the year then ended. These financial statements are the responsibility of the Government. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted accounting standards. Those standards require that I plan
and perform an audit in order to obtain reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
the Government, as well as evaluating the overall financial statement presentation.
As outlined in note 1 to the financial statements, the modified cash basis of accounting is used in the preparation of
these financial statements. This basis of accounting permits the flow of expenditures to be managed in such a way that
expenditure is not necessarily reflected in the period in which it has been incurred. Specifically, Government matching
contributions of $584 million to the Teachers’ Pension Plan and the Public service plan which pertained to and would
normally be charged to expenditure in the March 31,1993 fiscal year, were deferred until April 1993. This was
partially offset by employer special payments of $56 million to the Teachers’ Pension Plan which, although due in the
March 31, 1994 fiscal year, were charged to expenditure in the March 31,1993 fiscal year. If these transactions had
been recorded in the year in which they were incurred, total expenditure and the deficit for the year ended March 31,
1993 would be increased by $528 million and the accumulated deficit would be increased by $528 million.
In my opinion, except for the failure to record expenditure in the year in which it has been incurred as described in the
preceding paragraph, these financial statements present fairly, in all material respects, the financial position of the
Province’s Consolidated Revenue Fund as at March 31, 1993 and the results of its operations and changes in its
financial position for the year then ended in accordance with the accounting policies stated in note 1 to the financial
statements.
According to note 1, these financial statements have been designed to provide an accounting of the financial resources
appropriated by the Ontario Legislature by reporting the financial transactions of Government ministries as
Consolidated Revenue Fund cash inflows and outflows. However, the financial statements are not summary financial
statements that would more fully report on the nature and extent of the financial affairs and operations of the
Government of Ontario.
Therefore, during the 1993/94 fiscal year, I will strongly urge the Government to base these financial statements on the
recommendations of the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered
Accountants, since my audit of and opinion on the March 31, 1994 statements will be based on those recommendations.
This Board has issued statements that recommend standards for good practice in financial reporting and accounting by
Canadian governments. The recommendations that would have the most significant impact to provide a clearer and
fuller understanding of the financial position and the results of operations of the Government are:
• reflecting revenues and expenditures on an accrual basis of accounting, including the value of pension benefits
earned by employees, in order to reflect revenues and expenditures in the determination of the surplus or deficit for
the period in which they are considered to have been earned and incurred, respectively, whether or not such
transactions have been settled by the receipt or payment of cash or its equivalent; and
• the inclusion of all organizations owned or controlled by the Government, in order to provide an accounting for
the full nature and extent of the financial affairs and resources for which the Government is responsible.
Toronto, Ontario Erik Peters, C.A.

July 23, 1993 Provincial Auditor

FINANCIAL STATEMENTS OF THE
SPANISH TAX AGENCY
For the year ended December 31, 1997
Content
• Administration Proceedings
• Balance Sheet
• Statement of Financial Performance
• Budget Settlement:
– Settlement of the expenditure budget (Parts 1 & 2)
– Settlement of the revenues budget (Parts 1 & 2)
– Budgetary Result

ADMINISTRATION PROCEEDINGS:
All the transactions registered all through 1997 in the accounting system of the
AGENCIA ESTATAL DE LA ADMINISTRACIÓN TRIBUTARIA (the Spanish Tax
Agency) have been fairly reflected in the accounts for the year ended December 31, 1997.
Madrid, April 29, 1998
Financial Management Deputy Personnel and Administration Director
D. Juan Costa Climent, Chairman of the AGENCIA ESTATAL DE ADMINISTRACIÓN

TRIBUTARIA, approves the annual accounts (a 217-page report) for the year ended
December 31, 1997, in compliance with the corresponding legislation (Instrucción de
Contabilidad de la Administración Institucional del Estado aprobada por Orden del
Ministerio de Economía y Hacienda de 1 de Febrero de 1996).
Madrid, April 29, 1998
Chairman of the AGENCIA ESTATAL DE ADMINISTRACIÓN TRIBUTARIA

AGENCIA ESTATAL DE ADMINISTRACIÓN TRIBUTARIA
BALANCE SHEET
for the year ended December 31, 1997
ASSETS LIABILITIES
Account No 1997 1996 Account No 1997 1996
A) FIXED ASSETS 99,738,624,000 96,361,671,777 A) EQUITY 106,321,754,157 102,932,868,283
II. Intangible Fixed Assets 354,143,578 439,752,488 I. Net worth 98,363,113,398 98,367,669,898
215 3. Software 1,562,506,455 1,185,544,665 100 1. Net worth 21,749,525,297 21,749,525,297
217 5. Rights on leased goods 0 248,286,350 101 2. Assigned property 76,559,993,101 21,749,525,297
(281) 7. Depreciation -1,208,362,877 -994,078,527 103 3. Granted property 53,595,000 76,564,549,601
III. Tangible Fixed Assets 99,384,480,422 95,921,919,289 III. Results of previous years 4,565,198,385 53,595,000
220, 221 1. Land and buildings 91,641,073,573 89,336,252,338 120 1. Profit from previous years 4,565,198,385 0
222, 223 2. Machinery and equipment 1,734,852,981 1,541,478,002 129 IV. Results for the year 3,393,442,374
224, 226 3. Furniture and tools 5,659,687,230 4,491,825,051 C) LONG-TERM LIABILITIES 0 4,565,198,385
227, 228, 229 5. Other tangible fixed assets 23,236,366,347 19,366,719,840 II. Other long-term debt 0 152,076,661
(282) 6. Depreciation -22,887,499,709 -18,814,355,942 173 2. Other long-term debt 0 152,076,661
27 B) DEFERRED EXPENSES 0 21,809,440 D) SHORT-TERM LIABILITIES 14,261,556,942 13,140,136,865
C) CURRENT ASSETS 20,844,687,099 19,841,600,592 III. Current liabilities 14,261,556,942 13,140,136,865

II. Debtors 15,632,874,750 17,826,271,989 40 1. On-budget debt 10,608,355,625 9,466,541,992
43 1. On-budget receivables 15,575,023,326 17,676,619,394 41 2. Off-budget debt 501,209,892 529,223,119
44 2. Off-budget receivables 69,452,353 82,394,279 475, 476, 477 4. Public Institutions 3,151,054,314 3,127,634,170
470, 472 4. Public Institutions 153,927,969 227,642,701 523, 554 5. Other liabilities 937,111 16,737,584
(555) 5. Other receivables -165,528,898 -160,384,385
III. Short -term Investments 33,026,376 51,579,523
544 2. Other investments and temporary lending 25,016,548 25,530,529
565 3. Short-term garantee deposits received 8,009,828 26,048,994

57 IV. Cash and banks 5,178,785,973 1,963,749,080
TOTAL NET WORTH AND

TOTAL ASSETS ( A+B+C) 120,583,311,099 116,225,081,809 120,583,311,099 116,225,081,809
LIABILITIES (A+C+D)

STATEMENT OF FINANCIAL PERFORMANCE
for the year ended December 31, 1997
EXPENSES REVENUES
Account
1997 1996 Account No. 1997 1996
No.
A) TOTAL EXPENDITURE 122,761,575,980 119,088,444,272 B) TOTAL REVENUE 126,155,018,354 123,653,642,657
1. Operating expenses 122,638,292,620 118,685,907,701 1. Ordinary revenues 19,461,967 4,042,100
a) Personnel expenses 89,545,348,003 87,250,104,715 a) Taxes 19,461,967 4,042,100
640,641 a.1) Wages and salaries 84,556,146,197 82,177,741,066 740 a.15) Tax on services provided 19,461,967 4,042,100
642,644 a.2) Social Security expenses 4,989,201,806 5,072,363,649 2. Other ordinary revenues 4,500,682,292 4,247,240,379
645 b)Other welfare expenses 95,936,039 101,241,846 773 a) Reimbursements 29,499,230 10,172,209
68 c) Fixed assets depreciation 4,286,367,991 3,964,387,055 c) Other ordinary revenues 4,212,867,249 3,952,825,609
e) Other operating expenses 28,709,527,433 27,355,578,349 775,776,777 c.1) Other ordinary revenues 4,212,867,249 3,952,825,609
62 e.1) Outside services 28,442,591,511 26,957,497,184 761 e) Revenues from marketable securities and loans 0 29,659,615
63 e.2) Tax 266,869,942 385,810,288 f) Interests and similar revenues 258,315,813 254,582,946
676 e.3) Other operating expenses 65,980 12,270,877 769 f.1) Other interests 258,315,813 254,582,946
f) Financial expenses 1,113,154 14,595,736 3. Grants and transfers 121,478,653,113 119,350,183,706
662,669 f.1) Financial expenses from debt 1,113,154 14,595,736 750 a) Current transfers 117,155,883,113 118,306,241,070
2. Grants and transfers 49,705,851 68,331,251 755 c) Capital transfers 4,322,770,000 1,043,942,636
650 a) Current transfers 49,705,851 68,331,251 4. Extraordinary gains and revenues 156,220,982 52,176,472
3. Extraordinary losses and expenses 73,577,509 334,205,320 771 a) Gains from fixed assets 2,729,921 20,537,524
671 a) Losses from fixed assets 2,092,789 67,718,579 778 c) Extraordinary revenues 108,571,607 9,958,778
678 b) Extraordinary expenses 316,087 225,032 779 d) Gains and revenues of previous years 44,919,454 21,680,170
679 c) Losses and expenses of previous years 71,168,633 266,261,709
SURPLUS FOR THE YEAR (B-A) 3,393,442,374 4,565,198,385

