Foundations of Public Sector Accounting

Learning Objectives:
At the end of this lecture, students should be able to:

 Define public sector accounting

 Public sector organizations
 Explain its objectives
 Identify Public Sector Organizations That Can Use IPSAS for Preparing Financial
Statements

 Identify users of public sector financial information
 Distinguish public vs private sector accounting

Meaning of Public Sector Accounting

Public sector accounting refers to the process of recording, analyzing, and reporting financial
transactions of government and public institutions.
It focuses on:

 Accountability
 Stewardship
 Transparency

Public sector organizations

According to International Public Sector Accounting Standards Board (2016), there are different
types of public sector institutions that can be envisaged along a spectrum. At one end, are
institutions that have similar characteristics to the profit - oriented organizations that use
International Financial Reporting Standards (IFRS). At the other end of the spectrum, are
organizations that provide public service to maintain or enhance the well being of the citizens.
These organizations are totally dependent on government funding. In between these two types of
organizations are other types of public sector organization which are more difficult to classify as
either profit oriented or service oriented. Until 2016, IPSASB identified some public sector
institutions that could be called Government Business Enterprises (GBEs) provided they met five
criteria. These organizations were to use IFRS instead of IPSAS. The term GBE has now been
deleted from IPSASB literature because some entities that were being called GBEs did not meet
the definition of GBEs.

Public Sector Organizations That Can Use IPSAS for Preparing

Financial Statements
According to IPSASB (2016), any public sector organization that wants to use IPSASs must
meet three criteria which are:

 Responsible for the delivery of services to the benefit the public and/or to redistribute
income and wealth.
 Finance its activities directly or indirectly mainly through taxes and/or transfers from
other levels of government, social contributions, debt or fees.
 It does not operate for the primary purpose of making profit.

Commercial Public Sector Entities

In place of GBE, IPSASB in 2016 introduced the term "Commercial Public Sector Entities" into
the literature without explaining what the term means. It left each country's accounting standard

regulator to interpret the term by taking into consideration its "jurisdictional factors". These
commercial entities are expected to use IFRS in their financial reporting.

Objectives of Public Sector Accounting

1. Ensure accountability of public funds:

Accountability means that government officials are responsible for how they use public
money. Public sector accounting ensures that:

 Every naira collected is recorded

 Every expenditure is properly authorized and documented
 Officials can be questioned and held responsible

2. Promote transparency in government activities:

Transparency means that financial information is open, clear, and accessible to the public.

Public sector accounting ensures:

 Financial statements are published

 Transactions are clearly recorded
 There is no hidden or secret spending

3. Assist in decision-making:

Government needs reliable financial information to make decisions such as:

 How much to spend

 Where to allocate resources
  Whether to increase taxes or borrow

This data are provided through Bugets, annual reports and performance report.

4. Evaluate performance of government programs:

Public sector accounting helps to measure how well government projects and programs are
performing.

It answers questions like:

 Was the project completed?

 Was it within budget?
 Did it achieve its objective?

Users of Public Sector Accounting Information

 Government (Executive arm)
 Legislature
 Taxpayers (Citizens)
 Donor agencies
 Oversight bodies

Key Principles of Government Accounting

1. Accountability:

Accountability means that public officials must be answerable for how they manage and use
government resources.

Public sector accounting ensures:

 All revenues and expenditures are properly recorded

 Officers can be held responsible for misuse of funds
 There is proper documentation for every transaction

2. Consistency:

Consistency means that the same accounting methods and procedures should be used over
time.

This ensures:

 Financial statements can be compared across years

 There is uniformity in reporting
  Users can rely on the information

In simple terms “Use the same accounting methods every year.”

3. Transparency:

Transparency means that government financial activities must be open, clear, and accessible
to the public.

Public sector accounting promotes:

 Clear financial reporting

 Disclosure of all relevant information
 Easy understanding by users

In simple terms “Nothing should be hidden from the public.”

4. Prudence:

Prudence means that government should be careful and conservative in financial reporting
and spending.

It ensures:

 Expenses are not understated

 Revenues are not overstated
 Risks and uncertainties are properly considered

In simple terms “Be careful—don’t overstate income or understate expenses.”

The role of Government in the Society

 Adam Smith in the Wealth of Nations identified the three basic duties of the state as:
 protection of the citizens from external aggression:
 protection of the citizens from other members of the country and administration of
justice;
 engagement in activities that are of benefit to the society as a whole because they are not
profitable for individual efforts.4

Differences between Public Sector Organization and Profit

Oriented Organizations.
Basis Public sector Profit oriented
 Law They are created by the act of They are required by required by
parliament law to register with the corporate
affairs commission
Purpose The dominant purpose is to The dominant purpose is to
render services or specific maximize profit the success of such
desirable services to the society organization is measured by the
at a reasonable cost. amount of profit earned in relation to
the assets of the origination.
Reporting Financial statements are prepared Financial statement is prepared in
in line with the International line with the international principles
public sector accounting for public sector accounting.
standard.
Accountability They are accountable to the They are accountable primarily to
public their shareholders

Class Exercise
1. Define public sector accounting
2. List 3 objectives
3. State 3 differences between public and private sector

Assignment
Explain why accountability is important in public sector accounting

Legal and Institutional Framework

Learning Objectives:
Students should be able to:

 Identify key laws governing public sector accounting

 Explain roles of major institutions

1. Legal Framework
Key Laws:

1. Finance (Control and Management) Act, 1958:

The Finance (Control and Management) Act, 1958 is a key law that provides the legal
framework for managing public funds in Nigeria.
Objectives of the Act

The Act is designed to:

 Ensure proper control of government revenue and expenditure

 Promote accountability and transparency
 Prevent misuse and mismanagement of public funds
 Establish clear financial procedures in government

2. Fiscal Responsibility Act, 2010

The Fiscal Responsibility Act, 2010 is a law designed to ensure prudent management of
Nigeria’s public finances through fiscal discipline, transparency, and accountability.

Objectives of the Act

The Act aims to:

 Ensure fiscal discipline in government operations

 Promote transparency and accountability
 Achieve sustainable economic growth
 Reduce budget deficits and public debt

3. Public Procurement Act, 2007

The Public Procurement Act, 2007 is a law that regulates how the government purchases
goods, works, and services.

