ACCOUNTING PRACTICES &

DEVELOPMENT IN PUBLIC SECTOR

Prepared By:

Introduction
The Malaysian Government has adopted &
developed various accounting systems in ensuring
effectiveness & accountability in accounting &
reporting for public sector organizations
Among the accounting systems being used are
Accrual Accounting, Micro Accounting System
(MAS), & Standard Accounting System for
Government Agencies (SAGA)

ACCRUAL ACCOUNTING
Accrual accounting concept states that: Revenues
are recognized in the period in which the revenues
are earned & expenses are recognized in the
period in which the expenses are incurred in
generating the revenue
It is a technique of recognizing revenues &
expenses of an organization over a particular
period for the purpose of determining profit

ACCRUAL ACCOUNTING
It does not require any movement of cash
for accounting purposes
Because accrual accounting makes the
distinction between the receipt of cash &
the right to receive; and the payment of
cash & the legal obligation to pay cash.

ACCRUAL ACCOUNTING
The Statement of Standard Accounting Practices
(SSAP) No. 2 states that:
Revenue & costs are accrued (that is recognized
as they are earned or incurred, not as money is
received or paid) or matched with one another so
far as their relationship can be established or
justifiably assumed, & dealt with in the Profit &
Loss Account of the period to which they relate;
provided that where the accruals concept is
inconsistent with the prudent concept, the latter
shall prevails.
5

ACCRUAL ACCOUNTING
Under the Modified Accrual Accounting System:
All revenues are recognized either when they are
received in cash or when collection of the amount
can be reasonably estimated to be received in the
near future
All expenditures are recognized in the period in
which goods & services are received or a liability
is incurred
6

CASH, ACCRUAL & MODIFIED

ACCUAL BASES OF ACCOUNTING
BASES OF ACCOUTNING
Point of Recognition

REVENUE

EXPENDITURE

CASH

When cash is
received
When cash is
paid

ACCRUAL

MODIFIED

When revenue is
earned

When measurable
& available

When expenses
is incurred

When expenditure
is incurred

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
Currently the Malaysian public sector uses
either cash basis, modified cash or accrual
basis of accounting in preparing their
accounts
Abdul Samad (2001) states that these
situations exist because there is no specific
provisions for public accounting & financial
management
8

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR

Neither found in the following rules or

regulations:
1. Financial Procedure Act 1957, nor the
2. Unclaimed Monies Act 1965, or the
3. Pension Fund Act 1991
Stating the mode of accounting to be
adopted by the Public Sector organizations
for preparing their accounts
9

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
The earlier purpose of PS financial reporting was
to demonstrate compliance with legal &
contractual provisions (Juhari 1992)
These provisions did not require the determination
& reporting of profit
As a result accrual accounting was less practiced
& known among public sector agencies

10

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
Due to the growing establishment of
business-like Government organizations,
the need for improvement in the accounting
& reporting practices of those entities
became essential
Generally with the view of disclosing more
meaningful information in the financial
statements prepared by Government entities
11

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
Many countries have begun to change their
accounting techniques from cash basis to either
modified cash basis, accrual basis, modified
accrual basis or a combination of those techniques
In Malaysia, there is no such body similar to the
US Government Accounting Standard Board or to
the Public Sector Accounting Standard Board of
Australia to look into the pronouncements or
guidelines in formulation standards applicable to
the public sector as a whole
12

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
Therefore, any reform or reengineering in
improving the Public Sector organizations
as a whole would take a much longer time
The continuous & increasing deficits of
Government annual budgets coupled with
the mounting of Public debts in the past
decade, have posed a heavy burden to the
Public Sector Finance (Juhari 1992)
13

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
The Public Sector has been urged to find
ways & means to commercialize their
services
The issuance of a number of statutes &
rulings have been seen as a stepping stone
for some Malaysian Government agencies
to convert their cash accounting systems to
the accrual basis system of accounting
14