1997 Budget Settlement
C.1.1). Settlement of the expenditure budget (Part 1)

ORGANIC CLASSIFICATION : 15.302
FUNCTIONAL CLASSIFICATION, PROGRAM EXPENDITURE: 613-G NATIONAL TAX SYSTEM APLICATION
800-X TRANSFERS AMONG SUBSECTORS
ECONOMIC
BUDGETARY APPROPIATION ENGAGED NET OBLIGATIONS NON-DISPOSED
CLASSIFIC. EXPENDITURE RECOGNISED APPROPIATION
INITIAL CHANGES FINAL
1 Personnel expenses 85,602,000,000 6,068,133,204 91,670,133,204 89,607,956,869 89,603,002,702 2,067,130,502
2 Operating expenditure on goods and services 19,998,650,000 10,672,317,792 30,670,967,792 29,105,981,184 28,772,329,350 1,898,638,442
3 Financial expenses 18,394,000 3,500,000 21,894,000 1,227,981 1,227,981 20,666,019
4 Current transfers 53,178,000 1,650,000 54,828,000 49,705,851 49,705,851 5,122,149
CURRENT TRANSACTIONS TOTAL 105,672,222,000 16,745,600,996 122,417,822,996 118,764,871,885 118,426,265,884 3,991,557,112
6 Fixed assets 4,324,620,000 7,488,346,645 11,812,966,645 9,452,683,680 7,844,497,499 3,968,469,146
CAPITAL TRANSACTIONS TOTAL 4,324,620,000 7,488,346,645 11,812,966,645 9,452,683,680 7,844,497,499 3,968,469,146
NON-FINANCIAL OPERATIONS TOTAL 109,996,842,000 24,233,947,641 134,230,789,641 128,217,555,565 126,270,763,383 7,960,026,258
8 Variation in financial assets 43,000,000 43,000,000 41,987,717 41,987,717 1,012,283
FINANCIAL OPERATIONS TOTAL 43,000,000 43,000,000 41,987,717 41,987,717 1,012,283
TOTAL 110,039,842,000 24,233,947,641 134,273,789,641 128,259,543,282 126,312,751,100 7,961,038,541

AGENCIA ESTAL DE ADMNISTRACIÓN TRIBUTARIA
C.1.2). Settlement of the expenditure budget (Part 2)

ORGANIC CLASSIFICATIONS: 15.302
FUNCTIONAL CLASSIFICATION PROGRAM EXPENDITURE: 613-G NATIONAL TAX SYSTEM APLICATION

800-X TRANSFERS AMONG SUBSECTORS
NET OBLIGATIONS
NET OBLIGATIONS RECOGNISED TOTAL OF NET
ECONOMIC OBLIGATIONS DUE FOR
RECOGNISED AS OF DURING THE OBLIGATIONS PAID (all through the year)
CLASSIF. PAYMENT AT YEAR END
DECEMBER,31 FOLLOWING RECOGNISED
JANUARY
1 Personnel expenses 89,603,002,702 89,603,002,702 89,584,952,172 18,050,530
2 Operating expenditure on goods and services 28,772,329,350 28,772,329,350 23,145,492,297 5,626,837,053
3 Financial expenses 1,227,981 1,227,981 1,227,981
4 Current transfers 49,705,851 49,705,851 48,308,719 1,397,132
CURRENT TRANSACTIONS TOTAL 118,426,265,884 118,426,265,884 112,779,981,169 5,646,284,715
6 Fixed assets 7,844,497,499 7,844,497,499 3,085,409,727 4,759,087,772
CAPITAL TRANSACTIONS TOTAL 7,844,497,499 7,844,497,499 3,085,409,727 4,759,087,772
NON-FINANCIAL OPERATIONS TOTAL 126,270,763,383 126,270,763,383 115,865,390,896 10,405,372,487
8 Variation in financial assets 41,987,717 41,987,717 41,987,717
FINANCIAL OPERATIONS TOTAL 41,987,717 41,987,717 41,987,717
TOTAL 126,312,751,100 126,312,751,100 115,907,378,613 10,405,372,487

C.2).Settlement of the revenues budget ( Part 1)
BUDGETARY REVENUE ESTIMATION

ECONOMIC CLASSIFICATION
INITIAL CHANGES FINAL
3 Rates and other income 6,587,805,000 0 6,587,805,000
4 Current transfers 92,860,767,000 24,233,947,641 117,094,714,641
5 Property revenue 225,000,000 0 225,000,000
CURRENT TRANSACTIONS TOTAL 99,673,572,000 24,233,947,641 123,907,519,641
6 Sale of physical assets 0 0 0
7 Capital transfers 4,324,620,000 0 4,324,620,000
CAPITAL TRANSACTIONS TOTAL 4,324,620,000 0 4,324,620,000
NON-FINANCIAL OPERATIONS 103,998,192,000 24,233,947,641 128,232,139,641

TOTAL
8 Variation in financial assets 6,041,650,000 0 6,041,650,000
FINANCIAL OPERATIONS TOTAL 6,041,650,000 0 6,041,650,000
TOTAL 110,039,842,000 24,233,947,641 134,273,789,641

C.2).Settlement of the revenues budget ( Part 2)
RECEIVABLES DUE FOR

ECONOMIC NET RECEIVABLES CANCELLED
NET COLLECTION COLLECTION AT YEAR
CLASSIFICATION RECOGNISED RECEIVABLES
END
3 Rates and other income 4,260,136,636 4,252,455,482 0 7,681,154
4 Current transfers 117,155,883,113 102,711,701,273 0 14,444,181,840
5 Property revenue 260007623 221654115 0 38,353,508
CURRENT TRANSACTIONS TOTAL 121,676,027,372 107,185,810,870 0 14,490,216,502
6 Sale of physical assets 2,712,365 2,712,365 0 0
7 Capital transfers 4,322,770,000 3,241,615,000 0 1,081,155,000
CAPITAL TRANSACTIONS TOTAL 4,325,482,365 3,244,327,365 0 1,081,155,000
NON-FINANCIAL OPERATIONS TOTAL 126,001,509,737 110,430,138,235 0 15,571,371,502
8 Variation in financial assets 60,887,698 60,887,698 0 0
FINANCIAL OPERATIONS TOTAL 60,887,698 60,887,698 0 0
TOTAL 126,062,397,435 110,491,025,933 0 15,571,371,502

for the year ended December 31,1997
BUDGET SETTLEMENT
C.4). BUDGETARY RESULT
NET RECEIVABLES NET OBLIGATIONS

BALANCES
RECOGNISED RECOGNISED
1. (+) Non-financial operations -269,253,646

126,001,509,737 126,270,763,383
2. (+) Financial operations 18,899,981
60,887,698 41,987,717
3. (+) Commercial operations (*)
I. BUDGETARY RESULT OF THE YEAR (1+2+3) 126,062,397,435 126,312,751,100 -250,353,665
II. NET VARIATION OF FINANCIAL LIABILITIES
III. BUDGET BALANCE OF THE YEAR (I+II) -250,353,665
* Applicable only to industrial and commercial entities

F IN A N C IA L
STA TEM EN TS
OF THE
G O VERNM ENT O F NEW ZEALAND
)RUWKH\HDUHQGHG
-XQH
REPORT OF THE AUDIT
OFFICE
To the Readers of the Financial Statements

of the Government of New Zealand
for the Year Ended 30 June 1999
We have audited the financial statements on pages 26 to 100. The financial statements
provide information about the past financial performance of the Government of New Zealand (the
Government) and its financial position as at 30 June 1999. This information is stated in
accordance with the accounting policies as set out on pages 57 to 64.
Responsibilities of the Government

Section 29 of the Public Finance Act 1989 places a responsibility on the Treasurer and the
Minister of Finance to ensure that the financial statements fairly reflect the performance and
position of the Government. Section 27 of the Public Finance Act 1989 requires the Treasury to
prepare, in accordance with generally accepted accounting practice, annual financial statements
which fairly reflect the financial position of the Government as at 30 June 1999 and the results of
its operations and cash flows for the year ended 30 June 1999.
Auditor’s responsibilities
Section 30 of the Public Finance Act 1989 requires the Audit Office to audit the annual
financial statements presented by the Government. It is the responsibility of the Audit Office to
express an independent opinion on the financial statements.
Basis of opinion
An audit includes examining, on a test basis, evidence relevant to the amounts and
disclosures in the financial statements. It also includes assessing:
• the significant estimates and judgements made in the preparation of the financial
statements; and
• whether the accounting policies are appropriate to the circumstances of the Government,
consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing standards, including
the Auditing Standards issued by the Institute of Chartered Accountants of New Zealand. We
planned and performed our audit so as to obtain all the information and explanations which we
considered necessary in order to provide us with sufficient evidence to give reasonable
assurance that the financial statements are free from material mis-statements, whether caused by
fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation
of information in the financial statements.
Unqualified opinion
We have obtained all the information and explanations we have required.
In our opinion the financial statements of the Government of New Zealand on pages 26 to
100:
• comply with generally accepted accounting practice; and

• fairly reflect:
− the results of its operations and cash flows for the year ended 30 June 1999;
and
− the financial position as at 30 June 1999.