Objectives of the Act

The Act aims to:

 Ensure transparency in procurement processes

 Promote competition among contractors
 Achieve value for money
 Reduce fraud, corruption, and waste
 Ensure accountability in contract awards

2. Financial Regulations
 Guide government financial operations
 Apply at federal, state, and local levels
3. Key Institutions
Revenue & Allocation:

 Federation Accounts Allocations Committee (FAAC)

FAAC is the body responsible for sharing revenue generated by the federal government among
the three tiers of government:

 Federal Government
 State Governments
 Local Governments

Functions of FAAC:

I. Distributes revenue from the Federation Account

II. Ensures proper allocation based on approved formula
III. Meets monthly to allocate revenue
IV. Promotes fiscal coordination among governments

 Revenue Mobilization Allocation and Fiscal Commission (RMAFC)

RMAFC is the constitutional body responsible for advising on how revenue should be
generated and shared in Nigeria.

Functions of RMAFC:

I. Recommends revenue allocation formula

II. Monitors accruals into the Federation Account
III. Ensures revenue is properly collected
IV. Advises government on fiscal matters
V. Determines remuneration of public office holder.

Anti-Corruption Bodies:

 Economic and Financial Crimes Commission (EFCC)

EFCC is a government agency responsible for investigating and prosecuting financial crimes and
corruption in Nigeria.

Functions of EFCC:

 Investigates financial crimes such as:

o Fraud
o Money laundering
 o Embezzlement
 Prosecutes offenders in court
 Recovers stolen public funds
 Monitors financial transactions
 Enforces anti-corruption laws

 Independent Corrupt Practices Commission (ICPC)

ICPC is responsible for preventing, investigating, and prosecuting corruption in public offices.

Functions of ICPC:

 Investigates corruption in government institutions

 Prosecutes offenders
 Educates the public on corruption prevention
 Reviews systems to reduce corruption opportunities
 Promotes ethical conduct in public service

Legislative Oversight:

 Public Accounts Committee (PAC):

Public accounts committee serves as a body which takes evidence from accounting officers to
confirm the comments contained in the auditor general annual reports. It is also empowered to
exmine the audited accounts of government parastatals that the Auditor general for federation is
not allowed to audit as stipulated in the 1999 constitution. The committee also reports on the
major irregularities established and make recommendation on necessary corrective actions.

Functions of PAC:

 Reviews Auditor-General’s reports

 Investigates misuse of public funds
 Summons public officers to explain financial issues
 Ensures compliance with financial regulations
 Recommends corrective actions

Class Exercise
 Explain the role of FAAC
 Differentiate EFCC and ICPC

Assignment
Discuss the importance of the Fiscal Responsibility Act
WEEK 3: Government Planning and
Budgeting
Learning Objectives:
Students should:

 Understand budgeting in government

 Explain budget processes and techniques

Meaning of Budget
A budget is a financial plan of government revenue and expenditure for a period. Budgetting can
therefore be defined as the statement of expenditure preference of government expressed in
monetary terms indicating the planned utilization of available reasources to the government in
order to implement what the dominant individuals within the political leadership agree to the
government priorities during the financial year.
Purpose of Government budgeting

One of the reasons why organizations engage in budgeting is scarcity of resources which always
leads to claims and demands outweighing the resources to satisfy them (Omolehinwa, 2018).

Schick (1980) identified four types of resources that the government can face as:

Relaxed Scarcity: This is a situation where the government has enough incremental resources to
meet not only the incremental costs of existing programmes but also to execute new ones.

Chronic Scarcity: This is a situation where established programmes can be continued but
available resources 'cans only meet limited programme growth.

Acute Scarcity: This is a situation where there is not enough money to meet incremental costs of
established programme let alone the costs of new ones.

Total Scarcity: This is a situation where established programmes cannot be sustained and the
government may have to resort to expenditure cut or in the alternative resort to escapism by
including in the budget, the programmes the government has no intention of implementing in the
first instance but look for excuses later on for not implementing them.

Types of Budgets
 Incremental budgeting:

A budgeting system where the current year’s budget is based on the previous year’s budget, with
small adjustments (increments). The incremental budgeting school of thought was led by Aaron
Wildavsky, according Wildavksy, "Budgeting is incremental and not comprehensive, the
beginning of wisdom about agency budget is that it is almost never actively reviewed as a whole
every year in the sense of reconsidering the value of all existing programmes as compared to all
possible alternatives. Instead, it is based on last year's budget with special attention given to a
narrow range of increases and decreases. Thus the men who make the budget are concerned with
relatively small increments to an existing base."

How it work?

 Start with last year’s budget

 Add or subtract changes (e.g., inflation, new policies)
 Approve revised figures
Criticisms of Incremental Budgeting

The criticisms of incremental budgeting can be summarized as follows:

I. The focus is on one year alone without looking at the future cost implications of current
decisions.
II. By beginning the budgeting process for each year with the funding level of the current
year, it assumes that the activities performed are effective and cost efficient, As a result,
any inefficiencies or errors of the past are therefore enshrined as standards for the future.
III. Incremental budgeting provides little information on the nature and level of services, or
programmes provided, the reasons for providing the services, the beneficiaries of the
services or the resources needed to maintain a specific level of service alternatives to a
programme, alternative methods of providing a service
IV. Incremental budgeting does not provide a meaningful way to evaluate or trade-offs
between different services or levels of services.
V. Finally, the incremental budgeting with emphasis on line item budgeting does not permit
the use of technique of flexible budgeting where we can relate the cost with level of
activity achieved. In the absence of such a technique, there is no way (for example) that
we can know precisely the impact on crime rate of increases or decreases in police
funding.

 Planning Programming Budgetary System :

A system that links planning, programming, and budgeting to achieve government objectives
efficiently.

Planning Programming Budgeting System (PPBS) was introduced into USA Department of
Defence by Robert McNamara in 1961 and later xtended to all US Federal agencies by President
Johnson (Phyrr, 1973). The time of the introduction of the PPBS in USA agencies coincided with
resident Johnson's "Great Society" programme leading to increases in social expenditure of
government.

