Part 5: Public Sector Accounting Malaysian Context

1
Part 5 Public Sector AccountingMalaysian
Context

• iii. Financial Systems and Procedures

2
Federal Constitutions(Financial Provisions)

• Specified in Article 96 112 covering 8
  categories of financial matters
• Revenues
• Expenditures
• Control and management of fund
• Borrowings
• Budgets and financial statements
• Auditor General
• National Finance Council
• Special Provisions for Sabah and Sarawak

3
Federal Constitutions(Financial Provisions)

• Objectives
• Establish the general framework for the control
  of public expenditure
• As a broad requirements of a good financial
  management systems in government
• Govern the methods of which public funds are to
  be administered and accounted for
• Provide for division of various revenues of
  Federal and State government
• Define the borrowing powers of Federal and State
  government
• As a requirement to maintain specified
  Consolidated Funds by the Federal and State
  government
• Specify basic principles of government finance
• As a requirement to prepare financial statements
• As a requirement to prepare annual statements of
  assets and liabilities

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Revenues

• State Government
• Revenues from local government
• Revenues fro religious activities
• Export duty on minerals
• Entertainment duties
• Fees from state courts
• Treasure trove

• Federal Govt
• All proceeds of revenues except specify by
  Article 110

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Revenues(Grants)

• Article 109 State government is entitled to
  receive financial assistance from Federal
  Government in a form of grants
• The grants are repayable by state government
• It is an expenditure to the Federal government
• Types of grants
• Capitation Grant
• State Road Grant
• State Reserve Fund
• Grant for infrastructure (upon approval of NFC)
• Grants payable under various act of parliament
  (Revenue Growth Grant and Iron Ore Export Duty
  Grant)

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Revenues(Grants)

• Rationale for the grants
• States have insufficient revenue to finance their
  expenditures
• Redistribution of wealth (rich state vs poor
  states)
• Different quality of life and standard of living

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Revenues(Grants)

• Capitation Grant
• Payable by the virtue of Article 109 (1)(a)
• Purpose
• to assist the State government in their operating
  expenditure
• Basis of the grant (rates)
• the number of population of a particular state
• The rates could be changed, but any changes
  (reduction) should not be lesser than 90 of the
  previous years receipts.

8
Revenues(Grants)

• State Road Grant
• Payable by the virtue of Article 109 (1)(b)
• Purpose
• For the maintenance of the state road in a
  particular state
• Maintenance includes the preservation, upkeep and
  restoration of the State roads, roadside
  furniture, bridges, viaducts and culverts.
• Basis of the grant
• Used to be the length of the road
• Effective from 1990 Consumer Price Index that
  take into account the material costs, labour
  costs and cost of machinery

9
Revenues(Grants)

• Revenue Growth Grant
• Payable by the virtue of the Revenue Growth Grant
  (Amendment) Act 1980
• Rationale
• the growth of the Federal Govt. is contributed by
  State Government
• Basis of the grant
• When the Federal Government there has an economic
  growth by more than 10 in any financial year as
  compared to the preceding year
• The allocation is based on the population of the
  State
• Uses
• Water supply
• Public housing
• Industrial estate development
• Other development projects approved by the
  National Finance Council

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Expenditure Financial Commitments (Expenditure)

• Article 129
• the Federal and State governments to cover their
  own expenditure
• However, if the state governments are unable to
  cover their expenditure (development), the
  Federal Govt. will finance some of these
  expenditures on a reimbursable basis
• Article 98
• All the expenditures, both at the Federal or the
  State level shall be charged to the Consolidated
  Fund ie requires an approval from the Parliament
• Article 102
• Parliaments approval is required for any unusual
  urgency expenditure (contingency expenditure)
• Article 103
• Contingency Fund may be created for an urgent and
  unforeseen need for expenditure, where there is
  no other provisions allowing for such purpose
• However, the estimates of such expenditure needs
  to be presented to the Parliament

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Control and Management of Fund

• Article 97 (receipts of revenues)
• all revenues and moneys raised or received by
  the Federation shall be paid into Federal
  Consolidated Fund and the same applies to the
  State Consolidated Fund but excluding zakat,
  fitrah, baitulmal or similar Islamic religious
  revenues
• Article 104 (withdrawals)
• No money shall be withdrawn from the Consolidated
  Fund except in the manner provided by the Federal
  Law
• The withdrawals are for the following purposes
• Charged Expenditure (Article 98)
• Authorized Supply Act (Article 100)
• Authorized to be issued under Article 102

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Borrowings

• Article 111(1) and (2)
• The Federal shall not borrow except authorized by
  the Federal Law
• The provision is also applicable to State
  government except if the borrowings are from
  approved financial institutions and are for the
  period of less than 5 years
• Purposes of government borrowings
• Budget deficits
• Development and Operating expenditure