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
However, Malaysia is still in the process of
of studying & analyzing the feasibility for
the migration to accrual accounting as that
being done by other countries in the world
Countries such as Canada, New Zealand,
Australia & the United Kingdom, have
successfully migrated to accrual accounting
15

APPLICATION OF ACCRULA
ACCOUNTING IN PUBLIC SECTOR
The objectives of migrating to accrual accounting
in New Zealand for example are to inform the
Government regarding costs of outputs produces
& the value of assets owned
Thus, providing the Government with better
information for purchase & ownership
The Australian Public Sector also did the same
with the commencement by the Victorian
Government in early 1990
16

ADVANTAGES OF USING
ACCRUAL ACCOUNTING
1. The use of accrual accounting will provide a true
financial position of the public sector agencies
It is believed that accrual accounting can show
exactly how much an organization earned rather
than how much they have collected in terms of
revenue in particular accounting period
It enables expenses incurred to be matched with
revenue earned in the same period
17

ADVANTAGES OF USING
ACCRUAL ACCOUNTING
2. It has been accepted as a standard to measure
performance in a similar manner to the Private
Sector
That profit measured implies the level of success
in a particular period
The cash basis merely provide the amount of
cash inflows & outflows in a particular period
Thus restricting the measure of performances
among Public Sector agencies & discouraging
inter-sector comparisons
18

ADVANTAGES OF USING
ACCRUAL ACCOUNTING
3. The presentation of both an operating statement
& a statement of financial position will allow the
calculation of performance indicators
The performance indicators can be used to
compare targets with other Public Sector or
Private Sector entities
This is expected to create a more efficient
operations in Public Sector entities
19

ADVANTAGES OF USING
ACCRUAL ACCOUNTING
4. Accrual accounting will allow for a distinction
to be made between capital & operating
expenditures
This important for an assessment of
intergenerational equity issues
When there is no distinction being made, it is
argued that the generation that pays for noncurrent assets actually subsidizes the later
generations that receive the benefits from those
assets
20

ADVANTAGES OF USING
ACCRUAL ACCOUNTING
Henderson & Pierson (1995):
An accrual accounting system which
distinguishes between capital expenditure &
operating expenditure & which charges
depreciation on assets would enabled capital
costs to be spread across generations
provided that the prices were set to cover
the full costs of providing the services
21

ADVANTAGES OF USING
ACCRUAL ACCOUNTING
5. The accrual accounting provides a more
comprehensive accountability framework then
the cash based system.
It focuses attention on the effects of decisions
made by the Government that may be favorable
or unfavorable
The accrual management framework also
encourages Public Sector entities to consider the
full financial implications of a particular
decision to be made
22

DISADVANTAGES OF
ACCRUAL ACCOUNTING
1. Accrual accounting brings about more
subjectivity into the accounts & this could
distort the accounting information that is being
produces
For example, the use of different depreciation
methods would lead to a different amount of
depreciation expenses to be charged to a
particular accounting period, as well as
The estimates used in determining the salvage
value of an asset & its expected useful life
23

DISADVANTAGES OF USING
ACCRUAL ACCOUNTING
2. During period of rising prices, the
relevance of the accrual concept is rather
limited
For example, during inflation the same
quantity of sales made will result in a
higher sales value figure compared to
sales made during a period of normal
prices
24

DISADVANTAGES OF USING
ACCRUAL ACCOUNTING
In such a situation, an organizations profit
will merely indicates the excess of the
initial capital invested by the organization
rather than the true profit figure
Thus, the income statement becomes less
acceptable as a measure of performance
during an inflationary period
25

DISADVANTAGES OF USING
ACCRUAL ACCOUNTING
3. The cost of switching to an accrual accounting
system will be high as it involves more
administrative & accounting costs
All Government assets must be measured &
valued before being reported for the first time in
the Balance Sheet
The numerous numbers of Government assets
with different types & of different nature would
involves a large amount of costs to be allocated
& used for measuring those assets
26

