YOU NEED TO UNDERSTAND GOVERNMENT ACCOUNTING BEFORE YOU CAN ANALYSE THEIR FINANCIALS

This blog is primed for the many that I have come across who bemoan the difficulty of understanding public financial statements. Some of these are accountants. If professionals have difficulty understanding, the ordinary guys surely have no chance. As stakeholders, citizens should take a keen interest and pay attention to public spending. In a presidential system of government, such as US and Philippines, Congress has fiscal oversight. The Executive, ie the government, must present the budget to Congress, and Secretaries of each Department are grilled as to the nature of each spending head at Congressional hearings. In Singapore Parliament, budget time is a free speech event - the Minister of Finance is free to say whatever. Bean counting is a boring topic. The Minister is lucky to get a 10% eyes-wide open attendance in the hallowed chamber during his Budget Speech.

The unsung heroes are the guys that look after the biggest ledger in the land. It is a humongous job. The Accountant General's Dept is the steward of our public finances and they are doing a great job keeping up with technology and delivering timely reports. Theirs is not to question why, but to record where the money is coming from and going to. This blog is in a way a tribute to them. The feature image is taken from AGD website and if some observant readers feel it is AGD of another country, that is not intentional on my part.

The first point to grab is public accounting works on a cash basis. You won't find the traditional accrual items like Accounts Payable, Accounts Receiver, loans, advances etc. Of course separate records are maintained. Understanding the cashflows is key.

The second point is the AGD's ledgers include only all organs of the state and ministries. Statutory boards and corporations owned by them are excluded.

NOTE: The debits and credits are my way of explanation to provide a conceptual accounting overview. I have no details of exactly how the system works. It may well be no traditional 'T' accounts at all, just some forms and complex cost centre, revenue and expense codes.

Understanding the main Accounting heads:

The Statement of Assets and Liabilities (let's call it Balance Sheet for short) of the government is very simple.

ASSETS	LIABILITIES
Cash	Deposit Accounts
Investment	Main Fund :    Consolidated Fund
	Other Fund* : Development Fund
	Pension Fund
	Mederka Generation Fund
	GST Voucher Fund
	Edusave Endowment Fund
	Medical Endowment Fund
	Special Fund :Securities Fund

* There are 19 other funds in 2022. These 6 are just listed for illustration

There are just 2 main categories of assets -- Cash and Investments, and 2 main liabilities categories - Deposit Accounts and Funds Accounts.

Cash : Deposits with MAS is the main account. The government should have operating accounts with commercial banks (probably DBS). As deposits at commercial bank accounts build up, they are transferred to MAS account. When funds are required, commercial bank accounts are replenished by transfers from the MAS account.

The money coming into the government coffers can be grouped as :
(1) Operating revenue - taxes, excise duties, permits, licences, fees, fines, rental, etc
(2) Debt (spending) - SGS (infras) under SINGA (Significant Infrastructure Loan Act)
(3) Investment income (government's own portfolio -- nothing to do with GIC/Temasek)
(4) NIRC (Net Investment Return Contribution fro GIC, Temasek and MAS)
(5) Fiduciary money - money held in trust by government, such as deposits from statutory boards, money of bankruptcies, corporate liquidation, official assignees, GST output tax, etc.
(6) Debt (non-spending) - in the form of various government securities.

(1)-(4) are money that can be spent, (5)-(6) are not to be spent.

Receipts (1)-(5) go to Consolidated Fund, (6) goes to Securities Fund.

Entries on receipts:
Debit : Cash        Credit: Consolidated Fund (1-5)
Debit : Cash        Credit: Securities Fund (6)
On payments:
Debit : Relevant fund              Credit : Cash
Debit : Securities Fund            Credit : Cash
On investment of funds (to GIC/Temasek, invesment agent, or invested by government:
Debit : Investments         Credit : Cash

Investment : The government invests through GIC, Temasek, investment agencies, or by themselves. Some funds that are not meant to be spent are transferred to GIC/Temasek to invest. The government holds massive amount of cash meant to be disbursed by the various funds over a time plan. In the meantime, these are invested temporarily. The funds are parked in earning assets, mostly in government stocks. Returns from government investments are distributed to the relevant funds accordingly.