Why it was established:

 To improve decision-making and resource allocation

 To link budget to long-term planning

How it works:
  Identify government goals with precisions and on a continuing basis
 Allocate resources based on priorities from most urgent to less urgent
 Evaluate alternative means of reaching those goals
 Inform themselves not merely on next year’s cost but on second and third year
subsequent cost
 Develop programs to achieve them to ensure that dollar worth of service for each dollar
spent.

Criticisms against PPBS:

 From the theoretical point of view, the methodology is similar to that of corporate
planning in the private sector where decision is supposed to be guided by weighing up the
value of all end product against the relevant costs.
 The manner in which they were introduced across the board and without much
preparation. There was inadequate time to educate agency heads about the advantages of
PPBS let alone the techniques involved in it.
 The insensitivity of the new men in power to budgetary traditions, institutions loyalties
and personal relations
 Inadequate support of leadership especially the knowledgeable leadership provided by
McNamara in Defense.
 Inadequate suppy of good analysis and data.

 Zero-based budgeting:

A budgeting system where every expense must be justified from zero, not based on previous
budgets.

The idea of Zero Base Budgeting was first coined in 1962 at the time Orville Freeman was
the United States Secretary of Agriculture and was first experimented with his department's
1964 budget (Wildavsky & Hammond, 1965).

The experiment was short-lived because it was considered expensive and time consuming.
The concept was resurrected by Peter Phyrr in 1969 while working as Financial director of
Texas Instruments. Peter Phyrrs concept of ZBB was first introduced into government
budgeting by Jimmy Carter while he was the Governor of Georgia State.

At the time he became American President in 1979, he characterized American federal

budget as "inefficient, chaotic and virtually uncontrollable by either the President or the
 In theory, ZBB calls for total review of all proposed activities and expenditures of
government irrespective of whether they are new or continuing ones. The idea is to justify
every government spending. Zero indicates that the past is cut off, the present is regarded as a
clean slate on which the departments set up "decision packages" (Madsen & Polesie, 1981).

According to Phyrr (1970) the important steps involved in ZBB process include:

 Identify 'decision units'. For example, in the area of education, a decision unit could be
primary education with identifiable civil servants with authority to establish priorities.
 Develop decision packages showing different levels of efforts (and related costs) for the
purpose of highlighting the impact of various funding levels.
 Evaluate and rank all decision packages at each level of management in ranking order for
the purpose of preparing appropriation requests.
 Prepare the detailed packages approved in the budget [Link]" (United
States GAO, 1997:46).

Why it was established:

 To eliminate waste
 To improve efficiency
 To ensure proper justification of spending

How it works:

 Start from zero budget

 Justify every activity
 Rank priorities
 Allocate resources based on importance

Criticisms:

 Time-consuming
 Requires a lot of effort and data
 Difficult for large government systems

Step Involved in Government Budgeting Process

The steps involved in the government budgertary process are divided into four stages:

1. Formulation and Preparation stage;

2. Approval and enactment stage;
3. Implementation stage;
4. Monitoring and evaluation stage.

Budget Control
  Monitoring actual vs budget
 Identifying variances

IPSAS Link
IPSAS 24 presentation of Budget information in financial statement: It requires the
comparison between of budget amounts with the actual amount in the general purpose financial
statement of the entities that elect to publicly make available its approved budget.

Class Exercise
 List 3 types of budgets
 Explain budget process

Assignment
Discuss advantages of zero-based budgeting

Government Accounting System & Control

Learning Objectives:
Students should:

 Understand accounting records used in government

 Explain control systems

Key Accounting Records

 Treasury Single Accounts:

TSA is a unified government bank account or set of accounts through which all the receipts and
payments of a specific government are transacted. The TSA is domiciled at Central Bank of
Nigeria (CBN) but all payments to beneficiaries out of TSA are done through Central Bank of
Nigeria that pays directly into the accounts of the beneficiaries which they have with the
commercial banks. The major problem that TSA is meant to address is the lack of unified view
and centralized controls over government's cash resources, resulting in some cash lying idle for
extended periods in numerous bank accounts held by spending agencies while the government
continues to borrow to execute its budget (Pattanayak and Fainboim, 2010).

The Objectives of TSA

 (i) To reduce idle cash balance that is often accumulated in commercial banks by
investing any surplus fund.
(ii) To facilitate budget implementation by ensuring that fund is available to the MDAs at
the right time.
(iii) To enable government anticipate the funding gap that may arise in budget
implementation so that arrangement that will minimize borrowing cost can be put in
place.
(iv) To block leakages in revenue collections
(v) To ensure effective monitoring and reconciliation of government accounts.
(vi) To facilitate the implementation of government monetary policy.

Achievements Claimed For TSA Implementation in Nigeria

TSA is said to have achieved the following:

 Enabled efficient cash management through regular monitoring of balances;

 Enabled timely and complete view of cash position;
 Total elimination of Ways and Means charges which stood at N4.7 billion per month pre-
TSA;
 Elimination of idle funds hitherto with commercial banks;
 Ability to monitor the operations of all MDAs by the OAGF; and
 Improved IGR collection through direct remittance of all revenues to the TSA under the e-
collection initiative.5

Challenges of TSA in Nigeria

The following have been identified as part of the challenges of TSA.

 Inadequate ICT infrastructure

 There is still residue of public funds with Commercial Banks
 Lack of framework for management of idle funds in the TSA
 Non-enforcement of spending limit on extra-budgetary funds and MDAs
 Lack of competition in the provision of payment gateway services for the TSA
 Difficulties in accessing bank statements online and non- implementation of auto
reconciliation.
 Limited reporting and monitoring capabilities
 Non automation of foreign exchange transaction processing.

 Vote book
 Vouchers
 Subsidiary accounts

Bank Reconciliation in an Era of E-P'ayments and Treasury Single Account

With the introduction of TSA, the bank reconciliation that an MDA on TSA must deal with, is
with its account with CBN and not with any commercial bank as was the case before. One of the
key challenges of TSA is about the ability of MDAs to reconcile their accounts with CBN
because the sources of some of the entries in the bank statements are not known and as a result,
they must go the extra mile to find out what such entries are meant for.