DISADVANTAGES OF USING
ACCRUAL ACCOUNTING
In addition, the use of accrual accounting
will also result in a higher cost for
maintaining sundry debts & creditors
accounts
This is because substantial amounts of
administrative & accounting time will now
consumed for adjusting those accounts at
the end of an accounting period
27

DISADVANTAGES OF USING
ACCRUAL ACCOUNTING
4. Accrual accounting can lead to a certain kind of
manipulations, particularly at the end of a fiscal
year
For example, if a Government agency have a
favorable balance in the budget, the agency
manager might purposely spend more on some
not so essential purchases in order to avoid
being questioned for not spending the approved
budget allocations
28

CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUNTING
Although the adoption to accrual accounting
provides several advantages to the Public Sector,
at the same it also offers several drawbacks
Thus, the implementation of the full accrual basis
of accounting in the Public Sector is not an easy
task
Several problems needed to be solved first to
ensure the successful adoption of the accrual
accounting system
29

CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUNTING
1. Accrual accounting does not support the main
objectives of accounting for the Public Sector
i.e. for stewardship & performance evaluation
purposes
These objectives require Government
agencies to report fully, frankly & promptly
upon the stewardship of receipts, payments,
assets & liabilities
In addition, such reports must disclose
resources used & how resources were used
30

CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUNTING

With regard to accounting for performance

evaluation purposes, it can only be achieved by
combining the analysis of financial statements
with information that has been produces from
other available resources
2. The iterative changes in the implementation
process involves additional works & require
development of new skills by Department
finance officers
31

CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUTNING

The time factor & lack of skilled

personnel to handle the conversion to
accrual accounting in the Public Sector
has contributed to the resistance towards
the changes required by accrual
accounting

32

CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUTNING
3. The conversion to accrual accounting will
require the Public Sector organizations to
identify their fixed assets
The peculiar characteristics & nature of
Public Sector assets may cause difficulties
in determining the value of those assets
In addition, there will also be problems in
providing depreciation on those assets
33

CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUTNING
This is due to the fact that the assets
acquired for community benefits are
frequently large, have long lives & not
capable of being subdivided for easy
disposal
Besides, the Public Sector assets usually
have no readily determinable market value
as well as determinable economic lives
34

THE FUTURE OF ACCRUAL

ACCOUNTING IN MALAYSIA
The adoption & use of accrual accounting in
Malaysia is seen feasible as the
corporatization & privatization of major
Government projects have proven to be
successful
Examples include Syarikat Telekom
Malaysia, Tenaga National Berhad & Pos
Malaysia
35

THE FUTURE OF ACCRUAL

ACCOUNTING IN MALAYSIA
Upon privatization exercises, the concept of
valuation of assets are needed to comply
with the commercial requirements
Therefore, the Government entities will be
compelled by circumstances to produce
accounts of acceptable standards for
commercial use.
36

MICRO ACCOUNTING SYSTEM

The costing of Government services has been a
widely discussed issue
The public has frequently queried regarding the
relevancy & applicability of costing in Public
Sector
As a result, a guideline on costing of Government
services known as Micro Accounting System
(MAS) was issued on 30th July 1992 under the
Public Administration Improvement Circular No
3/92
37

MICRO ACCOUNTING SYSTEM

Background information:
Prior to the introduction of MAS, budgeting
& accounting system of the Public Sector
provided limited information to managers
Only information on revenue, budgeted
allocation & expenditure by responsibility
centers & programs and/ activities were
available to the Government managers
38

MICRO ACCOUNTING SYSTEM

There were lack of information on the
allocation of resources & the efficiency of
the organization on the utilization of the
resources
The Government has issued a few circulars
as a mean to provide a suitable environment
for the implementation of MAS
39

CIRCULARS ISSUED PRIOR TO

MAS
GOVERNMENT
CIRCULARS

DESCRIPTION

Program Performance & This circular has laid down the foundation for
Budgeting System
costing in Government agencies through the
Responsibility centers/cost centers structure &
the Program/Activity structure, which relates
cost to the higher level of classification