Our audit was completed on 10 September 1999 and our unqualified opinion is expressed as at
that date.
D J D Macdonald
Controller and Auditor-General
Wellington
New Zealand

Statement of Responsibility
These Financial Statements have been prepared by the Treasury in accordance with the
provisions of the Public Finance Act 1989. The Financial Statements comply with
generally accepted accounting practice.
The Treasury is responsible for establishing and maintaining a system of internal control
designed to provide reasonable assurance that the transactions recorded are within
statutory authority and properly record the use of all public financial resources by the
Crown. To the best of my knowledge, this system of internal control has operated
adequately throughout the reporting period.
Dr A E Bollard
Secretary to the Treasury
10 September 1999
We accept responsibility for the integrity of these Financial Statements, the information
they contain and their compliance with the Public Finance Act 1989.
In our opinion, these Financial Statements fairly reflect the financial position of the
Crown as at 30 June 1999 and its operations for the year ended on that date.
Hon Bill English Rt Hon Sir William Birch

Treasurer Minister of Finance
10 September 1999 10 September 1999

Ministerial Statement
These financial statements show a strong result in a year marked internationally by a
weak economic environment and domestically affected by two quarters of recession. A
$1.8 billion surplus was posted, and net debt fell by $2.4 billion.
The 1998/99 fiscal surplus contains a number of one-offs, most significantly the gains on
the sale of Contact Energy Limited, and the negative impact of the Government
Superannuation Fund unfunded liability revaluation. At one level the small underlying
surplus of around $150 million is evidence that the Asian crisis put the Crown finances to
the test but it also reiterates two key lessons.
New Zealand’s fortunes are inextricably linked to the world market place. The Asian
downturn in 1998/99 cost us exports and a large amount of tax revenue.
It is a reminder that the Government must continually focus on policies that allow New
Zealand enterprises to compete internationally.
The importance of a transparent and disciplined medium term fiscal strategy of

running surpluses and reducing debt. While investing significantly in health and
education, we have budgeted prudently for over 8 years now through carefully
targeted spending. It was this discipline that has laid the platform for tax cuts, the
latest round putting around $1.2 billion back in taxpayers pockets in 1998/99.
Last December, a year-end deficit of $52 million was forecast, reflecting an underlying
deficit of around $250 million. Instead, we have emerged from the worst shock in 20
years with a robust fiscal position. More importantly, we were able to achieve this
without compromising the level of service New Zealanders expect of their Government.
Hon Bill English Rt Hon Sir William Birch

Treasurer Minister of Finance
10 September 1999 10 September 1999

Forecast Actual
$m $m Note $m $m
Revenue
Levied through the Crown’s

Sovereign Power
21,603 20,490 Direct taxation 1 20,289 21,260
12,095 11,866 Indirect taxation 2 11,867 11,722
33,698 32,356 Total taxation revenue 32,156 32,982
263 270 Compulsory fees, fines, penalties and levies 300 258
Total Revenue Levied through the
33,961 32,626 Crown’s Sovereign Power 32,456 33,240
Earned through the Crown’s

Operations
1,243 2,778 Investment income 3 2,901 1,154
673 657 Sales of goods and services 683 689
380 413 Other operational revenue 4 401 420
Unrealised gains/ (losses) arising from
- (12) revaluations of commercial forests (84) 78
Total Revenue Earned through the
2,296 3,836 Crown’s Operations 3,901 2,341
36,257 36,462 Total Revenue 36,357 35,581
Expenses 5
By functional classification
12,939 12,894 Social security and welfare 12,906 12,509
738 473 GSF pension expenses 1,132 494
6,444 6,577 Health 6,573 6,001
5,953 5,910 Education 5,899 5,714
1,624 1,714 Core government services 1,705 1,562
1,395 1,527 Law and order 1,499 1,345
1,115 1,031 Defence 1,030 1,065
933 1,018 Transport and communications 1,029 948
876 898 Economic and industrial services 858 840
329 342 Primary services 334 423
327 328 Heritage, culture and recreation 316 297
51 45 Housing and community development 41 29
154 30 Other 34 167
2,564 2,520 Finance costs 5 2,516 2,804

- (51) Net foreign-exchange (gains)/ losses (47) 13
100 - Contingency expense provision - -
35,832 35,256 Total Expenses 35,825 34,211
425 1,206 Revenue less Expenses 532 1,370
Net surplus, less distributions,

attributable to State-owned enterprises
880 958 and Crown entities 9 1,245 1,164
1,305 2,164 Operating Balance 1,777 2,534
The accompanying Notes are an integral part of these Statements.

as at 30 June 1999
Forecast Actual
$m $m Note $m $m
Assets
53 135 Cash and bank balances 230 171
8,193 9,773 Marketable securities and deposits 6 11,153 10,285
4,042 3,779 Advances 7 3,628 3,367
5,135 5,045 Receivables 8 5,250 5,040
306 314 Inventories 321 302
State-owned enterprises and Crown
20,540 12,049 entities 9 12,917 19,022
256 187 Other investments 10 270 261
15,478 15,453 Physical assets 11 15,258 14,962
481 500 Commercial forests 12 422 573
8,490 8,436 State highways 13 8,770 8,359
2 3 Intangible assets 4 14
62,976 55,674 Total Assets 58,223 62,356
Liabilities
4,426 4,261 Payables and provisions 14 5,005 4,639
1,826 2,023 Currency issued 1,960 1,809
36,860 36,056 Borrowings 36,712 37,892
8,144 7,878 Pension liabilities 15 8,524 8,095
51,256 50,218 Total Liabilities 52,201 52,435
11,720 5,456 Total Assets less Total Liabilities 6,022 9,921
Crown Balance 16
4,650 (1,595) Accumulated operating balance (1,197) 3,132
7,070 7,051 Revaluation reserve 7,219 6,789
11,720 5,456 Crown Balance 6,022 9,921

6
Statement of Movements in Equity
6
For further discussion of the accounting policy change illustrated in this statement, readers are referred to Chapter 13
Accrual Basis – Liabilities, or a full copy of the financial statements at http:/www.gov.nz.

Statement of Cash Flows
Forecast Actual
$m $m $m $m
Cash Flow s from Operations
Cash was Provided From
Direct Taxation
Individuals
12,571 12,325 Source deductions 12,328 12,739
3,639 3,548 Other persons 3,566 3,721
(1,025) (1,104) Refunds (1,189) (1,078)
344 334 Fringe benefit tax 329 341
15,529 15,103 Total Individuals 15,034 15,723
Companies
4,805 4,500 Gross com panies 4,467 4,386
(485) (592) Refunds (646) (603)
4,320 3,908 Total Companies 3,821 3,783
1,688 1,627 W ithholding taxes 1,654 1,863

1 2 Other direct taxation 2 2
21,538 20,640 Total Direct Taxation 20,511 21,371
Indirect Taxation
Goods and Services Tax

12,818 12,425 Gross goods and services tax 12,628 12,068
(4,497) (4,250) Refunds (4,194) (4,144)
8,321 8,175 Total Goods and Services Tax 8,434 7,924
1,980 1,930 Excise duties 1,864 1,919

1,766 1,614 Other indirect taxation 1,575 1,845
12,067 11,719 Total Indirect Taxation 11,873 11,688
33,605 32,359 Total Taxation Receipts 32,384 33,059
250 245 Compulsory Fees, Fines, Penalties and Levies 251 242
Other Receipts
1,091 954 Interest, profits and dividends 1,034 731
661 628 Sales of goods and services 642 676
374 416 Other operating receipts 372 383
2,126 1,998 Total Other Receipts 2,048 1,790
35,981 34,602 Total Cash Provided from Operations 34,683 35,091
Cash was Disbursed To

4,366 4,643 Departm ental outputs 4,536 4,193
14,239 14,635 Other outputs 14,402 13,965
2,635 2,418 Finance costs 2,398 2,378
151 154 Subsidies 134 156
Current transfers
12,773 12,678 Social assistance grants 12,601 12,387
219 220 Other transfers 220 209
100 - Contingency expenditure provision - -
34,773 34,748 Total Cash Disbursed to Operations 34,291 33,288
1,208 (146) Net Cash Flow s from Operations 392 1,803