For example, transactions in the Central Bank statements are usually lumped together in batches
which will need to be broken down to know the sources of the payments made into TSA by the
relevant MDA's customers before any bank reconciliation can be effected

Why Bank Reconciliation is Necessary

In most cases, the figure for the ending cash balance in the bank statement of CBN will be
different from the ending cash balance prepared in the Cash Book of the MDA. As a result of the
difference between the two balances, there is a need to prepare bank reconciliation which is a
schedule that accounts for the difference between the bank balance and the cash book balance as
prepared by the MDA. The focus of the reconciliation is to discover and correct errors and to
adjust for the timing differences between the bank and the MDA in recording receipts and
payments.

Causes of Differences between the Balance in the Bank Statement and the
Balance in the Cash Book

In order to facilitate the bank reconciliation, the causes of the difference in the two balances can
be broken into three categories as follows:

 Transactions recorded in the Cash Book of the MDA but not in the Bank Statement sent
by CBN.
 2. Transactions recorded in the Bank Statement but not in the Cash Book.
 Errors made in the Cash Book or/and in the Bank Statement.
 (1)Transactions Recorded in the Cash Book Alone

There are two main types of transactions that are recorded in the Cash Book but which might not
be reflected in the bank statement.

They are:

 Unapplied Mandates by the bank

 Uncredited payments.

An unapplied mandate (which the Sub-Committee of FAAC prefers to call unpresented mandate)
occurs when a payment made through a mandate to a bank is reflected in the cash book but not
reflected in the bank statement. This can occur for many reasons among whichare:

When a payment is made to a beneficiary, the payment may be returned into the TSA if the bank
details supplied to CBN do not exist due to error(s) in inputting the account number or whenever
there is a network [Link] from the bank in posting the mandate
 Failure of the bank to post according to the mandate instructions.

(ii) An uncredited payment is a payment made by a customer for an MDA through the remita
which has been reflected in the cashbook but not in the bank account of the MDA with CBN as
at the date the bank statement was issued.

Transactions Recorded in Bank Statement Alone They include:

Payment made by a customer through the remita which is reflected in the account at CBN but not
yet reflected in the cashbook of the MDA

Charges by the bank which have not been reflected in the cashbook.

Revenue Control Procedures

Revenue control procedures in Nigeria center on ensuring efficiency, transparency, and
accountability across government tiers primarily enforced through the Treasury Single Account
(TSA), Government Integrated Financial Management Information System (GIFMIS), and
remita payment platforms to minimize leakage. These systems, backed by constitutional
provisions, focus on tracking revenue accruals into the Federation Account.

Revenue control procedures are the systems, policies, and processes put in place by government
to ensure that all revenue due is:

 Properly collected
 Accurately recorded
 Safely kept
 Fully accounted for

Summary of Sources of Revenue that go into the federation Account

TOTAL REVENUE

Oil Revenue Non-Oil Revenue

Crude Oil and Companies’ income

Oil Taxes and Custom and Excise
Gas Sales Tax
Levies Duties
Royalties
Petroleum Rent and
Profit tax Others

Expenditure Control Procedures

 Budget approval required
 Authorization before spending
 Monitoring expenditure

Bank Reconciliation
 Ensures accuracy between cash book and bank balance

Role of Auditor-General
 Audits government accounts
 Ensures accountability

Class Exercise
 Explain vote book
 State importance of bank reconciliation

Assignment
Discuss internal control in government accounting

Financial Reporting, IPSAS & Analysis

Learning Objectives:
Students should:
  Prepare and interpret financial statements
 Understand IPSAS standards

IPSAS Overview
Public sector uses IPSAS for reporting:

IPSAS 1 – Presentation of Financial Statements

This standard sets out the overall requirements for the presentation of financial statements in the
public sector.

 It ensures comparability both with previous periods and with other entities.
 It outlines the structure and minimum content of financial statements.
 Key components include:
o Statement of Financial Position
o Statement of Financial Performance
o Statement of Changes in Net Assets/Equity
o Cash Flow Statement
o Notes to the Accounts

IPSAS 2 – Cash Flow Statements

IPSAS 2 focuses on the presentation of cash flow information.

 It requires entities to present cash flows classified into:

o Operating activities
o Investing activities
o Financing activities
 Helps users assess:
o Liquidity
o Solvency
o Financial flexibility

IPSAS 3 – Accounting Policies, Changes in Accounting Estimates and Errors

This standard provides guidance on how to select and apply accounting policies and how to
treat changes.

 Covers:
o Selection of appropriate accounting policies
o Changes in accounting estimates (prospective application)
o Correction of prior period errors (retrospective adjustment)
 Ensures consistency and comparability in financial reporting.
IPSAS 34 – Separate Financial Statements

IPSAS 34 deals with how an entity prepares separate (individual) financial statements when it
has investments in other entities.

 Applies when an entity chooses or is required to present separate financial statements.

 Investments in:
o Controlled entities
o Associates
o Joint ventures
 These investments are accounted for using:
o Cost method
o Fair value
o Equity method (depending on policy choice)

IPSAS 35 – Consolidated Financial Statements

This standard sets out the requirements for preparing consolidated financial statements.

 Applies when a public sector entity controls one or more entities.

 Introduces the concept of control, which includes:
o Power over the investee
o Exposure to variable benefits
o Ability to use power to affect benefits
 Requires:
o Combining financial statements of parent and subsidiaries
o Eliminating intra-group transactions

Basis of Accounting
Financial Statements under the IPSAS Cash Basis

The financial statements prepared under the IPSAS cash basis of accounting are called cash basis
GPFS.

These statements are prepared in order to enhance the entities accountability for its cash receipts,
cash payments and cash balances. In addition, the statements help the decision makers in
assessing the ability of the relevant entity to generate adequate cash to meet its future needs and
the likely sources and uses of cash.

Objective:

To ensure transparency and accountability by showing:

 All cash inflows (receipts)

  All cash outflows (payments)
 Opening and closing cash balances

Important Note:

Unlike accrual IPSAS (e.g., IPSAS 1), this standard focuses only on cash transactions, not
receivables, payables, or non-cash assets/liabilities.

Format Recommended by Federation Account Allocation Committee (F AAC) Sub-

committee on IPSAS Implementation.

A format of cash basis GPFS was designed by FAAC sub-committee in 2012 for use by the
Federal Government, all the states and all the local governments in Nigeria. In the format, 15
items are to be reported upon under four broad [Link] four broad categories are:

1. Statutory Financial Statements which the Sub-Committee called the Main Financial
Statements
2. Performance Reports
3. Statistical Reports
4. Cash Basis Accounting Policies.