40

CIRCULARS ISSUED PRIOR TO

MAS
GOVERNMENT
CIRCULAR
Clients charter

Total Quality
Management

DESCRIPTION
This circular requires Government
agencies to specify clearly the outputs
& time frame for provision of services
This circular provides the guidelines
for good management & operational
practices with the objective of overall
improvement in the quality of services
41

OBJECTIVES OF MAS
1. To assist in strategic planning & optimum
utilization of Government resources
2. To facilitate the collection, processing &
preparation of cost information
3. To prepare information on cost efficiency
& in a more flexible manner
4. To produce reliable cost information for
decision-making
42

MICRO ACCOUNTING SYSTEM

MAS is a detailed accounting system with
emphasis on costing the outputs i.e. the
goods & services of the various Federal
Government Ministries & departments
The implementation of MAS include all
production-oriented, service-oriented &
revenue-earning Government agencies
43

MICRO ACCOUNTING SYSTEM

The introduction of MAS, which provides the
most cost-effective method in providing quality
services to the public at large has become a
mechanism for better accountability of resource
utilization among Public Sector organizations
The Ministry of Works, Ministry of health & the
Accountant-General Department are among the
agencies which have shown good progress in the
implementing of MAS in Malaysia
44

MAS IN-BUILT FACILITIES

FACILITIES
Interface with other
accounting system

DESCRIPTIONS
The data for computerized Micro
Accounting System can be obtained
from the interfacing of Budgetary
Control & Planning System (for
expenditure & budget).
Asset management system (for asset
depreciation & usage of material) &
the Human Resource Management
System (for labor cost).
The system also can function as a stand-alone
system.
45

MAS IN-BUILT FACILITIES

Facilities
Cost Analysis

Cost Comparison

Cost Distribution

Descriptions
Possess facilities to compare standard
cost with actual costs & analyze the
variance to its source
Maintain information on movement of
costs & the changes in the workload
over a year period
Possess facilities to allocate indirect
costs accepted & overhead to the
output based on formula
46

MAS IN-BUILT FACILITIES

Facilities
Cost Definition
Integration

Descriptions
Possess facilities to give detailed cost
expenditure for the costing of output
Provide two forms of costing which are
integrated:
* Process costing for output that are
homogeneous & routine
* Job costing for output based on
order or for specific job

47

BASIC REPORTS GENERATED

BY MAS
Report No.
M 01

M 02

M 03

M 04

Usage
Summary of cost output
Provides unit cost for output produced
by Government Agencies
Total variance for output
Provides information for comparison between actual
costs & standard costs the variances between the two
Cost variance for output
Provides comparison between actual costs & standard
costs & analysis of variance
Monthly cost statement
Provides an analysis of the cost component i.e. labor,
material, other direct cost & indirect costs for every
output
48

BASIC REPORTS GENERATED

BY MAS
Reports No.
M 05
M 06

M 07

M 08

Usage
Costs comparison between months
Provides cost comparisons between months
Budgetary variance per expenditure
Provide comparison between actual costs &
budgets
Cumulative cost statement
Provide cumulative costs & average costs for
every output
Personal costs contribution
Provide information of each personal cost for each
project or specific job based on time sheet
49

MAS IMPLEMENTATION
STRATEGIES

It comprises of (Sudirman 1995):

Implementation machinery
Training
Implementation approach
Follow up
Computerized implementation

50

IMPLEMENTATION
MACHINERY
The MAS Steering Committee involves all
Government agencies heads
Was set up to ensure successful
implementation of MAS in each agency
Responsible to plan, supervise & guide the
implementation team, monitor & coordinate
implementation of MAS
51

IMPLEMENTATION
MACHINERY
The Committee also answerable to the
Public Sector Improvement Panel which is
chaired by the Chief Secretary of the
Federal Government
The members of the Steering Committee
comprises of the Heads & Deputy Heads of
the agencies, the Heads of Divisions & the
implementation team members
52