Statement of Cash Flows (continued)
Forecast Actual
$m $m $m $m
1,208 (146) Subtotal (brought forward) 392 1,803
Cash Flows from Investing Activities

588 3,403 Net sale/ (purchase) of investments 1,554 (942)
171 219 Sale of physical assets 239 123
759 3,622 Total Cash Provided 1,793 (819)

518 332 Net increase in advances 179 434
1,439 1,283 Purchase of physical assets 1,142 1,104
1,957 1,615 Total Cash Disbursed 1,321 1,538
(1,198) 2,007 Net Cash Flows from Investing Activities 472 (2,357)
Net Cash Flows from Operating and
10 1,861 Investing Activities 864 (554)
Cash Flows from Financing Activities

- 214 Issue of circulating currency 151 68
573 2,903 Issues of Government stock 4,756 2,332
1
- - Other New Zealand-dollar borrowing 1,124 1,470
1
- - Borrowing in foreign currencies 2,703 3,939
573 3,117 Total Cash Provided 8,734 7,809

Repayment of Government stock 1,882 2,541
Repayment of other New Zealand-dollar
1
333 3,280 borrowing 3,915 975
1
240 1,755 Repayment of foreign-currency borrowing 3,763 3,812
573 5,035 Total cash disbursed 9,560 7,328
- (1,918) Net Cash Flows from Financing Activities (826) 481
10 (57) Net Movement in Cash 38 (73)
43 171 Opening Cash Balance 171 196
- 21 Foreign-exchange gains on opening cash 21 48

53 135 Closing Cash Balance 230 171
1
Issues and repayments of other New Zealand-dollar borrowing and foreign-currency borrowing are
forecast on a net basis. Actual issues and repayments are reported on a gross basis.

Forecast Actual
$m $m $m $m
Reconciliation Between the Operating

Balance and Net Cash Flows from
Operations
1,305 2,164 Operating Balance 1,777 2,534
Items included in the operating balance but not

in net cash flows from operations
Valuation Changes
- 12 Revaluation of commercial forests 84 (78)
- (73) Unrealised net foreign-exchange gains (44) (155)
- (61) Total Valuation Changes 40 (233)
Physical Asset Movements

820 779 Depreciation 765 737
- (2) Loss/(gain) on sale of physical assets 26 1
820 777 Total Physical Asset Movements 791 738
Other Non-cash Items

Net surplus, less distributions, attributable
to State-owned enterprises and
(880) (958) Crown entities (1,245) (1,164)
Gain on sale of Contact Energy Limited
- (1,625) and Airport companies (1,625) -
48 (217) Movement in pension liabilities 429 (233)
(36) 9 Other 5 56
(868) (2,791) Total Other Non-cash Items (2,436) (1,341)
- (50) Total Other investing and financing items 69 (128)
Movements in Working Capital1

(88) (6) Increase in taxes receivable (135) (10)
76 (58) (Increase)/decrease in other receivables (75) 14
(8) (12) Increase in inventories (19) (7)
(29) (109) Increase/(decrease) in payables 380 236
(49) (185) Total Movements in Working Capital 151 233
1,208 (146) Net Cash Flows from Operations 392 1,803
1
Only movements in working capital resulting from operations are included.

Forecast Actual
$m $m $m $m
Reconcilation of Net Cash Flows from

Operations with Net Cash Proceeds
from Domestic Bonds
1,208 (146) Net Cash Flows from Operations 392 1,803
Investing Flows
Net advances
2 210 Housing Corporation of New Zealand 212 (75)
(507) (534) Student loans (470) (534)
(43) (42) Residual Health Management Unit 43 (23)
19 23 Other 25 21
(518) (332) Total Net Advances (179) (434)
Net investments
- 2,331 Contact Energy Limited 2,331 -
- 487 Auckland and Wellington Airport companies 487 -
- - Housing New Zealand Limited - 300
Net (purchase)/sale of marketable securities
819 759 and deposits (1,184) (1,038)
(210) (75) Hospital and health services (45) (163)
(21) (99) Other (35) (41)
588 3,403 Total Net Investments 1,554 (942)
Physical assets
(1,268) (1,064) Net purchase of physical assets (903) (981)
10 1,861 Available to Repay Debt 864 (554)
Used in:
Net (repayment)/issue of other New Zealand-dollar
(333) (3,280) borrowing (2,791) 495
(240) (1,755) Net (repayment)/issue of foreign-currency borrowing (1,060) 127
(10) 57 (Increase)/decrease in cash (38) 73
- 214 Issue of circulating currency 151 68
(583) (4,764) (3,738) 763
Net (Cash Proceeds from)/Repayments of
(573) (2,903) Domestic Bonds (2,874) 209

Forecast Actual
$m $m $m $m
Net (Cash Proceeds from)/Repayments of

(573) (2,903) Domestic Bonds (brought forward) (2,874) 209
Gross Cash Proceeds from Domestic Bonds

2,392 3,463 Domestic bonds (market) 3,450 2,034
- 1,002 Domestic Bonds (non market) 977 -
289 320 Inflation bonds 329 298
Total Gross Cash Proceeds from Domestic
2,681 4,785 Bonds 4,756 2,332
(2,108) (1,782) Repayment of domestic bonds (market) (1,782) (2,541)

- (100) Repayment of domestic bonds (non market) (100) -
Net Cash Proceeds from/(Repayments of)
573 2,903 Domestic Bonds 2,874 (209)

Statement of Borrowings
Analysis at 30 June 1999 — Book Values
Forecast Actual
$m $m $m $m
Outstanding Debt
New Zealand-Dollar Debt

20,736 22,743 Government stock 22,701 19,859
6,635 5,850 Treasury bills 5,881 8,008
277 275 Loans and foreign-exchange contracts 299 289
1,241 - Reserve Bank bills - 1,204
935 - Earthquake Commission deposits - -
327 685 Retail stock 729 491
30,151 29,553 Total New Zealand-Dollar Debt 29,610 29,851
Foreign-Currency Debt
3,256 2,857 United States dollars 3,565 4,088
1,621 1,770 Japanese yen 1,706 1,852
1,832 1,876 European and other currencies 1,831 2,101
6,709 6,503 Total Foreign-Currency Debt 7,102 8,041
36,860 36,056 Total Outstanding Debt 36,712 37,892
Less
Financial Assets
1
Marketable Securities and Deposits
376 2,403 New Zealand dollars 3,601 1,219
3,738 3,161 United States dollars 3,857 4,367
1,998 2,356 Japanese yen 1,827 2,238
2,081 1,853 European and other currencies 1,868 2,461
8,193 9,773 Total Marketable Securities and Deposits 11,153 10,285
Advances and Cash

Advances to State-owned enterprises and
885 385 Crown entities 299 783
3,040 3,061 Student loans 3,002 2,470
117 333 Other advances 327 114
53 135 Cash 230 171
4,095 3,914 Total Advances and Cash 3,858 3,538
12,288 13,687 Total Financial Assets 15,011 13,823
24,572 22,369 Net Crown Debt 21,701 24,069
25,680 23,236 Net New Zealand-dollar debt 22,309 25,152

(1,108) (867) Net foreign-currency debt (608) (1,083)
24,572 22,369 Net Crown Debt 21,701 24,069
1
As at 30 June 1999 foreign currency securities with a face value of $1,945 million (30 June 1998:
$1,214 million) had been transferred to counterparties as security for borrowings.

Statement of Borrowings (continued)
Analysis as at 30 June 1999 – Nominal and Current Market Values
30 June 1999 30 June 1998

Current Current
Nominal market Nominal market
value value value value
$m $m $m $m
Outstanding Debt

Government stock 22,460 23,445 19,799 20,522
Treasury bills 5,980 5,879 8,184 7,807
Loans and foreign-exchange contracts 301 316 292 305
Reserve Bank bills - - 1,213 1,204
Retail stock 729 737 491 493
Total New Zealand-Dollar Debt 29,470 30,377 29,979 30,331
United States dollars 3,706 3,739 4,244 4,345
Japanese yen 1,796 1,915 1,942 2,069
European and other currencies 1,852 1,865 2,111 2,130
Total Foreign-Currency Debt 7,354 7,519 8,297 8,544
Total Outstanding Debt 36,824 37,896 38,276 38,875
New Zealand dollars 3,601 3,601 1,220 1,218

United States dollars 3,787 3,851 4,106 4,361
Japanese yen 1,675 1,834 2,150 2,247
European and other currencies 1,814 1,870 2,252 2,461
Total Marketable Securities and Deposits 10,877 11,156 9,728 10,287
The current market value has been determined using the present value of cash flows discounted
at a rate derived from a market yield curve.

