Charting the Federal government of Malaysia’s progress in its journey to Accrual Accounting.
By Nazatul Izma
The Federal government of Malaysia is currently applying the modified cash basis of accounting.
While cash accounting is easy to implement and understand, the quality of information in a set of financial statements prepared on the cash basis is very limited. For example, the Statement of Financial Position of the Federal government only shows the amount of cash and the investments held in respect of the Consolidated Fund, and thus does not present the full picture of the Federal government’s financial position.
As such, the government announced its intention to move to the accrual basis of accounting in the 2010 New Economic Model (NEM) report. Subsequently, in 2011 a one-month long intensive PEMANDU lab was conducted to analyse the change, resulting in a detailed implementation roadmap with a high-level timeline.
The actual journey then started in 2013 with the creation of a special taskforce in the Accountant General’s Department (AGD) of Malaysia to spearhead this change. The multiple activities required to facilitate the transition can be categorised into the following workstreams:
Standards and accounting policies – The Governance Accounting Standards Advisory Committee (GASAC) was set up to create the Malaysian Public Sector Accounting Standards (MPSAS), drawn primarily from the International Public Sector Accounting Standards (IPSAS) with the International Federation of Accountants (IFAC)’s agreement.
Laws and regulations
The current Financial Procedures Act 1957 only requires a cash basis financial statement to be presented to Parliament. Therefore, amendments to the Financial Procedures Act 1957 and other relevant acts have to be made to enable a set of accrual-based financial statements to be tabled in Parliament.
A new accounting system had to be developed because the existing system was only designed for cash accounting. This new system, 1GFMAS (1 Government Financial and Management Accounting System) will be a centralised system with a single database to be integrated with some of the other government systems. The new system also needs to have the capabilities to perform cash reporting, taking into consideration that the budgeting process will still be in cash basis even though the accounting will be accrual.
Accrual accounting requires a transaction to be recorded when the event happens, as opposed to cash accounting where the transaction is recorded when the cash is paid. Accrual accounting also introduces new accounting processes like fair value and impairment. Therefore, new standard operating procedures and guidelines were developed to provide guidance and knowhow on the application of such processes.
The AGD needed to restructure its processes and culture in line with the new need arising from the accounting change. Accounts divisions in the line ministries were set up and the Responsibility Cost Centres were strengthened with accounting personnel. Change management and numerous training programmes were organised to build capacity. Change Ambassadors were nominated and empowered to assist with the transition management.
Opening balance information
Relevant financial information which was not accounted for under the current cash accounting system such as fixed assets, liabilities, receivables and payables, and impairment values needed to be compiled for the opening balance. This was a huge exercise covering all the 25 ministries impacted; such information was complied using templates. External consultants were also engaged to assist in the compilation of information and to provide technical assistance.
As expected, there were many challenges along the journey. These included:
One of the most challenging aspects of the entire project is the development of the new accrual accounting system, 1GFMAS. 1GFMAS is a SAP-based accounting system that needed major customisation to meet the specific needs of the government.
A major customisation required for 1GFMAS is dual ledger capabilities – one for accrual accounting and one for cash accounting. In order to develop dual ledger capabilities, a fully-customised module has to be added on the existing standard accrual SAP system. This fully customised module will receive all accrual transactions from the existing standard accrual SAP general ledger and make postings to a separate ledger using cash basis rules. The development of these cash basis rules can be complicated due to the massive number of transaction types available in the government.
Another challenging aspect of the system development is the integration with other existing government systems. Major systems that need to be integrated into the new accrual accounting system include procurement and payment (eServices, ePerolehan, HRMIS and PMS) and fixed asset management systems (SPA and MYSPATA). The integration has to be done carefully and properly, otherwise the whole system could fail.
Obtaining the opening balance
One of the biggest challenges in obtaining the opening balance is determining the complete list of assets that are owned or controlled by the Federal government. Currently, the Federal government maintains immovable assets (land and building) information in the MYSPATA system and movable assets (office equipment) in the SPA system. The information from these two systems was leveraged to help build the list of government fixed assets.
The information was then reconciled to other sources of information. For example, for land and buildings, the list of properties was compared to the Federal Land Commissioner database to ensure completeness and accuracy.
As a result of this exercise, it was realised that there was inaccurate data, leading to the implementation of data cleansing activities in both the agency and the Federal Land Commissioner databases.
The accounting standard allows historical cost or replacement cost to be used to record the value of the opening balance fixed assets. Although historical cost is the preferred method, the difficulty of locating original purchase documents for older assets makes it very challenging to adopt. As a result, only new acquisitions use historical cost, while most of the older assets use replacement cost as the basis for the opening balance value.
The method used to determine the replacement cost depends on the type of assets. The service of the government valuers, Jabatan Penilaian dan Perkhidmatan Harta (JPPH), was used to determine the replacement cost of land and buildings. This was a massive exercise and required a reasonable period to complete. Valuation of other infrastructure assets, such as roads and sewerage facilities were performed by the respective agencies due to the specialised knowledge required.
Application of standards
Applying accounting standards in the government is more complicated than in the private sector due to the size and diversity of the government services. A similar item can have a different treatment depending on how the agency is using the item. For example, books and journals will normally be an expense item for most agencies but if the agency is the public library, these items will be treated as an asset item. This requires the users to apply judgement in interpreting the correct accounting treatment which can be challenging to implement.
Materiality is a fundamental concept in the application of accounting standards. For application in Malaysia, the materiality threshold for capitalisation of assets has been set at RM2,000 per line of assets. This can be seen as low considering that the total of government assets is in the billions. However, setting a materiality threshold can be very judgemental for the public sector because the government is dealing with public funds. The threshold is usually lower as compared to the private sector because there is public accountability involved. As a result, more items would have to be capitalised making the transition to accrual accounting more difficult.
The accounting standard requires the entity to allocate the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciate each part separately. This is called componentisation. However, information to componentise the existing assets of the government to their significant parts would be very challenging due to the lack of information and the huge cost or effort to rebuild such information. Fortunately, the IPSAS board has recognised that when an entity first adopts IPSAS, it may not have comprehensive information about the existence of all assets under its control, and may require a period of time to obtain and compile appropriate records to account for such assets. A transition period of three years is given to fully adopt the requirements of the standard.
While Malaysia is close to the finish line, there is still more to be done. The challenges faced in Malaysia are no different from those faced by other countries which have implemented accrual accounting. While new standard operating procedures have been developed and appropriate training conducted, it will still take time for the entire government machinery to absorb them and adjust to these changes. The journey may be painful, but it is necessary to enhance the public sector’s financial discipline and governance for the betterment of the country.
This article was first published in the government’s newsletter Fokus Akruan.