Comprehensive Study Guide for Governmental and State Accounting

Fundamentals and Scope of Governmental Accounting

• Definition of Governmental Accounting: It is an information system that collects, records, and classifies the financial information of government agencies to provide necessary reports for users. This process is conducted with strict adherence to laws, regulations, and standard governmental accounting principles.

• Primacy of Law: In governmental organizations, compliance with national laws and current regulations always takes precedence over common accounting standards and principles. If a conflict arises between legal regulations and standard accounting principles, the governmental accountant must prioritize legal compliance.

• International Variation: Unlike commercial accounting, where principles are largely similar worldwide, governmental accounting systems vary significantly between countries because they are built upon the specific legal frameworks and organizational structures of each nation.

Types of Government Activities

• Sovereignty (Governance) Activities: These are activities performed as part of the exercise of state power and sovereignty. They are within the exclusive jurisdiction of the government, and other members of society do not have the right to perform them. Examples include:

  • Legislation

  • Defense and security

  • Collection of taxes and customs duties

• Non-Profit Nature of Sovereignty: These activities do not yield a direct economic benefit to the government and are thus classified as non-profit activities.

• Stewardship (Management) Activities: These are activities that both the government and other members of society can perform. The government undertakes these to implement political, social, economic, and cultural programs. Examples include:

  • Industrial production

  • Banking

  • Aviation

  • Shipping

• Profit vs. Non-Profit Stewardship: Stewardship activities can be divided into two groups:

  • Non-Profit Stewardship: Activities where the primary goal is not direct economic benefit.

  • Profit-Oriented Stewardship: Activities that fulfill social/economic goals while also generating income (e.g., state-owned banking).

Differences Between Government and Private Institutions

• Motive and Purpose: Private institutions are established exclusively to generate profit. Government institutions are founded based on legal necessity and to serve the general public interest.

• Ownership Type: Ownership in government institutions is public, and the disposal of assets is subject to special laws. Private ownership is private and follows private sector regulations.

• Financing Methods: Government agencies are funded through taxes, state-owned natural resources (mines), and natural capital. Private entities are funded by owners' equity. Both may use loans and bonds.

• Revenue-Expenditure Relationship: In the government, income levels and costs do not necessarily correlate; an activity may cost significantly more than it yields. In the private sector, investors seek revenue that covers costs plus a profit margin.

• Method of Income Generation: Private firms earn income only through selling goods or services. The government can earn income through economic activity but primarily through the power of legislation (taxes and duties).

Governmental Accounting Information Systems and Users

• Accountability: A major part of the government's responsibility to the people depends on transparent and sufficient financial information extracted from the accounting system.

• System Characteristics: The system must provide reliable data for forecasting financial status, logical planning/budgeting, performance evaluation of agencies, and financial/operational control.

• Internal Users:

  • Ministers or Heads of Agencies: To be accountable to the government and parliament.

  • Middle Managers: To manage and evaluate their respective units.

  • Planners: To organize programs and budgets.

  • Internal Auditors: To evaluate financial controls.

• External Users:

  • Citizens: To evaluate the performance of the government.

  • Parliament (The Majlis): To monitor budget execution and legislative compliance.

  • Cabinet and the President: For decision-making and oversight.

  • Independent Auditors (Court of Audit): For formal auditing of accounts.

Key Differences Between Governmental and Commercial Accounting

• Reporting Goals: Commercial reports help decision-makers maximize profit. Governmental reports help users monitor legal compliance and budget execution.

• Financial Statements: Instead of a Profit and Loss statement, the government uses the Statement of Revenues and Expenditures or the Statement of Receipts and Payments and the Statement of Changes in Fund Balance.

• Independent Fund Accounting: In the government, separate "Funds" (Independent Accounts) are maintained to ensure specific resources are spent on specific purposes. A single agency may have multiple balance sheets.

• Recording Non-Current Assets:

  • Commercial: Assets expected to be used over several years are recorded as long-term assets.

  • Governmental: Such assets are often recorded as an expenditure at the time of purchase.

  • Example: Buying a car for $60,000,000$ rials:

    • Commercial: Vehicle Dr. $60,000,000$, Bank Cr. $60,000,000$.

    • Governmental: Current Year Expenditure Dr. $60,000,000$, Bank Cr. $60,000,000$.