Maturity Profiles as at 30 June 1999 — Book Values
1999/00 2000/01 2001/02 2002/03 2003/04 2004/05- 2009/10 Total

2008/09 and book
after value
$m $m $m $m $m $m $m $m
Outstanding Debt

Government stock 3,285 3,184 2,909 1,426 3,642 3,154 5,101 22,701
Treasury bills 5,881 - - - - - - 5,881
Loans and foreign-exchange contracts 147 2 70 50 5 24 1 299
Reserve Bank bills - - - - - - - -
Retail stock 577 69 47 36 - - - 729
Total New Zealand-Dollar Debt 9,890 3,255 3,026 1,512 3,647 3,178 5,102 29,610
United States dollars 1,849 188 - 78 565 558 327 3,565
Japanese yen 230 - 622 301 1 457 95 1,706
European and other currencies 973 621 - - - 228 9 1,831
Total Foreign-Currency Debt 3,052 809 622 379 566 1,243 431 7,102
Total Outstanding Debt 12,942 4,064 3,648 1,891 4,213 4,421 5,533 36,712

New Zealand dollars 3,601 - - - - - - 3,601
United States dollars 2,744 100 151 67 (26) 777 44 3,857
Japanese yen 572 87 349 307 82 420 10 1,827
European and other currencies 1,109 505 95 20 (2) 36 105 1,868
Total Marketable Securities and
Deposits 8,026 692 595 394 54 1,233 159 11,153
The maturities of marketable securities and deposits in this Statement are based on the contractual maturity dates.

Movements during the year ended 30 June 1999
As at Decreases/ Foreign Unamortised As at

1 July Increases/ Disposals/ Exchange Currency premiums/ 30 June
1998 Additions Repayments Contracts Realignment discounts 1999
$m $m $m $m $m $m $m
Outstanding Debt
By Type

Government stock 19,859 4,536 (1,882) - - 188 22,701
Treasury bills 8,008 - (2,204) - - 77 5,881
Loans and foreign-exchange
contracts 289 21 (11) - - - 299
Reserve Bank bills 1,204 - (1,204) - - - -
Retail stock 491 1,038 (800) - - - 729
Total New Zealand-Dollar Debt 29,851 5,595 (6,101) - - 265 29,610
Foreign Currency-Debt
United States dollars 4,088 118 (605) (33) (16) 13 3,565
Japanese yen 1,852 54 (441) - 240 1 1,706
European and other currencies 2,101 228 (602) 43 56 5 1,831
Total Foreign-Currency Debt 8,041 400 (1,648) 10 280 19 7,102
Total Outstanding Debt 37,892 5,995 (7,749) 10 280 284 36,712
Less
Financial Assets
Marketable Securities and

Deposits
New Zealand dollars 1,219 2,006 (3) 379 - - 3,601
United States dollars 4,367 64,483 (64,748) (294) 109 (60) 3,857
Japanese yen 2,238 6,260 (7,143) 314 182 (24) 1,827
European and other currencies 2,461 2,474 (2,429) (451) (201) 14 1,868
Total Marketable Securities
and Deposits 10,285 75,223 (74,323) (52) 90 (70) 11,153
Advances and Cash 3,538 1,605 (1,306) - 21 - 3,858
Total Financial Assets 13,823 76,828 (75,629) (52) 111 (70) 15,011
Net Crown Debt 24,069 (70,833) 67,880 62 169 354 21,701

Statement of Commitments
as at 30 June 1999
As at As at
30 June 30 June
1999 1998
$m $m
By Type
Capital Commitments
Specialist military equipment 361 554
Land and buildings 125 73
Other plant and equipment 32 68
Investments 232 211
State-owned enterprises and Crown entities 1,207 1,280
Total Capital Commitments 1,957 2,186
Operating Commitments
Non-cancellable accommodation leases 638 710
Other non-cancellable leases 2,443 3,525
Non-cancellable contracts for the supply of goods and services 454 365
Other operating commitments 909 879
State-owned enterprises and Crown entities 2,516 3,872
Total Operating Commitments 6,960 9,351
Total Commitments 8,917 11,537
By Term
Capital Commitments
One year or less 1,511 1,567
From one year to two years 246 377
From two to five years 186 196
Over five years 14 46
Total Capital Commitments 1,957 2,186
Operating Commitments
One year or less 2,136 2,414
From one year to two years 966 1,180
From two to five years 1,293 1,911
Over five years 2,565 3,846
Total Operating Commitments 6,960 9,351
Total Commitments 8,917 11,537
Commitments of the Reserve Bank of New Zealand, State-owned enterprises and Crown entities
are included in the Statement of Commitments. Commitments to State-owned enterprises and
Crown entities are excluded.

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PUBLIC ACCOUNTS OF CANADA, 1998-99
STATEMENT OF RESPONSIBILITY
The financial statements in this section are prepared by the Government of Canada in
accordance with the accounting policies set out in Note 1 to the statements on a basis consistent
with that of the preceding year.
Responsibility for the integrity and objectivity of the financial statements rests with the
Government. The financial statements are prepared under the joint direction of the President of the
Treasury Board, the Minister of Finance, and the Receiver General for Canada in compliance with
governing legislation. The financial statements are generally prepared on an accrual basis of
accounting; two notable exceptions are that capital assets are charged to budgetary expenditures at
the time of acquisition or construction and tax revenues are generally reported on a cash basis. The
information included in these financial statements is based on the Government’s best estimates and
judgement, with due consideration given to materiality.
To fulfill its accounting and reporting responsibilities, the Government maintains systems of
financial management and internal control which give due consideration to costs, benefits and risks.
These systems are designed to provide reasonable assurance that transactions are properly
authorized by Parliament, are executed in accordance with prescribed regulations, and are properly
recorded so as to maintain accountability of public money and safeguard the assets and properties of
Canada under Government administration. The Receiver General for Canada maintains the accounts
of Canada, a centralized record of the Government’s financial transactions, and obtains additional
information as required, from departments, agencies and Crown corporations, to meet accounting
and reporting requirements.
The Government presents the financial statements to the Auditor General of Canada who audits
them and provides an independent opinion to the House of Commons. The duties of the Auditor
General in that respect are contained in section 6 of the Auditor General Act and section 9 of the
Debt Servicing and Reduction Account Act. Additional information is provided in the observations
of the Auditor General at the end of this section.
Annually, the financial statements are tabled in Parliament as part of the Public Accounts of
Canada, and are referred to the Standing Committee on Public Accounts, which reports to
Parliament on the results of its examination together with any recommendations it may have with
respect to the financial statements and accompanying audit opinion.
On behalf of the Government of Canada.
V. PETER HARDER C. SCOTT CLARK RANALD A. QUAIL

Secretary of the Treasury Board and Deputy Minister of Finance Deputy Receiver General for Canada
Comptroller General of Canada

OPINION OF THE AUDITOR GENERAL

ON THE
FINANCIAL STATEMENTS OF THE GOVERNMENT OF CANADA
To the House of Commons:
My responsibility: I have audited the statement of assets and liabilities of the Government of Canada as at
March 31, 1999 and the statements of revenues, expenditures and accumulated deficit, changes in
financial position and transactions for the year then ended. These financial statements are the
responsibility of the Government. My responsibility, as required by section 6 of the Auditor General Act,
is to express an opinion on these financial statements based on my audit as to whether:
1. the financial statements present information fairly (fairness);

2. the financial statements were prepared in accordance with the Government’s stated accounting
policies (compliance); and
3. the Government’s stated accounting policies were applied on the same basis as in the preceding year
(consistency).
The scope of my audit: I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting policies used and significant estimates made by the Government, as well as
evaluating the overall financial statement presentation.
In my opinion:
1. Fairness: These financial statements present fairly, in all material respects, the financial position of
the Government of Canada as at March 31, 1999 and the results of its operations, the changes in its
financial position and its financial requirements for the year then ended.
2. Compliance: These financial statements were prepared in accordance with the stated accounting
policies of the Government of Canada set out in Note 1 to the financial statements.
3. Consistency: The Government’s stated accounting policies have been applied on a basis consistent
with that of the preceding year.

My opinion on the March 31, 1998 financial statements:
In my report dated July 27, 1998, I expressed a qualified opinion on the March 31, 1998 financial
statements of the Government of Canada, for the recording of a transaction related to the Canada
Millennium Scholarship Foundation as if it were a liability and an expenditure. In my opinion, this
understated the 1997-98 surplus by $2.5 billion and overstated accounts payable and accrued liabilities as
well as the accumulated deficit by the same amount.
Additional information: Additional information and comments on the financial statements and this
opinion are included in my observations at the end of Section 1, Volume 1 of the Public Accounts of
Canada.
L. Denis Desautels, FCA

Auditor General of Canada
Ottawa, Canada
July 26, 1999

GOVERNMENT OF CANADA
Statement of Transactions
for the Year Ended March 31, 1999
1999 1998
BUDGETARY TRANSACTIONS
Revenues ………………………………………………………………………... 155,671 153,162

Expenditures …………………………………………………………………….. -152,787 -149,684
Surplus for the year ……………………………………………………… 2,884 3,478
NON-BUDGETARY TRANSACTIONS
Net source from loans, investments and advances ……………………………… 500 2,031
Net source from pension and other accounts …………………………………… 7,024 3,829
Net source from other transactions ……………………………………………… 1,083 3,391
Net source ……………………………………………………………….. 8,607 9,251
Source of funds (excluding foreign exchange transactions) …………….. 11,491 12,729
NET REQUIREMENT FOR FOREIGN EXCHANGE TRANSACTIONS …. -5,700 -2,155
Total source of funds …………………………………………………….. 5,791 10,574
NET REQUIREMENT FOR UNMATURED DEBT TRANSACTIONS ……. -6,864 -9,561
Decrease (-) or increase in cash ………………………………………….. -1,073 1,013
CASH IN BANK AT BEGINNING OF YEAR (1) ……………………………... 10,379 9,366
CASH IN BANK AT END OF YEAR (1)

………………………………………. 9,306 10,379
The accompanying notes are an integral part of these statements.