ROLE OF MAS STEERING

COMMITTEE MEMBERS
MEMBERS
Head of Agency
Deputy Head of Agency

Heads of Divisions
Implementation team

ROLES
Chairman
Chief facilitator & in some
circumstances act as alternate
Chairman
Members
Secretariat

53

IMPLEMENTATION
MACHINERY
The Chief Facilitator is responsible for the overall
implementation of MAS
Among his duties are to guide & supervise the
implementation team, resolve problems & to
report to the Steering Committee on its progress &
any problems faced by the agencies
The members of the implementation team
comprises of the facilitator & the trainers
The trainers are responsible to train the
implementers at the divisional levels
54

IMPLEMENTATION
MACHINERY
MAS Implementation Steering Committee was set
up on 27th September 1993 & is chaired by the
Accountant-General of Malaysia
Other members are representatives from the
Malaysian Administration & Modernization Unit
(MAMPU), Public Service Department (PSD),
Financial Management System Unit of the
treasury, national Institute of Public
Administration & the Accountant-General
Department which acts as the Secretariat
55

IMPLEMENTATION
MACHINERY
These people are responsible for:
The overall training programs of all the
Ministries and their Departments
Setting implementation targets, and
Carrying out periodic review of the
implementation of MAS

56

TRAINING
The main approach used in the MAS
implementation process is to train the
trainers
The trainers formed part of the
Implementation team of each Ministry or
Department
These trainers will then carry out their own
in-house training programs
57

IMPLEMENTATION
APPROACH
The First step in the implementation approach is to
start off by identifying the direct costs
The method adopted depends on the nature of
output produced by each Agency
The activity based costing is adopted for routine &
standardized output where average costs per unit
of output can be obtained
The job costing method is used for output which
are specific in nature, non-standardized & where
the usage fro resources varies
58

FOLLOW-UP
Follow-up action is very important to
sustain interests in MAS among the
Government managers
This is because the commitment from the
management is important to successfully
implement MAS in the Government
Agencies
59

COMPUTERIZED
IMPLEMENTAITON
Computerized MAS has been introduced in
August 1999 to reduce the process of cost
collection, calculation & analysis
The main feature of this system lies on its
ability to interface with Budgetary &
Planning System, Asset Management
System & the Human Resource
Management System
60

CHALLENGES IN
IMPLEMENTING MAS
References to Sudirman (1995) the
challenges can be discussed into two major
categories:
MAS IS A NEW CONCEPT OR SUBJECT
Is especially a new concept to most
Government agencies especially to their
officials & staff
The following are evidences:
61

CHALLENGES IN
IMPLEMENTING MAS
1. MAS is based on accrual basis accounting
whereas Government accounting is based on
cash basis or modified cash basis of accounting
2. MAS is a departmental based system. Which
needs to be operated mostly by non-accounting
staff
3. MAS involves creating & upgrading the
information system for the consumption of
resources & output statistics
62

CHALLENGES IN
IMPLEMENTING MAS
PUBLIC SECTOR ENVIRONMENT
The unique features of Public Sector
environment have become one of the main
contributors to the challenges in
implementing MAS in the Government
Agencies
Among the examples are:
63

CHALLENGES IN
IMPLEMENTING MAS
1. There is no clear bottom line of Public
Sector motives unlike the Private Sector
where profit is a very important motive for
them
2. Most of the government services are
monopolistic in nature, thus contributed to
the lack of competition among the service
providers in the market
64

CHALLENGES IN
IMPLEMENTING MAS
3. There are minimal direct positive
consequences or rewards for the
Department or the public servant
who perform their jobs costeffectively

65

STANDARD ACCOUNTING SYSTEM FOR

GOVERNMENT AGENCIES (SAGA)
The idea of introducing an accounting package
known as SAGA was announced by the Cabinet in
September 1994
This package is specifically designed for the
Statutory Bodies
The Public Administration Improvement Circular
No1/96 was issued on 1 February 1996 by the
Government to encourage the use of the
computerized accounting systems in the
preparation of financial reports
66