• Accounting Bases: Commercial accounting strictly uses the Full Accrual Basis. Governmental accounting often uses the Modified Accrual Basis or Modified Cash Basis.

Theoretical Frameworks and GASB Statement 34

• Role of Theoretical Frameworks: They constitute a system of objectives and fundamentals used to create consistent standards and determine professional judgment boundaries.

• Historical Development (USA):

  • $1934$: National Committee on Municipal Accounting.

  • $1948$: National Committee on Governmental Accounting.

  • $1973$: National Council on Governmental Accounting.

  • $1984$: Governmental Accounting Standards Board (GASB) was formed under the Financial Accounting Foundation (FAF).

• Statement 34 Highlights: It introduced a new reporting model based on public accountability. It requires:

  • Management’s Discussion and Analysis (MD&A) before financial statements.

  • Government-wide Financial Statements: Statement of Net Assets and Statement of Activities.

  • Measurement Focus: Shifted from focusing only on current financial resources to also focusing on economic resources (long-term focus), which includes recording and depreciating capital assets.

• Dual Reporting in the US: Uses the economic resources focus and accrual basis for business-type activities and the current financial resources focus and modified accrual basis for governmental-type activities.

Standard-Setting Bodies in Iran

• Ministry of Economic Affairs and Finance: Plays a vital role in drafting governmental accounting and auditing instructions based on the General Accounting Law.

• Court of Audit (Divan Mohasabat): Established under Article $54$ of the Constitution, it monitors government spending and audits all accounts of ministries and state companies.

• Audit Organization (Sazman Hesabrasy): Per Article $7$ of its statutes, it is the official specialized authority for compiling accounting and auditing standards in the country.

Fundamental Principles of Governmental Accounting

• Principle of Separate Funds: Agencies must maintain a separate accounting unit for revenues and resources that must be spent on specific activities (e.g., General Fund, Revenue Fund).

• Principle of Budgetary Control: The accounting system must provide a basis for budgetary control. A statement comparing actual figures with budget figures must be prepared at year-end.

• Standard Classification: Common terms and classifications must be used throughout the budget and financial reports to allow for aggregation and oversight by the Treasury.

• Recognition of Expenditures: In the modified accrual basis, expenditures are recognized in the period the liability is incurred (if measurable), except for interest on long-term debt.

• Fixed Assets and Depreciation:

  • Fixed assets of commercial-type funds are recorded and depreciated within those funds.

  • Fixed assets of general government funds are recorded in the General Fixed Assets Account Group.

  • Depreciation is generally not recorded in governmental funds unless the accrual basis is strictly utilized.

Recognition Bases in Accounting

• Accrual Basis: Revenues are recognized when earned and expenses when incurred, regardless of cash flow.

• Cash Basis: Revenues are recognized when cash is received and expenses when cash is paid.

• Semi-Accrual Basis: Expenses are recorded on an accrual basis, but revenues are recorded on a cash basis.

• Modified Cash Basis: Revenues are recorded when received. Expenses are recorded only if two conditions are met: Commitment (delivery of goods/services) and Payment.

• Modified Accrual Basis: Expenses are recorded on an accrual basis. Revenues are recognized only if they are Measurable (definite amount) and Available (collectible within the current period or shortly after to pay current liabilities).

The 7 Stages of Government Expenditure (In Iran)

According to Article $52$ of the General Accounting Law, government spending must follow these steps:

1. Diagnosis (Tashkhis): Determining and selecting the goods and services needed for programs. Responsibility: Minister or Head of the Institution.

2. Credit Provision (Tamin-e-Etebar): Allocating part of the approved credit for a specific cost. Responsibility: Paymaster (Zihasab).

   • Entry: Uncommitted Credit Dr. / Reserve for Potential Commitments Cr.

3. Obilgation/Commitment (Ta-ahhod): Creating a debt for the government through the delivery of goods or performance of a service.

4. Verification (Tasjil): Determining the exact amount of debt based on valid documents (invoices, contracts).

5. Remittance (Havaleh): A written order issued by a manager to the Paymaster to pay the debt from the relevant credit.

   • Entry: Current Year Expenditure Dr. / Accounts Payable Cr.

   • Budgetary Entry: Reserve for Potential Commitments Dr. / Expended Credit Cr.