Details (unaudited) can be found in other sections of this volume.
In this statement, a positive amount indicates a source of funds and a negative amount indicates a requirement for funds.
(1)
Cash in bank excludes outstanding cheques, warrants and deposits.

Statement of Revenues, Expenditures and Accumulated Deficit

for the Year Ended March 31, 1999
1999 1998
Gross (1) Net (1) Gross (1) Net (1)
REVENUES (Note 4)
TAX REVENUES—
Income tax—
Personal ……………………………………………………………….. 77,707 72,488 75,672 70,787
Corporation …………………………………………………………… 21,575 21,575 22,496 22,496
Other income tax revenues ……………………………………………. 2,901 2,901 2,974 2,974
102,183 96,964 101,142 96,257
Excise taxes and duties—

Goods and services tax ………………………………………………... 23,534 20,684 22,353 19,461
Energy taxes …………………………………………………………… 4,716 4,716 4,638 4,638
Customs import duties ………………………………………………… 2.359 2,359 2,766 2,766
Other excise taxes and duties …………………………………………. 3,640 3,640 3,995 3,995
34,249 31,399 33,752 30,860
Employment insurance premiums …………………………………………… 19,363 19,363 18,802 18,802
TOTAL TAX REVENUES ………………………………….. 155,795 147,726 153,696 145,919
NON-TAX REVENUES—
Return on investments ………………………………………………… 5,072 4,991 4,511 4,427
Other non-tax revenues ……………………………………………….. 6,676 2,954 6,155 2,816
TOTAL NON-TAX REVENUES …………………………… 11,748 7,945 10,666 7,243
TOTAL REVENUES …..………………………………………….. 167,543 155,671 164,362 153,162
EXPENDITURES (Note 5)
TRANSFER PAYMENTS—
Old age security benefits, guaranteed income supplement
and spouse’s allowance ……………………………………………… 22,285 22,781 21,758 22,225
Other levels of government …………………………………………… 25,523 25,523 20,504 20,504
Employment insurance benefits (2)……………………………………… 11,884 11,884 11,842 11,842
Canada child tax benefits ……………………………………………… 5,715 5,352
Other transfer payments ………………………………………………. 21,585 18,735 23,557 20,664
TOTAL TRANSFER PAYMENTS …………………………. 86,992 78,923 83,013 75,235
CROWN CORPORATION EXPENDITURES ……………………………….. 4,995 3,497 3,775 2,548

OTHER PROGRAM EXPENDITURES—
National Defence ……………………………………………………… 9,125 8,781 9,240 8,879
All other departments and agencies …………………………………… 22,153 20,192 22,113 20,279
TOTAL OTHER PROGRAM EXPENDITURES ………….. 31,278 28,973 31,353 29,158
TOTAL PROGRAM EXPENDITURES ……………………. 123,265 111,393 118,141 106,941
PUBLIC DEBT CHARGES …………………………………………………… 41,394 41,394 40,931 40,931
TOTAL EXPENDITURES …..…………………………………… 164,659 152,787 159,072 147,872
SURPLUS BEFORE CHANGE IN
ACCOUNTING POLICY ………………………………………………….. 2,884 2,884 5,290 5,290
Change in accounting policy (Note 2) ………………………………………….. -1,812 -1,812
SURPLUS FOR THE YEAR …..……………………………………………... 2,884 2,884 3,478 3,478
ACCUMULATED DEFICIT, BEGINNING OF YEAR …………………… 579,708 579,708 583,186 583,186
ACCUMULATED DEFICIT, END OF YEAR (Note 6) …………………… 576,824 576,824 579,708 579,708
(1)
The difference between Gross and Net is revenues netted against expenditures, revenues of consolidated Crown corporations
credited to expenditures and tax credits and expenditures related to the tax system included in revenues.
(2)
Employment insurance benefits exclude administration costs of $1,360 million ($1,322 million in 1998) related to the operation of
the Employment Insurance Account. These costs have been allocated to other program expenditures.

Statement of Assets and Liabilities
at March 31, 1999
1999 1998
LIABILITIES
ACCOUNTS PAYABLE, ACCRUALS AND ALLOWANCES—
Accounts payable and accrued liabilities …………………………………………………….. 24,509 22,364
Interest and matured debt ……………………………………………………………………… 9,791 10,419
Allowance for employee benefits …………………………………………………………….. 6,926 6,729
Allowance for loan guarantees and borrowings of Crown corporations ……………………… 4,090 4,188
TOTAL ACCOUNTS PAYABLE, ACCRUALS AND ALLOWANCES ……… 45,316 43,700
INTEREST-BEARING DEBT—
Unmatured debt—
Payable in Canadian currency—
Marketable bonds……………………………………………………………………………… 295,752 294,583
Treasury bills ………………………………………………………………………………….. 96,950 112,300
Canada savings bonds ………………………………………………………………………… 27,662 29,769
Bonds for Canada Pension Plan ………………………………………………………………. 4,063 3,456
424,427 440,108
Payable in foreign currencies ………………………………………………………………. 36,000 27,183
Total unmatured debt (Note 7) ………………………………………………………. 460,427 467,291
Pension and other accounts—
Public sector pensions (Note 8) ………………………………………………………………. 122,407 117,457
Canada Pension Plan (net of securities) (Note 9) …………………………………………….. 5,427 4,205
Other pension and other accounts …………………………………………………………….. 6,724 5,872
Total pension and other accounts ……………………………………………….. 134,558 127,534
TOTAL INTEREST-BEARING DEBT ……………………………………….. 594,985 594,825
TOTAL LIABILITIES ……………………………………………………….. 640,301 638,525
ASSETS
CASH AND ACCOUNTS RECEIVABLE—
Cash in bank…………………………………………………………………………………… 9,306 10,379
Cash in transit …………………………………………………………………………………. 5,432 4,530
14,738 14,909
Less outstanding cheques and warrants …………………………………………………………… 4,045 3,218
Total cash ……………………………………………………………………………. 10,693 11,691
Accounts receivable (net of allowance for doubtful accounts of $2,432 million
($2,261 million in 1998)) ………………………………………………………………………… 4,580 4,122
TOTAL CASH AND ACCOUNTS RECEIVABLE …………………………… 15,273 15,813
FOREIGN EXCHANGE ACCOUNTS (Note 10) …….…………………………………………. 34,668 28,968
LOANS, INVESTMENTS AND ADVANCES—
Enterprise Crown corporations (Notes 11 and 14) ……………………………………………. 11,052 12,601
National governments, including developing countries and
international organizations (Note 12) ……………………………………………………… 7,555 6,869
Provincial and territorial governments and other loans, investments and advances ………….. 3,100 2,591
Portfolio investments ………………………………………………………………………….. 1,241 1,241
22,948 23,302
Less allowance for valuation …………………………………………………………………. 9,412 9,266
TOTAL LOANS, INVESTMENTS AND ADVANCES …………………………………….. 13,536 14,036
TOTAL ASSETS ………………………………………………………………. 63,477 58,817
ACCUMULATED DEFICIT (Note 6) ………………………………………………………….. 576,824 579,708

Statement of Changes in Financial Position
for the Year Ended March 31, 1999 (1)
1999 1998
OPERATING ACTIVITIES —
Surplus for the year ………………………………………………………………………………. 2,884 3,478
Expenditures not requiring cash :
Interest on pension and other accounts ……………………………………………………….. 10,048 9,474
Government contribution for employee benefits ……………………………………………… 2,116 1,773
Provision for valuation of assets and liabilities ………………………………………………. -698 2,620
14,350 17,345
Net payments from pension and other accounts ………………………………………………….. -3,531 -5,110
Net change in accounts receivable, accounts payable and accruals ……………………………… 181 -470
CASH PROVIDED BY OPERATING ACTIVITIES ………………………… 11,000 11,765
INVESTING ACTIVITIES —
Net decrease in loans, investments and advances …………………………………………….. 566 1,467
CASH PROVIDED BY INVESTING ACTIVITIES …………………………. 566 1,467
FOREIGN EXCHANGE ACTIVITIES —

Net increase in foreign currencies borrowings ………………………………………………... 8,817 4,167
Net increase in foreign exchange accounts …………………………………………………… -5,700 -2,155
CASH PROVIDED BY FOREIGN EXCHANGE ACTIVITIES …………….. 3,117 2,012
TOTAL CASH GENERATED BEFORE FINANCING ACTIVITIES ………………………… 14,683 15,244
FINANCING ACTIVITIES —
Net decrease in Canadian currency borrowings ………………………………………………. 15,681 13,728
CASH USED FOR FINANCING ACTIVITIES ……………………………… 15,681 13,728
Net decrease (-) or increase in cash ……………………………………………………………… -998 1,516

CASH AT BEGINNING OF YEAR ……………………………………………………………… 11,691 10,175
CASH AT END OF YEAR ……………………………………………………………………….. 10,693 11,691

(1) The figures in this statement differ from those shown in the Statement of Transactions because the non-cash transactions have
been reclassified and shown separately.