When the funds are invested or moved out to invest:
Debit : Investments        Credit: Cash

Deposit Accounts : These are various types of funds held in trust by the government. The bulk of these are cash belonging to Statutory Boards which are in access of their immediate needs. These are deposited with the government under a Centralised Liquidity Management programme. Deposit accounts are interest interest bearing deposits.

When funds are received for Stat Boards:
Debit : Cash        Credit: Deposit Accounts.
When funds are withdrawn:
Debit : Depoit Accounts        Credit : Cash.

Funds : Governments use fund accounting which is a system used to tracking the amount of cash assigned to different purposes and the usage of that cash. It's purpose is accountability, not profitability. A Fund Account is created for each specific purpose governed by a relevant legislation. Each fund accounts for its individual Income and Expenditure Statement. These statements are consolidated in a Government Income and Expenditure Statement. The 3 groupings of funds are my own arbitrary classification for the purpose of explanation here.

Main fund - Consolidated Fund : This fund has 3 main functions -
1. All receipts (which can be spent) are credited into this Consol Fund
2. All the funds appropriated to the various "Other Funds" are debited to the Consol Fund and credited to the relevant "Other Funds".
3. All money spent by the government (except securities) are debited to Consol Fund. Thus all operating expenses of the state organs are recorded in this fund. By the use of well-defined codes for all expense headings and cost centres, AGD can track each and every Ministry's expenditure in detail.
4. The consolidated government income and expenditure statement is extracted within this fund.

When money is received :
Debit : Cash          Credit: Consolidated Fund
When money is spent:
Debit : Consolidated Fund        Credit: Cash
When funds are appropriated to other funds:
Debit : Consolidated Fund        Credit: Relevant other funds

Other funds - Governments have all sorts of funds not related to the running of the state machinery. Some funds are one-off purpose, some long term and on-going purposes, such as development purposes. Fiduciary funds are common - to take care of pension funds, etc.

All these spending programmes have nothing to do with the day-to-day running of the government. They are reported under relevant funds for accountability purposes. Each of the funds will separately report how the money is spent each year and what is carried forward.

Unlike the budget which are spendings for each fiscal year, these funds have different timeline for disbursement depending on the specific programmes. It could be funded in one fiscal year and disbursed over several fiscal years. Development funds are of this nature.

Some funds are Endownment Funds, a few of them have endownments which have to be retained as principals. The funds are invested and only the earnings can be spent.

When money is allocated to these funds:
Debit : Consolidated Fund        Credit: Relevant other funds
When money is spent:
Debit : Relevant other funds        Credit: Cash

Special fund : Securities Fund
All receipts and payments regarding government securities are recorded in the Securities Fund. These are debts for which the proceeds cannot be spent. Thus the Securities Fund are segregated from Consol Fund. The cashflows do not course through the Consol Fund.

On receipt of funds:
Debit : Cash        Credit : Securities Fund
On payments :
Debit : Securities Fund        Credit : Cash

Note: The only securities not included in the Securities Fund are the SGS (Infras) issued under the SINGA (Significant Infrastructure Government Loan Act

The big picture of the government balance sheet :

The broad stroke picture I painted is simply this. The assets side represents all the money that the government has which consist of cash deposits at MAS (and possibly some commercial banks) and investments, some of which are with GIC, Temasek and other investment agents. The liabilities side represents (1) money which does not belong to the government (Deposit accounts), (2) programmes which the money has been committed (various other funds), (3) debt (Securities Fund) (4) Balance available for next fiscal year (Consolidated Fund).


In the follow-up blog I shall be discussing some of my observations of the Government Statement of Assets and Liabilities as at 31 Mar 2022. This blog is a prep to understanding the controversial points I shall be raising. That's coming up next.

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