Key financial statements under Cash Basis IPSAS:

 Statement 1: Cash Flow Statement (statement of cash receipt and payment)

 Statement 2: Statement of assets and Liability
 Statement 3: Statement of Consolidated revenue fund
 Statement 4: statement of capital development fund
 Notes to the financial statement
 Supplementary Notes

Performance Reports

The performance reports are:

I. Revenue Performance Report

II. Recurrent Expenditure Performance Report.
III. Capital Expenditure Performance Report
IV. Periodic Bank Reconciliation Statements
V. Monthly Cash Advances Report

Statistical Reports

There are three types of statistical reports

i. Annual total expenditure broken into ten functional categories of general public
services, defense, public order and safety, economic affairs, environmental protection,
 housing and community development, health; recreation, culture and religion,
education and social protection. By way of note, the amount spent on recurrent and
capital expenditure should also be stated per function.
ii. Total expenditure according to program like poverty alleviation power and
transportation in similar manner to functional categories.
iii. Total capital expenditure according to the six geopolitical zones of the country and
Federal Capital Territory. By a way of note the amount spent on capital projects in
each Zone should be broken down according to the states in the Zone.

In all the three types of statistical reports, the actual expenditures are not only compared with
the final budgeted figures but also the initial/ original budgets and Supplementary budgets
are also disclosed, just like the case of Statement No.4 which is on Capital Development
Fund.

Cash Basis Accounting Policies.

These are the Specific principles, bases, conventions; rules and practices adopted by an entity
in preparing and presenting financial statements based on cash basis IPSAS.

The Main Financial Statements under Cash Basis IPSAS:

1. Cash Flow Statement (Statement No 1)

The statement has as its objectives, the provision of relevant information that will enable the
users of the report to know how the government raised the cash required for funding its
activities, the different items cash was used for and the cash balance as at the reporting date.
Such information is useful in assisting the users in predicting the future cash requirements of
government and its ability to do so. Although, there are direct and indirect methods of
preparing cash flow statements, the treatment in this book is limited to the direct method in
which the major classes of gross cash receipts and payments are disclosed. This is because it
is the method recommended by FAAC and IPSAB. The cash flow statement has three
components, namely. Operating activities, investment activities and financing activities.
The classification by the three activities enables the user of such information to assess the
impact of these activities on the financial position of the government.

I. Operating Activities

These are the main revenue generating or revenue consuming activities of the government.
For federal government of Nigeria the revenue generating activities include:

i. Statutory allocation from the federation accounts.

ii. Federal Government share of VAT
iii. Personal Income tax that Federal government can collect. This is referred to as Direct
Tax
iv. Rent of Government properties
v. Investment Income
 vi. Interest Earned
vii. Sale/Rent of government land, building and others.

There operating Payment activities include:

 Personnel costs;
 Contribution to Pension fund
 Overhead charges;
 Consolidated revenue fund charges
 Subvention to parastatals.

The Net Cash flow from operating activities is obtained by deducting the total operating
payments from the total of operating receipts

II. Cash Flow From Investment Activities

According to the format of General Purpose Financial Statements for IPSAS Cash
basis developed by the Federation Account Allocation Sub-Committee (2012), cash
flow from Investment Activities are cash paid for capital expenditure on:
i. Administrative Sector
ii. Economic Sector
iii. Law and Justice
iv. Regional Development
v. Social Service Sector

It also includes any capital expenditure funded from Aids and Grants.

III. Cash Flows from Financing Activities.

According to the format developed by the FAAC Sub-Committee, the activities classified
as financing activities are:

i. Proceeds from Aid and Grants

ii. Proceeds from External Loan
iii. Proceeds from Internal Loan.
iv. Proceeds from Development of Natural Resources
v. Proceeds of Loans from other Funds
vi. Repayment of External Loans including Servicing Cost
vii. Repayment of Internal Loans.
viii. Repayment of Loans from Development of Natural Resources
ix. Repayment of Loans from other Sources.

Change in Cash and Cash Equivalents

The sum of Net cash flows from operating activities, Net cash flows from investment activities
and the Net cash flows from financing activities gives the figure for net increase/ decrease in
cash and cash equivalent during the period.
Cash equivalents for the purpose of cash flow statement, are short term investments of less than
three months maturity from the date of acquisition and the disposal value of the investments is
known with insignificant risk of change in value.

The cash flow statement for a given year is supposed to be shown along with the corresponding
figures for the previous year.

Example:

From the following information extracted from the records of the Accountant-General of the
Federation for the year ended 31" December, 20X2. You are required to prepare the Cash Flow
Statement for the year ended 31ª December, 20X2.

N’Million’

Share of statutory allocation 10,000,000

Share of Value-Added Tax collection 2,580,000
Personal Income Tax (Direct Tax) 7,000,000
Rent of Federal Government Properties 190,000
Grants and subventions received from foreign donors 50,000
Miscellaneous revenue 250,000
Personnel costs 5,000,000
Federal government contribution to Pension 170,000
Overhead charges 800,000
Consolidated Revenue Fund Charges 1,500,000
Subvention to Parastatals 1,200,000
Proceeds from the sale of federal government properties in Lagos 700,000
Purchases and construction of fixed assets 1,800 000
Capital expenditure funded from Aid and Grants 200,000
Proceeds from loan and other borrowings 2,000,000
Repayment of loans 580,000
Cash and its equivalents as at 1st January, 20X2 2,500,000

Solution
Federal Government of Nigeria
Cash Flow Statement for the year ended 31s December, 20X2

Cash flow from operating activities

Receipts:
Statutory allocation 1,000,000
VAT allocation 2,580,000
Personal Income Tax (Direct Tax) 7,000,000
Rent on federal government properties 190,000
Sale of federal government properties in Lagos 700,000
Miscellaneous revenue 250,000
Total Receipts (A) 20,720,000
Payments
Personnel costs 5,000,000
Federal government contribution to Pension 250,000
Overhead charges 800,000
Consolidated revenue fund charges 1,500,000
Subvention to Parastatals 1,200,000
Total Payments (B) (8,750,000)