FRANCE
REPORT PRESENTING THE

COMPTE GÉNÉRAL DE L'ADMINISTRATION DES FINANCES (CGAF)
FOR 1996
The CGAF or General Financial Administration Account is a document summarizing

government accounts for a given year, and is therefore a fundamentally important step in
the drafting of the Budget Review Law.
Pursuant to Article 131 of the Decree of December 29, 1962, it includes the following:
• a general balance of government accounts which results from the summarized

accounts of government accountants;
• a breakdown of budget revenue;
• a breakdown of budget expenditure showing expenditure totals by budget
chapters for each ministerial department; the breakdown must be certified by
the minister concerned;
• a breakdown of transactions posted to special Treasury accounts; and
• a breakdown of the income statements.

1996 General Financial Administration Account Report
INCOME STATEMENT
The income statement shows the year's expenditure and revenue items and
distinguishes between those arising from current government operations, financial
transactions and extraordinary transactions.
FRF billion
1996 1995 %
Operating revenue 1 643,80 1 528,40 7,60

Operating expenditure 1 706,70 1 616,10 5,60
OPERATING INCOME - 62,90 - 87,70 28,30
Financial revenue 53,20 56,20 - 5,40

Financial expenditure 252,40 262,80 - 4,00
FINANCIAL INCOME - 199,20 - 206,60 3,60
Extraordinary revenue 18,40 29,10 - 36,70

Extraordinary expenditure 32,90 57,10 - 42,80
EXTRAORDINARY INCOME - 14,50 - 28,00 48,20
Total revenue 1 715,30 1 613,70 6,30
Total expenditure 1 992,00 1 936,00 2,90
CHANGE IN NET WORTH - 276,70 - 322,30 16,50
The change in net worth is carried to the liabilities side of the balance sheet under
account 117.
The change in net worth for 1996 was - 276.7 billion FRF versus - 322.3 billion FRF in 1995.
This 16.5% improvement stems from a substantial 6.3% increase in revenue and
containment of expenditure growth at 2.9%.
FROM THE BUDGET OUTTURN BALANCE TO THE INCOME ACCOUNT
The compilation of the income account from the budget outturn balance proceeds as
follows:
• exclusion of budget transactions carried to the balance sheet (acquisitions, fixed
assets, loans and advances);
• incorporation of revenue and expenditure arising from outright treasury
transactions (e.g., profits and losses on loans and loan guarantees);
• incorporation of depreciation at conventional values equal to the fixed assets
acquired during the year; and
• restatement of budget receipts on an accrued basis: all of the revenue paid in
between 1 January and 31 December is reported in the budget outturn, but it is
revenue falling due between these two dates that is the revenue for the year.

BALANCE SHEET AT 31 DECEMBER 1996
AGGREGATED BALANCE SHEET AT 31.12.96
ASSETS 1996 1995

G ross Depreciation Net Net
FIXED ASSETS (1)

20 - Intangible fixed assets 1,226,955,394.36 1,226,955,394.36
21 - Tangible fixed assets 1,155,974,845,009.73 1,144,201,310,878.15 11,773,534,131.58 10,634,344,937.91
25 - Loans 134,272,758,186.01 134,272,758,186.01 133,195,048,533.45
26 - Endowm ents, interests and connected claim s 493,671,462,401.28 493,671,462,401.28 619,259,528,402.80
27 - Advances and other financial assets 100,488,903,767.15 100,488,903,767.15 68,514,044,869.53
369.31 - Claim s corresponding to governm ent 20,985,750,000.00 20,985,750,000.00 18,207,650,000.00
securities issued for the governm ent
debt m anagem ent fund
TOTAL FIXED ASSETS 1,906,620,674,758.53 1,145,428,266,272.51 761,192,408,486.02 849,810,616,743.69
CURRENT ASSETS (II)

41 - Taxpayers 346,821,036,487.40 346,821,036,487.40 335,682,680,617.79
46 - M isc. Receivables 7,731,336,186.04 7,731,336,186.04 7,734,328,054.68
47 - Nom inal and suspense accounts receivable 48,300,836,881.92 48,300,836,881.92 50,158,851,651.69
51 - Banks and financial institutions 64,261,598,755.27 64,261,598,755.27 117,078,093,760.90
53 - Cash 347,904,422.94 347,904,422.94 346,932,533.49
58 - Transfers between financial accounts 7,175,200.00 7,175,200.00 4,051,850.00
TOTAL II - CURRENT ASSETS 467,469,887,933.57 467,469,887,933.57 511,004,938,468.55
ACCRUALS
482 - Deferred costs and com m itm ents 37,943,847,742.22 37,943,847,742.22 49,889,191,966.99
483 - Expenditure carried to the next year's budget 23,258,308,090.95 23,258,308,090.95 22,968,434,371.83
484-491 - O ther accrued receivables 18,123,230,039.89 18,123,230,039.89 38,748,236,249.36
TOTAL IV 79,325,385,873.06 79,325,385,873.06 111,605,862,588.18
129 - Issue prem ia and index-linking gains 25,538,953,276.89 1,706,736,351.21 23,832,216,925.68 25,025,275,253.51
TOTAL IV 25,538,953,276.89 1,706,736,351.21 23,832,216,925.68 25,025,275,253.51
GRAND TOTAL (I+II+III+IV) 2,478,954,901,842.05 1,147,135,002,623.72 1,331,819,899,218.33 1,497,446,693,053.93
(1) Accounts 269 and 36 (except 369.31) are posted as liabilities because they show a credit balance.

BALANCE SHEET 31 DECEMBER 1996
AGGREGATED BALANCE SHEET 31.12.96
FRF FRF
LIABILITIES 1996 1995
NET POSITION (1) -2,503,817,442,382.99 -2,095,993,626,581.65
112 - Carried forward from previous year -2,249,012,304,214.94 -1,928,267,509,108.23

115 - Appraisal increase credit 21,859,929,649.19 154,583,565,685.13
117 - Result for the year -276,665,067,817.24 -322,309,683,158.55
FINANCIAL LIABILITIES (2) 3,285,655,913,687.20 3,018,257,545,767.93
Negotiable financial debt 3,132,715,339,626.35 2,847,120,571,927.11

12 - Long-term borrowing on the capital market 2,041,508,019,626.35 1,786,100,709,927.11
145 - Holders of negotiable Treasury notes and bills 1,091,207,320,000.00 1,061,019,862,000.00
Non-negotiable financial debt 136,140,574,060.85 151,936,973,840.82
14 except 145 - Treasury notes and bills and short-term borrowing 66,705,562,499.27 69,144,021,520.17
16 - Misc. government liabilities 54,508,471,920.51 68,230,134,366.01
17 - Debts arising from coin in circulation 13,728,528,536.17 13,312,983,050.63
18 - Short-term debt 1,198,011,104.90 1,249,834,904.01
Assistance from the Banque de France (account 519) 16,800,000,000.00 19,200,000,000.00
TOTAL I (= 1+2) 781,838,471,304.21 922,263,919,186.28
OTHER LIABILITIES (II)

269 - Payments to be made on non-fully paid shares 29,257,029.00 29,257,029.00
36 except 369.31 - Unincorporated government agencies 2,152,762,917.86 1,949,416,866.55
38-39 - Transactions with specific government budgets 3,608,514,101.26 3,832,135,448.66
40 - Payees of cheques drawn on the Treasury 1,640,926,722.09 1,825,600,088.44
42-513 - Correspondents, financial organisations 169,624,594,906.10 178,273,847,521.02
43 - Correspondents, local communities and public establishments 101,074,164,003.30 94,002,116,460.32
44 - Other Treasury correspondents 82,554,507,978.83 66,545,882,661.96
45 - Depositors 24,952,086,820.90 26,721,385,679.10
46 - Misc. creditors 14,749,739,304.29 13,430,485,875.41
47 - Nominal and suspense accounts payable (475 to 478) 73,343,577,956.04 76,916,384,448.48
TOTAL II 473,730,131,739.67 463,526,512,078.94

BALANCE SHEET 31 DECEMBER 1996
AGGREGATED BALANCE SHEET 31.12.96
(continued)
FRF FRF
LIABILITIES 1996 1995
ACCRUALS
486 - Expenditure deferred to next budget 63,599,753,093.18 91,925,224,192.80

487-488 - Other accrual accounts payable (except 488.8) 8,695,393,959.25 10,316,739,567.83
495 - Repayments of funds for cancelled expenditure by ministries 49,536.42 45,561,381.99
TOTAL III 72,295,196,588.85 102,287,525,142.62
488.8 - Exchange adjustment - liability 3,956,099,585.60 9,368,736,646.09
TOTAL IV 3,956,099,585.60 9,368,736,646.09
GRAND TOTAL (I+II+III+IV) 1,331,819,899,218.33 1,497,446,693,053.93
(1) Only financial items are reported up until 31 December 1987.