STANDARD ACCOUNTING SYSTEM FOR

GOVERNMENT AGENCIES (SAGA)

The main purposes of SAGA:

To ensure that the accounts of the Statutory
Bodies are being updated daily & submitted
in time for auditing purposes
To ensure efficient processing of financial
information as well as enhancing the
accountability in financial reporting at both
the operational & management levels
67

STANDARD ACCOUNTING SYSTEM FOR

GOVERNMENT AGENCIES (SAGA)

Among the agencies that have adopted &

used SAGA are the Human Resource
Development Council under the Ministry of
Human Resources, Langkawi Development
Authority (LADA), Majlis Amanah Rakyat
(MARA), the Urban development Authority
(UDA) & the National Film Development
Corporation (FINAS)
68

OBJECTIVES OF SAGA
1. To provide for the maintenance of a
complete & updated set of accounts
2. To allow for the daily closing of accounts
3. To improve the Financial Management
System
4. To provide for the timely submission of
Pre-Audit Financial Reports
69

OPERATIONAL CAPABILITIES
OF SAGA
There are 2 major components of SAGA:
1. The operational accounting system (OAS)
2. The accounting information system (AIS)
THE OPERATIONAL ACCOUNTING
SYSTEM
There are 11 modules in the OAS of SAGA
which are used to keep all the relevant &
standard accounts used by the Statutory Bodies
70

THE ELEVEN MODULES

Modules
General ledger

Accounts payable

Descriptions of Functions
Provide the Chart of Accounts structure &
interfaces to the other package modules for
transfer of data.
Consolidated financial management
reports required by users are generated
under this module
Allows users to control aspects of the
payment process including the
selection of invoices to be paid, the production
of computer printed cheques & payment
vouchers
71

THE ELEVEN MODULES

Modules
Description of Functions
Accounts receivables Allows users to take control of all
aspects of the receipts process,
monitoring of actual receipts against
projected receipts, collection &
postings of cash received
Assets management Allows users to account for all assets
held by the agency & to keep track of
their movements

72

THE ELEVEN MODULES

Module
Investments

Inventory

Order entry

Description of Functions
Maintains information of investments made &
the management of the investment portfolios
such as fixed deposit accounts & records of
Government shares
Provides management with control of
inventory stock levels, prices, storage, the
issue of stocks to customers & receipt of stock
from vendors
Creates customers invoices for payment
process & associated purchase or requisition order for
the acquisition & delivery of the goods
73

THE ELEVEN MODULES

Module
Purchase orders

Loans
Payroll

Bank reconciliation

Description of Functions
Provides management & control of all
purchases made from vendors
Allows for effective management of
loans portfolio
Maintains detailed personnel records
for the generation of employee payroll
Assists the agency in reconciling their
receipts & payments records against
the bank statements
74

THE ACCOUNTING
INFORMATION SYSTEM (AIS)
Provides information to the management for
monitoring, evaluating & taking the
necessary steps to improve the Financial
performance of an organization
There are options in AIS namely the
Financial Management & the Annual
Financial Statement Preparation.
75

THE TWO OPTIONS OF AIS

Options
Financial
Management

Functions
Provides up-to-date information &
standard indicators on the performance
of the statutory body i.e.
- Examine the Income & Expenditure
breakdown
- View month & year to date figures
for Income & Expenditure plus
variances in relation to budget
- View the above in graphical form & review
the detailed items
76

THE TWO OPTIONS OF AIS

Options
Financial
Management

Annual Financial
Statement
Preparation

Functions
- Check on the Balance Sheet & view
the overall picture on a daily basis in
terms of Assets, Liabilities & Equity
- Select ratio Options & view Standard
Financial Ratios
Assist in the preparation of the PreAudit Annual Financial &
Management Reports
- Users may automate the preparation
of the Pre-Audit Report
- Review the latest update on the Annual
Financial Report
- Produce various reports to accompany the
Pre-Audit Accounts
77