Net Cash flow from Operation Activities (A-B) = C 11,970,000

Cash Flow fom Investment Activities

Purchase and construction of assets (1,800,000)
Capital Expenditure Funded from Aid and Grants (200,000)
Net Cash Flow Investment Activities (D) (2,000,000)

Cash Flow from Financing Activities

Foreign subvention and grants 50,000
Proceeds from Loans and other borrowings 2,000,000)
Repayment of Loans 580,000
Net Cash flow from financing activities (E) 1,470,000
Net Increase in Cash and its equivalents (C+D+E) 11,440,000
Cash and its equivalents as at 1st January, 20X2 2,500,000
Cash and its equivalent as at 31t December, 20X2 13,940,000

Statement of Assets and Liabilities

This is one of the Encouraged Disclosures in the cash basis GPFS which will not be required if
the country migrates to accrual basis IPSAS as its place will be taken over by consolidated
statement of financial position (Balance Sheet) as discussed in the next chapter. The statement is
therefore equivalent to Statement of Financial position (Balance Sheet) of a company except for
the absence of some items like non-current assets (Fixed Assets), trade receivables (Debtors) and
Trade Payables (Creditors). This is because of cash basis of accounting in government as
explained in Chapter 1. However, it is not only the cash basis of accounting that accounts for the
difference between the Statement of Assets and Liabilities of a government entity and that of the
financial position of a company. The other factor is the fund basis of accounting discussed in
Chapter 1. In the case of federal government of Nigeria, four categories of funds are listed under
Public Funds. They are:
 Consolidated Revenue Fund
 Capital Development Fund
 Trust and other Public Funds
  Police Reward Fund
These public funds constitute the first set of government liabilities.
The second set of liabilities are external and internal loans of government.
The assets of government are grouped into two categories. These are:
1. Liquid assets: The liquid asset consist of all cash and bank balances of the federal
government as at the end of the financial year, irrespective of their locations.
They include:
 The total of closing sash held by all federal pay offices in the 36 states and Abuja
 The total of cash held by all government ministries.
Also included in the liquid assets are the balances on other funds of government such as staff
housing loan scheme, Petroleum Technology Development Fund (PTDF) and Ecological Fund.
2. Investments and other cash assets: Among the items-listed under investment are:
i. Federal government investment through Ministry of Finance Incorporated
(MOFI).
ii. Outstanding advances to Ministries and departments.
iii. Revolving loans including Federal Government staff housing nuilieng loans.

Statement of Consolidated Revenue Fund

The Consolidated Revenue Fund is a creation of Section 84 of 1999 Constitution into which all
revenues accruing to Federal Government are paid. The statement provides information on the
amount collected on each main source of revenue during the reporting period.
It also reports on the various uses of the fund during the reporting report. The various sources of
revenue reflected in the statement include:
 Statutory Allocation from the Federation Account.
 Share of Federal Government from Value Added Tax (VAT)
 Direct Taxes
 Fines
The fund is used to pay:
(i) Recurrent expenditure of government including personnel costs and overhead costs.
(ii) Federal government contribution to staff pension.
(iii) Subvention to federal parastatals.
(iv)Federal government loan repayment. (Internal & External)
(v) Pension to any former President or Vice-President at a rate equivalent to the annual salary of
the incumbent President or Vice-President which is a direct charge to the fund as provided by
Section 84(6) of the constitution.
(vi)The remunerations, salaries and allowances paid to some serving public officials which are
charged directly against the fund as provided by Section 84 of the constitution. This means
that they do not require appropriation from the National Assembly Some of these serving
public officials include the Auditor-General of the Federation, Judges of Supreme Court,
 Federal High Court and Federal Court of Appeal, Independent National Electoral
Commissioners and Public Service Commissioners.
(vii) Finally, the fund is used to make transfer to Capital Development Fund Like the
statement of Assets and Liabilities, the Statement of Consolidated Revenue Fund is an
Encouraged Disclosure under GPFS Cash basis.
Example on the Preparation of a Consolidated Revenue Fund
From the following abridged reports of the Accountant-General of the country for the year ended
31s December, 20X2 you are required to prepare the Consolidated Revenue Fund Account for
year ended 31st December, 20X2.
Statutory allocations 20,000,000
Share of VAT 750,000
Federal Government Internally Generated Revenue 1,800,000
Grants and subventions received 28,000
Miscellaneous revenue 30,000
Personnel costs 7,000,000
Federal government contribution to staff pension 420,000
Pension to Former Presidents and Vice-Presidents 1,000
Overhead charges 4,000,000
Consolidated Revenue Fund Charges 700,000
Subvention to Parastatals 2,000,000
Loan Repayment 3,000,000
Transfer to capital development fund 5,000,000
Consolidated Revenue Fund Balance as at 31" December, 20×1 2,000,000

Solution
Federal Government Consolidated Revenue Fund for the Year Ended 31"
December, 20X2

Revenue:
Statutory Allocation 20,000,000
Share of VAT 750,000
Internally generated revenue 1,800,000
Grant/subventions 28,000
Miscellaneous revenue 30,000
Total Revenue: (A) 22,608,000
Less Expenditure:
Personnel costs 7,000,000
Staff pension contribution 420,000
Pension to former Presidents and Vice-Presidents 1,000
Overhead charges 4,000,000
Consolidated revenue fund charges 700,000
Subvention to Parastatals 2,000,000
Loan repayment 3,000,000
Total Payments (B) 17,121,000
Operating surplus (A-B) 5,487,000
Transfer to capital development fund 5,000,000
487,000
Opening balance 2,000,000
Closing balance 2,487,000

Statement of Capital Development Fund.

The Statement of Capital Development Fund provides information about the sources and uses of
funds for the purpose of capital oriented projects for an accounting period.
Sources of Receipts into the Development Fund
The sources of receipts into the development fund:
i. Contribution to development fund from consolidated revenue fund as approved in the
Appropriation Act.
ii. External loans taken during the year.
iii. Internal loan
In addition, any external grants received by the government for the purpose of capital projects
should be treated as a receipt in the development fund.