(2) Not including the debt guaranteed or managed by the government and posted to account 80. The amount was 431,114,395,039.91 FRF at 31
December 1996 and 562,747,091,384.96 FRF at 31 December 1995.

APPENDIX 3
WEB SITE REFERENCES

832. Readers may wish to access electronic copies of financial statements or other documents referred to in
this Study. These web sites were current at the time of printing.
Australia
http://www.dofa.gov.au – Financial Statements of the Commonwealth Government of Australia
http://www.treasury.nsw.gov.au – Consolidated Financial Statements of the NSW Public Sector and NSW
Budget Sector
Canada
http://www.pwgsc.gc.ca – Public Accounts of Canada
http://www.gov.on.ca/fin/ – Public Accounts of Ontario
Hong Kong
http://www.info.gov.hk/tsy – Accounts of the Government of the HKSAR
International
http://www.imf.org – Manual on Government Finance Statistics
India
http://cga.nic.in – Annual Financial Statement
Mauritius
http://ncb.intnet.mu – Annual Report
New Zealand
http://www.govt.nz – Financial Statements of the Government of New Zealand
United Kingdom
http://www.westsussex.gov.uk/tr/factfig.htm –West Sussex financial facts and figures
United States
http://www.doi.gov – U.S. Department of the Interior Annual Report
http://www.financenet.gov/financenet/fed/docs/docsstmt.htm – Consolidated Financial Statements of the
United States Government
http://www.gao.gov/reports.htm – Comptroller General’s Annual Report, United States General
Accounting Office (GAO)
Governmental Financial Reporting Appendix 3: Web Site References 281

BIBLIOGRAPHY
Australia
Australian Accounting Research Foundation (AARF), (1998); AAS 31, Financial Reporting by
Governments, June 1998
AARF, (1996); AAS 27, Financial Reporting by Local Governments
AARF, (1996); AAS 29, Financial Reporting by Government Departments
Commonwealth Government Accounting Guidelines, Accounting Guideline A 1. Asset Valuation
Accounting Guideline 9 November 1998
Financial Statements of the Commonwealth Government of Australia for the year ended 30 June 1997
Rowles T. R., (1992), Financial Reporting of Infrastructure and Heritage Assets by Public Sector Entities,
AARF Discussion Paper No 17.
SAC 4: Definition and Recognition of the Elements of Financial Statements, March 1995 (issue date)
Stace, D. and N., Richard, 1995, Re-invented Government: The New Zealand Experience, Centre for
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Cayman Islands
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Fiji
Report on the Accounts and Finance, Parliament of Fiji, For the Year 1997
Hong Kong
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India
Annual Financial Statement of the Government of India for the financial year 1997–98
International
Cangiano, M., 1996, Accountability and Transparency in the Public Sector: The New Zealand Experience,
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IASC, IAS 29 Financial Reporting in Hyperinflationary Economies, January 1990 (effective date)
IASC, Framework for the Preparation and Presentation of Financial Statements, July 1989
IASC, IAS 15 Information Reflecting the Effects of Changing Prices, January 1983 (effective date)
IASC, IAS 2 Inventories, January 1995 (effective date)
IASC, IAS 1 Presentation of Financial Statements, January 1998 (effective date)
IASC, IAS 16 Property, Plant and Equipment, January 1995 (effective date)
IASC, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, July 1999 (effective date)
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Committee
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Sector Committee,
IFAC, 1991, Study 1, Financial Reporting by National Governments, IFAC Public Sector Committee
IFAC, 1996, Study 7, Performance Reporting by Government Business Enterprises, IFAC Public Sector
Committee
IFAC, 1997, Occasional Paper 3, Perspectives on Accrual Accounting, IFAC Public Sector Committee
IFAC, 1996, Study 8, The Government Financial Reporting Entity, IFAC Public Sector Committee
International Monetary Fund, August 1996, Government Finance Statistics Manual, Annotated Outline,
Statistics Department
OECD/PUMA, Paris, 1993, Accounting for What: the Value of Accrual Accounting to the Public Sector
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Luxembourg: Office for Official Publications of the European Communities, European System of Accounts
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Premchand, A., 1996, Issues and New Directions in Public Expenditure Management, Working Paper of
the International Monetary Fund, WP/96/123
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Mauritius
New Zealand
Annual Report of the New Zealand Defence Force, for the year ended 30 June 1999
Financial Statements of the Government of New Zealand, for the year ended 30 June 1999
Richardson, R., 1995, Making a Difference, Christchurch, Shoal Bay Press
Scott, G. C., 1996, Government Reform in New Zealand, International Monetary Fund Occasional Paper
No.140 (Washington: International Monetary Fund)
Statistics New Zealand, 1996, The Crown Accounts 1987 to 1995
The Audit Office, 1992, Report on The Audit of the Crown and Government Departments for the year
ended 30 June 1992
The Treasury (1994), Improving Output Costing, Guidelines and Examples
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United Kingdom
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May 2000

535 Fifth Avenue

New York, New York 10017

United States of America

Copyright 2000 by the International Federation of Accountants.

Governmental Financial Reporting

PART II – CASH BASIS

PART III – ACCRUAL BASIS

PART IV – MEASUREMENT BASES

PART V – SYSTEM OF NATIONAL ACCOUNTS AND GOVERNMENT

CHAPTER 19 SYSTEM OF NATIONAL ACCOUNTS AND

Governmental Financial Reporting

Role of the PSC

Purpose of the Study

Governmental Financial Reporting Preface 3

The Standards Project

Focus on Two Bases of Accounting

4 Preface Governmental Financial Reporting

Objectives of the Study

Scope of the Study

Governmental Financial Reporting Chapter 1: Executive Summary 5

6 Chapter 1: Executive Summary Governmental Financial Reporting

System of National Accounts and Government Finance Statistics

Governmental Financial Reporting Chapter 1: Executive Summary 7

Transition between the Bases of Accounting

8 Chapter 1: Executive Summary Governmental Financial Reporting

The Importance of Objectives for Financial Reporting

Governmental Operating Environment

Governmental Financial Reporting Chapter 2: Objectives of Financial Reporting 9

10 Chapter 2: Objectives of Financial Reporting Governmental Financial Reporting

Governmental Financial Reporting Chapter 2: Objectives of Financial Reporting 11

12 Chapter 2: Objectives of Financial Reporting Governmental Financial Reporting

Objectives of Governmental Financial Reporting

Governmental Financial Reporting Chapter 2: Objectives of Financial Reporting 13

Relationship Between Alternative Bases and Financial Reporting Objectives

14 Chapter 2: Objectives of Financial Reporting Governmental Financial Reporting

CASH BASIS MODIFICATIONS MODIFICATIONS ACCRUAL

Governmental Financial Reporting Chapter 2: Objectives of Financial Reporting 15

16 Chapter 2: Objectives of Financial Reporting Governmental Financial Reporting

Governmental Financial Reporting Chapter 2: Objectives of Financial Reporting 17

18 Chapter 2: Objectives of Financial Reporting Governmental Financial Reporting

Governmental Financial Reporting Chapter 2: Objectives of Financial Reporting 19

20 Chapter 2: Objectives of Financial Reporting Governmental Financial Reporting

Governmental Financial Reporting Chapter 3: Cash Basis – Description 21

Transactions and Events not Recognized

22 Chapter 3: Cash Basis – Description Governmental Financial Reporting

Compliance with Appropriations

Governmental Financial Reporting Chapter 4: Cash Basis – Benefits and Limitations 23

Limitations of Cash Accounting

24 Chapter 4: Cash Basis – Benefits and Limitations Governmental Financial Reporting

Governmental Financial Reporting Chapter 4: Cash Basis – Benefits and Limitations 25

Definition and Recognition of Cash Balances

Cash comprises cash on hand and demand deposits.

Cash consists of:

3. CASH AND BANK BALANCES

Governmental Financial Reporting Chapter 5: Cash Basis – Cash Balances 27

Classification of Cash Balances

28 Chapter 5: Cash Basis – Cash Balances Governmental Financial Reporting

Definition of Cash Receipts