13
Borrowings

• Government may only undertake borrowings if
  authorized by the laws and to date 9 laws have
  been passed
• Internal Loans
• Loans (Internal banks) Ordinance 1958
• Loans (local) Ordinance 1959
• Treasury Bill (Local) Act 1064Government
  Investment Act 1983
• External Loans
• External Loan Act 1963
• Extended credit Act 1966
• Development fund Act 1966
• Loans (Asian development Bank) Act 968
• Loans (Islamic Development Bank) Act 1977

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Borrowings (Sources)

• Domestic Loans
• Malaysian Government Securities (MGS)
• Treasury Bills
• Investment Certificates
• Loan for Housing Loan Fund
• External Loans
• Loans that have original or extended maturity of
  more than one year, owned to non-residents and
  are repayable in foreign currency, goods and
  services.
• Bond issues
• International/Multilateral Financial Institutions
• World Bank
• Asean Development Bank
• Islamic Development Bank
• Bilateral Government Sources
• International Monetary Fund

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Budget and Financial Statements

• Article 99
• The Federal Government shall submit
• The estimated receipts and expenditure of the
  Federation of the following year before
  commencement of that year, and
• The statements of assets and liabilities of the
  Federation at the end of the last completed year
• Article 100
• The expenditure shall be included in the supply
  bill for them to be withdrawn from the
  Consolidated Fund except charged expenditure
• Article 101
• The Federal Government shall prepare a
  supplementary budget to cover the insufficient
  amount proposed by the Supply Act

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Auditor General

• Article 105(1)
• The appointment of the AG shall be made by the
  YDA upon the advice of the PM
• The AG is also eligible for reappointment but not
  for any other appointment in the service of
  Federal or State
• The AG may resign at any time but not to be
  removed except approved by the federal court.
• The remuneration is paid by the parliament
  (charged expenditure).
• The terms and conditions of the AG service shall
  be determined by the Federal Law
• Article 106
• The AG has the power and duties to audit and
  report on the accounts of the federal and states
• Article 107
• The AG shall prepare and report to YDA and the
  Parliament the accounts of the federal government

17
National Finance Council

• Established by the virtue of Article 108
• Purpose
• to provide a platform for representatives from
  the Federal and State government to meet and
  discuss issues concerning financial aspects of
  both parties
• Members
• Prime Minister
• Ministers of relevant ministries
• Rep from each state (Mentri Besar/Chief Minister)
• Meeting will take place if either one of these
  conditions arise
• As and when necessary by the PM
• At the request of three or more reps
• At least once a year
• Matters discussed
• Grants
• Annual loan requirements
• Loans to any state
• Development plans

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Special Provisions for Sabah Sarawak

• Special Privileges
• Article 112 (A)
• Audit Reports the reports for these two states
  shall be submitted to the YDA and the Yang di
  Pertua Negeri of the State
• Article 112 (B)
• Borrowing powers the FC shall not restrict
  them to borrow under the authority of the state
  law, but still subject to an approval from the
  Central Bank
• Article 112 (C)
• Grants assignments of revenues but subject to
  Article 112 (D) and the 10th Schedule
• The Federation shall pay grants specified by Part
  IV to the Borneo States for each FY
• Each of the states shall receive all proceeds fr.
  taxes, fees and dues specified in Part V, if
  collected, levied or raised within the states.
• Eg Import duty and excise duty on petroleum
  products and export duty on timber and other
  forest products, as well as other revenue
  concessions

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Financial Procedure Act (FPA) 1957

• The objectives are to provide
• Guidance for the control and management of public
  finance
• Financial and accounting procedure
• Guideline on collection, custody and disposal of
  public moneys
• Guideline on purchase, custody and disposal of
  public properties
• The authority for the investment of money
  standing in the Consolidated Fund
• Definition and explanation of the three accounts
  in the Consolidated Funds
• The enforcement of the FC relating to finance

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Financial Procedure Act (FPA) 1957

• Areas to be discussed
• Definition of terms
• Consolidated Funds
• Financial procedures for payment, virements,
  estimates and write-off
• Custody and investment of public fund
• Yearly account statements
• Financial regulation provided by the YDA

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Definition of terms

• Financial Authority
• Federal Consolidated Fund Treasury
• State Consolidated Fund State Treasury
• Financial Year
• 12 months (1 January to 31 December)
• Public moneys
• All revenues, loans, trusts and other moneys and
  all bonds, debentures and other securities raised
  and received by/on the account of the
  Federation/state except Zakat, Fitrah, Baitulmal
  and other Islamic revenues
• Public Stores
• Chattels and property of/in the possession
  of/under the control of the Federation/State

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Consolidated Fund

• Section 7 FPA
• 3 main accounts to be maintained by the Federal
  Government
• Consolidated Revenue Account
• Consolidated Trust Account
• Consolidated Loan Account

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Relationship Between The Consolidated Fund
Accounts
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Consolidated Revenue Account