Capital Expenditure from Development Fund

In line with the format of FAAC Sub-Committee, reports should be provided on five categories
of capital expenditure in the statement of capital fund. They are as follows:
i. Economic sector, which includes spending on works, agriculture and water resources,
power and steel.
ii. Social service sector: This includes education, health, housing and urban development.
iii. Law and Justice: This includes payments for capital projects for police, various federal
courts including Supreme Court, Ministries of Justice and Internal Affairs.
iv. Regional development which includes Niger Delta Development Commission.
v. Administrative sector which includes the Presidency, National Assembly, Military,
Foreign Affairs, INEC and Revenue Mobilization and Fiscal Commission.

The statement of Capital Development Fund should also include:

i. Opening and closing balances of the fund

ii. The budget for each item indicated in the fund which should be compared with the actual
figure.
Any note that throws further light into any item in the fund should also be included and
explained

 Accrual basis (recommended):

GPFS are Financial Statements meant to be so all-encompassing such that users will not require
additional information in order to make an informed decision about the reporting entity. This is
important especially for users that are not in position to demand financial information to meet
their specific information needs. Such users may include the citizens, their representatives and
other members of the public.

GPFS under accruals basis is fundamentally different from that of cash basis because of the way
transactions and other events are recognized. As discussed earlier in Chapter 1, transactions are
recognized under accrual basis when they occur as against cash basis when cash is actually
received or paid. As a result, while Property, Plant and Equipment (PPE), receivables and
payables are absent under cash basis GPFS, they are present under accrual basis GPFS.

Information provided by the GPFS

The GPFS provides information to its users about:

 The sources, allocation and uses of financial resources

 How the entity financed its activities and met its cash requirements.
 The financial condition of the entity at a particular time.
 The changes that have taken place in the financial condition of the entity over a period
usually one year.
 The entity's ability to finance its activities in the future and been able to meet its
Liabilities.
 The performance of the entity given the resources used to achieve what was
accomplished during the given period.

Steps involved in Preparation of Accrual Based GPFS

(i) Posting payment vouchers, receipt vouchers, journal vouchers, etc.

(ii) Balancing of Cashbooks
(iii) Balancing of General Ledger and Subsidiary Ledgers
(iv)Extraction of Trial Balance from the General Ledger
(v) Preparation of Statements and Notes from the Trial Balance

The Main Financial Statements of Accrual Basis IPSAS

The main financial statements that are in line with IPSAS 1 on presentation of financial
statements are:

i. Statement of Financial Performance

ii. Statement of Financial Position
iii. Statement of Cash Flows
iv. Statement of Changes in Net Assets/Equity
v. Statement of comparison of budget and actual amount.
vi. Notes and other disclosures to the Financial Statements.
vii. Comparative information in respect of the preceding period.

Statement of Financial Performance

This is also called Income and Expenditure Account showing all income accruing to the entity
from all sources and expenditure incurred during the period. It is a statement that reports on the
performance of the entity in terms of the amount of surplus or deficit generated during the
period.

Revenue:

The sources of revenues to be accounted for in Nigeria include statutory allocation, taxation
income, no-tax revenue investment income, interest earned, aids and grants and debt forgiveness.
IPSAS 1 requires that an entity "shall present on the face of the statement of financial
performance or in the notes, a sub classification of the total revenue, classified in a manner
appropriate to the entity's operations". Exhibit 19.1 is the Statement of Financial Performance of
Lagos State Government for the year ended 31st December, 2016. From the Exhibit, it can be
observed that Lagos State Government classified its total operating revenue into two broad
categories.

They are:

A. Revenue from non-exchange transactions:

Under this are:

a) Taxation income
b) Levies, fees and fines,
c) Statutory allocation
d) Grants
e) Other revenue from non-exchange transactions.
B. Revenue from exchange transactions

These are:
a) Capital receipts
b) Investment income
c) Interest Income
d) Income from other services

Expenses

IPSAS 1 requires that an entity "shall present, either on the face of the statement of financial
performance or in the notes, an analysis of expenses using a classification based on either the
nature of expenses or their functions within the entity, whichever provides information that is
faithfully representative and more relevant". In Figuret 19.1, Lagos State government opted
to classify expenses on the basis of the nature of expense such as wages, salaries and
employee benefits; subvention to parastatals; general and administrative expenses; and grants
and other transfers. These are all called operating expenses which are deducted from the
operating revenue to obtain surplus/(deficit) from operating activities.

Operating Surplus (Deficit)

The non-operating expenses are to be deducted from the operating surplus (deficit).

Operating Surplus (Deficit)

The operating surplus is adjusted to take care of capital expenditure, public debt charges,
depreciation, finance charges, impairment cost, gain or loss on disposal of assets, loss or gain
on foreign exchange transaction (among others) in order to obtain deficit/ surplus from
ordinary activities. In the case of Lagos State government (figure 19.1), the non-operating
reported are capital expenditure, public debt, charges, depreciation and net loss on foreign
exchange transactions.

Figure 19.1

Lagos State Government Financial Statement For the year ended 31st Dec
2016

Statement of financial performance

Revenue Notes N’000’

Revenue from non-exchange transactions

Taxable Income 8 XX
Levies, fees and fines 9 XX

Statutory allocation 10 XX
Grants 11 XX
Other revenue from non-exchange transactions 12 XX
Revenue from Exchange Transactions
Income from other services 13 xx
Capital receipts 14 xx
Investment Income 15 xx
Interest income 16 xx

Total Operating Revenue XX

Expenses
Wages, Salaries and employee benefits 17 XX
Grants and other transfers 18 XX
Subvention to Parastatals 19 XX
General and administrative expenses 29 XX

Total Operating Expenses XX

Surplus for the period before capital items, foreign
Exchange losses and public debt charges XX

Capital expenditure 21 XX
Public debt charges 22 XX
Depreciation 23 XX
Net loss/Gain on foreign exchange transactions XX

Income/Deficit for the Period

Statement of Financial Position

The statement of financial position of a government entity is a statement that lists the
resources available to the entity as at a particular date along with the sources of the resources
listed. This is done by providing information on the assets as well as the equity and liabilities
of the entity as at a particular date which for the purpose of financial reporting is usually the
end of the financial year of the entity. The statement of the financial position starts with:

a) The name of the reporting entity

b) The date the financial position is referring to
c) The currency used in the figures.
This is followed by the listing of the assets of the entity according to whether they are current
or non-current.