6. Financial Oversight: The Paymaster ensures the previous $5$ steps complied with the law before releasing funds.

7. Payment: Release of cash to the beneficiary through authorized bank accounts.

   • Entry: Accounts Payable Dr. / Bank Cr.

Types of Governmental Funds

• Governmental Funds:

  • General Fund: Records all financial activities not required to be in another fund.

  • Special Revenue Fund: Records revenues that are legally restricted for specific purposes.

  • Capital Projects Fund: Records resources used for the acquisition or construction of major capital facilities.

  • Debt Service Fund: Records resources for the payment of principal and interest on general long-term debt.

• Proprietary (Commercial-Type) Funds:

  • Enterprise Fund: For activities that provide goods or services to the general public for a fee (e.g., water/electricity utilities).

  • Internal Service Fund: For providing goods/services to other government departments on a cost-reimbursement basis.

• Fiduciary (Trust) Funds:

  • Expendable Trust Fund: Principal and interest can both be spent.

  • Non-Expendable Trust Fund: Only the income generated from the principal can be spent.

  • Pension Trust Fund: For employee retirement systems.

  • Agency Fund: For resources held by the government as an agent for others (e.g., tax collection for other entities).

Specific Accounting for the General Fund (The Treasury)

• Objective: Centralize all government revenues and manage public payments.

• Accounting Basis: Primarily follows a Full Cash Basis.

• Budgetary Entries:

  • Initial Budget: Estimated Revenues Dr. $1,000,000$, Approved Appropriations Cr. $960,000$, Unallocated Surplus Cr. $40,000$.

  • Budget Changes:

    • Budget Supplement (Motammem): Increases both revenue and appropriation.

    • Budget Reduction: Decreases both.

    • Budget Correction: Shifting funds between programs without changing the total.

• Credit Allocation (Takhsis): Giving permission to an agency to spend a portion of its budget after revenue is confirmed at the Treasury level.

• Imprest Funds:

  • Treasury Imprest: Money the Treasury receives from the Central Bank at the start of the year.

  • Accounting Imprest: Money the Treasury gives to agencies at the start of the year to facilitate payments before formal budget steps are finished. Must be settled by the end of the year.

Accounting for Operating (Salary) Funds

• Iranian Context: Known as the Current Expenditure Fund (pre-$2002$) or Operating Expense Fund.

• Article 63/64 Compliance: In Iran, unused operating credits must be returned to the Treasury by the end of Farvardin (the first month of the following year).

• Exemptions: Universities and research institutions are allowed to carry over unused funds to the next year.

• Accounting Entries for Personnel Costs:

  • Expenditure Dr. $700$, Bank Cr. $640$, Payable to Organizations (Insurance/Tax) Cr. $60$.

  • If using the Modified Cash Basis, the expenditure is only recognized when cash is paid to the insurance/tax bodies.

Capital Asset Acquisition (Development) Accounting

• Capital Assets: Defined widely to include strategic inventory and valuable items (antiques/art).

• Development Projects: Categorized into Profit-oriented vs. Non-profit (infrastructure).

• Contractor Payments:

  • Draft Payment (Advance): Maximum $25\%$ of the contract can be paid as an advance in installments ($8\%$ at site handover, $6.5\%$ at site equipment completion, $5.5\%$ after $30\%$ progress).

  • Progress Invoices (Surat-Vaziat): Contractors are paid based on work completed.

• Deductions from Contractor Payments:

  • $10\%$ Retention (Seporde-ye-Goshan-e-Anjam-e-Kar) for quality guarantee.

  • $5\%$ Tax.

  • $6.6\%$ Insurance ($1.6\%$ contractor share, $5\%$ employer share).

  • Amortization of the advance payment.

• Termination Stages:

  • Temporary Handover: Occurs when $97\%$ of work is done. Retention is half released.

  • Final Handover: Occurs after the guarantee period ends. Remaining retention is released.

Deposits and Pension Funds

• Deposit (Seporde) Fund: A fiduciary fund for holding money that doesn't belong to the government. Types include:

  • Tender deposits.

  • Judicial deposits (court-ordered holdings).

  • Utility deposits (water/electricity).

• Pension Fund: Government agencies deduct a percentage from employees' salaries ($9\%$ in Iran) and add a government share ($13.5\%$) totaling $22.5\%$ to pay retirees. All such transactions are handled through a separate trust fund account.