• Maintained by virtue of Section 7(a) FPA 1957
• Sources
• All revenues and moneys received by the
  Federal/State government except loans and trusts
• Revenues and moneys include tax revenue, non-tax
  revenue and non-revenue and receipts from Federal
  Territories
• Uses
• Operating expenditure all supply charges in the
  annual budget and transfer to other fund such as
  Development Fund.
• Charged expenditure specify in Article 98

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Charged expenditure

• Civil List
• Royal Allowances Lord President,
• Chief Justice and Judges
• Auditor General
• Speaker of The House of Representatives
• President of The Senate
• Election Commission
• Judicial and Legal Service Commission
• Public Services Commission
• Education Commission
• Police Force Commission
• Treasury
• Charges on Account of Public Debt
• Pensions,Retirement Allowances and Gratuities

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Consolidated Trust Account

• Maintained by virtue of Section 7(c) FPA 1957
• Sources
• All receipts of government and public trust funds
• All receipts for specific purposes
• Receipts include deposits, trusts and recoveries
  of loans/advances
• Uses to maintain 6 major trust funds
• Development Fund
• Housing Loan Fund
• Government Trust Funds
• Public trust Funds
• Deposits
• Accounts Payable

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Consolidated Trust Account

• Development Fund
• Set up under Development Fund Act 1965
• To account for loans for the purpose of
  development, contributions from Consol. Revenue
  Account and repayment loan given out from this
  fund
• Housing Loan Fund
• Established under the Housing Loan Fund Act 1971
• To provide housing loan facilities to government
  employees
• To account for contribution fro Consol. Revenue
  AC and Development Fund, proceeds from loans
  transferred from Loan AC, repayment of housing
  loan and interest earned

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Consolidated Trust Account

• Government Trust Funds
• Established under Sect. 10 FPA 1957
• Source
• Contributions from government
• 5 major classifications
• Clearance Account
• Trading Account
• Loan Account
• Contingency Fund
• Misc. Fund
• Pension Trust Fund
• Public Trust Funds
• Established under section 9 FPA 1957
• To account for trust monies entrusted to Federal
  government and Special Trust fund incorporated
  under relevant act
• Source
• Public that placed in trust of the government for
  specific purposes

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Consolidated Trust Account

• Deposits
• To account deposits/ monies received by
  government for a specific purpose under certain
  law/ contractual agreement
• Refundable when the specific purpose has been
  achieved
• Accounts Payable
• Represents the amounts owing to supplier of goods
  and services by the government as at 31 December
  for which payment were made in January

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Consolidated Loan Account

• Established under Section 7 FPA 1957
• To account for all receipts from loans and
  disbursements for outstanding loans and transfer
  to other loan funds
• Source
• Receipts form local and external borrowings

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Financial Procedures for Payment, Estimates,
Virements and Write-Off

• Warrant
• Section 3 FPA 1957
• A letter authorising Ministers at the federal
  level or Mentri Besar or Chief Minister to
  withdraw money from the Consolidated Funds
• Estimates
• Section 15 FPA 1957
• estimates on the revenues to be received and
  expenditure to be spent for the year and the
  purpose of such expenditure is to be prepared
  every year.

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Financial Procedures for Payment, Estimates,
Virements and Write-Off

• Virements
• Section 15(4) FPA 1957
• transfer of allocation between sub-heads within
  the same head, however need prior approval from
  the Treasury or State Financial Authority
• Write-Offs
• Section 17 FPA 1957
• empower Ministers or Chief Minister to authorize
  a write-off of any losses or deficiencies and
  irrecoverable amounts of debts, revenues and
  over-payments

33
Custody and Investment of Public Fund

• Section 8 FPA 1957
• all moneys paid to the Consolidated Fund should
  be kept in the banks according to the Treasury
  requirements and may be invested in various
  approved investments
• All investment revenue shall be credited to
  Consolidated Revenue Account except those
  received for the trust accounts.

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Yearly Statement of Accounts

• Section 16 FPA 1957
• as soon as practicable after the year end of
  every financial year prepare in respect of that
  year
• Consolidated Revenue Account
• Consolidated Loan Account
• Consolidated Trust Account
• A statement of accounts of any fund created by
  the Federal Constitution and not accounted in the
  Consolidated Trust Account
• A Statement of the assets and liabilities

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Financial Regulations by The YDA

• The YDA, after consulting with the National
  Finance Council may provide the following
  regulations
• Collection, receipts, custody, issue,
  expenditure, accounting, care and management of
  the public money
• Record, examination, inspection and departmental
  check of all receipts and the keeping of
  necessary books and accounts
• Forms all books and documents required under this
  Act
• Purchase, safe custody, issue, sale or other
  disposal or writing-off, accounting, stock-taking
  of stores and property of Federal and States
• Preparation of estimates of revenue and
  expenditure of Federal and States
• Authorization of rates and payments of public
  funds for specific purposes if not provided by
  law
• Making advances to public officers