 The current assets include:

  Cash and cash equivalents
 Inventories
 Receivables from exchange transactions such as advances to personnel, Recoverable
from non-exchange transactions such as recoverable from tax receipts.

The non-current assets include:

 Loans granted but not due for repayment within a year
 Investments
 Property, Plant and Equipment (PPE)
 Investment Property
 Intangible Assets.

All assets listed on the statement of financial position are at their net values, after deducting
provisions while details are disclosed in notes to the financial statements.
After this, the liabilities are listed distinguishing between current liabilities and non-current
liabilities.

The current liabilities include:

 Deposits
 Short-term loans and debts
 Unremitted deductions
 Accrued expenses including pension and gratuity
 Current portion of borrowings.
 Public funds such as scholarship and bursary award and Staff Vehicle Rebursement
Revolving Loan.

The non-current liabilities consist of:

 Retirement benefit obligations

 Long - term borrowings.

Other than separating the assets and liabilities into current and non-current parts, paragraph
70 of IPSAS I does not make it mandatory to arrange the assets and liabilities in order of
liquidity unless the information is reliable and is more relevant.

The statement should identify the Net Assets/Equity by deducting the total liabilities from the
Total Assets.

Equity should be identified as:

 Reserves (if any)

 Accumulated surplus/deficits.

Finally, Net Assets should be equal to Equity.

 An example of a government statement of financial position is illustrated with that of Lagos
state in Figure 19.2.

Statement of Cash flow

Statement of Cash flow is one of the Statements required by IPSAS 1 to be presented in the
GPFS. The cash flow statement identifies the sources of cash inflows, the items on which
cash was expended during the reporting period, and the cash balance as at the reporting date.
The preparation and presentation of Cash flow is covered by IPSAS 2.

Cash flows are basically reported under three separate activities as follows:

a. Operating Activities - Activities of the entity that are not investing or financing
activities. These are day to day activities of the entity.
b. Investing Activities - The acquisition and disposal of long term assets and other
investments not included in cash equivalent.
c. Financial Activities - Activities that result in changes in the size and composition of
the contributed capital and borrowings. Cash flow of an entity must fall within the
above three categories.

Methods of Preparing Cash Flows

IPSAS 2 recognizes two methods of preparing cash flows. They are direct and indirect methods.
Under the direct method, major cases of gross cash receipts and gross cash payments are
disclosed while under indirect method, net surplus/deficit is adjusted for the effect of, for
instance transactions of non-cash nature like depreciation.

Although statements of cash flows can be prepared by either direct or indirect method, the
preferred method by paragraph 28 of IPSAS 2 is the direct method. Paragraph 29 of IPSAS 2
encourages entities using the direct method to provide a reconciliation of the surplus/deficit from
ordinary activities with the net cash flow from operating activities. The reconciliation can be
done as part of the cash flow statement or in the notes to the financial statements. This is
achieved by adjusting the net surplus deficit for the period for the effect of non-cash nature like
depreciation and impairment charges.

An example of Accrual basis cash flow statement is illustrated with Worked Example 19.1

Figure 19.2

Lagos state Government Financial statement for the year ended 31st December
2016
Assets Notes 2016 2015
N’000’ N’000’

Current assets
Cash and casn equivaients 24 XX XX
Keceivables trom exchange transactions 25 XX XX
Recoverables from non-exchange transactions 26 XX XX
Non-current assets
Available-for-sale investments 27 XX XX
Other tinancial asset 28 XX XX
Property, plant and equipment 29 XX XX
TOTAL ASSETS XX XX
Liabilities
Current liabilities
Payables and other liabilities 30 XX XX
Public funds 31 XX XX
Public debt (Borrowings) 32ii XX XX

Non-current liabilities
Borrowings 32iii XX XX
Retirement benefit obligations 33 XX XX

Total liabilities

Net assets
Reserves 34 XX XX

Total Net Assets and Liabilities XX XX

Worked Example 19.1

The following information has been extracted from the records of the Bursary of Mosafodo
Federal University of Technology for the year ended, 31st December, 20X2.
Subvention from government 7,564,000
Internally generated revenue 936,736
Aids and grants received 2,879
Dividends received 1,670
Personnel emoluments 4,242,459
Payments to contactors 2,256,607
Debt charges paid 10,786
Purchase/Construction of Property, Plant &
Equipment, (PPE) 417,410
Investment in Private Companies 90,000
Loans granted 60,000
Proceeds from Loan 1,500,000
Repayment of loan 50,000
Surplus for the year 1,724,357
Depreciation charges 521,792
Amortization charges 5,312
Capital Grant Received 105,000

1ST Jan 20x2 31st Dec 20x2

Inventories 1,000 3,257

Receivables 140,000 294,093
Payables 199,681 100,000
Cash & its equivalents 646,554 3,629,574

You are further informed that cash balances accounted for 29,547,000 out of the ₦3,629,574
cash & its equivalents as at 31st December, 20X2.
Required: Prepare the statement of cash flow for the year ended 31st December, 20X2 in line
with IPSAS accrual basis.

Statement of Changes in Net Assets/Equity

The statement of changes in Net Assets/Equity is prepared so that the readers can ascertain the
reasons for the movement in Net Assets/Equity during the financial year under consideration.
There are many events that can bring about changes in equity of a government entity during a
financial year. Among these are:
 Surplus or deficit for the period
 Revaluation of non-current assets
 Correction of prior year's errors
 Significant changes in Accounting Policies
 Changes in currency translation
 Correction of prior years' errors

An example of a statement of changes in Net Assets/Equity is illustrated with Worked Example

19.2

Worked Example 19.2

The following information was gathered from the records of Action Government of Nigeria for
the year ended 31" December, 20X2.
(i) Net Surplus for the year = ₦2,330,000,000
(ii) Investments worth ₦120,000,000 were re-valued at ₦100,000,000 at the end of the year.
(iii) An equipment with a carrying value of ₦200,000,000 was re-valued at
₦300,000,000 at the end of the year
(iv)It was decided to transfer ₦50,000,000 to Reserves at the end of the year.
(v) (v)Balance as at the beginning of the year
Accumulated Surplus/Deficit N3, 500,000,000
Reserves N2, 752,000,000

Required: Prepare the statement of changes in Net Assets/Equity for Action Government of
Nigeria As At 31st December, 20X2.