How to present budget information for the public sector in MPSAS 24

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This article was first published in the April 2019 Malaysia edition of Accounting and Business magazine.

Even though the Malaysian Public Sector Accounting Standards (MPSAS) are very similar to their MFRS/IFRS counterparts, there a few standards in the MPSAS framework that are unique to the public sector. One such standard or area of financial reporting is the presentation of budget information for public sector entities, as set out in MPSAS 24, Presentation of Budget Information in Financial Statements, issued by the Accountant General’s Department in June 2013.

The spirit behind requiring public sector entities to present budget information is to ensure that they discharge their accountability obligations and enhance the transparency of their financial statements by demonstrating (a) compliance with the approved budget(s) for which they are held publicly accountable; and (b), where the budget(s) and the financial statements are prepared on the same basis, their financial performance in achieving the budgeted results.

Scope and applicability

MPSAS 24 applies to public sector entities, other than government business enterprises, which are required or elect to make their approved budget(s) publicly available. It is imperative to note that the requirement to present budget information in a public sector entity’s set of financial statements is not mandatory for all public sector entities. This standard does not require approved budgets to be made publicly available, nor does it require that the financial statements disclose information about, or make comparisons with, approved budgets that are not made publicly available.

An approved budget in the MPSAS context reflects the anticipated revenues or receipts expected to arise in the annual or multiyear budget period, based on current plans and the anticipated economic conditions during that budget period, and expenses or expenditures approved by a legislative body (the legislature or other relevant authority). It is not a forward estimate or a projection based on assumptions about future events and possible management actions that are not necessarily expected to take place.

A critical feature of approved budgets is that the authority to withdraw funds from the government treasury or similar body for agreed and identified purposes is provided by a higher legislative body (such as the Parliament or State Legislative Assembly) or other appropriate authority (such as a council). The approved budget establishes the expenditure authority for the specified items. The expenditure authority is generally considered the legal limit within which an entity must operate. In some jurisdictions, the approved budget for which the entity will be held accountable may be the original budget, and in others it may be the final budget.

Comparisons

A public sector entity shall present a comparison of the budget amounts for which it is held publicly accountable and actual amounts, either as a separate additional financial statement or as additional budget columns in the financial statements currently presented in accordance with MPSASs, though presenting it as a separate additional statement is a more common approach.

The comparison of budget and actual amounts sets out separately for each level of legislative oversight:

a) the original and final budget amounts

b) the actual amounts on a comparable basis

c) by way of note disclosure, an explanation of material differences between the budget for which the entity is held publicly accountable and actual amounts.

Original and final budget

The original budget is the initial approved budget for the budget period. Supplemental appropriations may be necessary where the original budget did not adequately envisage expenditure requirements arising from, for example, war or natural disasters. In addition, there may be a shortfall in budgeted revenues during the period, and internal transfers between budget heads or line items may be necessary to accommodate changes in funding priorities during the fiscal period. Consequently, the funds allotted to an entity or activity may need to be cut back from the amount originally appropriated for the period in order to maintain fiscal discipline. The final budget includes all such authorised changes or amendments. MPSAS 24 also uses the term ‘actual’ or ‘actual amount’ to describe the amounts that result from execution of the budget.

Material differences

The final budget includes all changes approved by legislative actions or other designated authority to revise the original budget. A public sector entity is required to include in the notes to the financial statements, or in a separate report issued before, in conjunction with, or at the same time as the financial statements, an explanation of changes between the original and final budget.

The explanation will include whether, for example, changes arise as a consequence of reallocations within the original budget parameters or as a consequence of other factors, such as changes in the overall budget parameters due to revised government policy. Such disclosures are often made in a management discussion and analysis or similar report on operations issued in conjunction with, but not as part of, the financial statements. Where disclosures are made in separate reports rather than in the financial statements, the notes to the financial statements will include a cross reference to the report.

Besides the differences in the budgets, explanation of material differences between actual and budget amounts must also be included in notes to the financial statements, unless included in other public reports or documents issued in conjunction with the financial statements and the notes to the financial statements identify the reports or documents in which the explanation can be found.

Comparable basis

All comparisons of budget and actual amounts must be presented on a comparable basis to the budget. An entity presents the comparison as additional budget columns in the primary financial statements only where the financial statements and the budget are prepared on a comparable basis. As such, if the budget is prepared on the cash basis and the financial statements are prepared on the accrual basis, no comparison as additional budget columns is necessary. If the financial statements and the budget were prepared on a comparable basis, additional columns can be added to the existing primary financial statements presented in accordance with MPSAS, denoting original and final budget amounts and, if the entity so chooses, differences between the budget and actual amounts, as depicted in Figure 1 (statement of financial performance for the year ended 31 December 20xx).

When the budget and financial statements are not prepared on a comparable basis, a separate statement of comparison of budget and actual amounts is presented. In this circumstance, the financial statements should clarify that the budget and the accounting bases differ, and the statement of comparison of budget and actual amounts is prepared on the budget basis, as shown in Figure 2 (statement of comparison of budget and actual amounts for the year ended 31 December 20xx. Note: The budget and the accounting basis are different. This statement is prepared on the budget basis).

Reconciliation

Where the financial statements and budget are not prepared on a comparable basis, the actual amounts presented on a comparable basis to the budget must be reconciled to the amounts presented in the financial statements. Reconciliation must be made for the following:

a) if the accrual basis is adopted for the budget, total revenues, total expenses and net cashflows from operating activities, investing activities and financing activities; or

b) if a basis other than the accrual basis is adopted for the budget, net cashflows from operating activities, investing activities and financing activities.

Differences can stem from the accounting basis, timing differences between the budget and the financial statements, and entity differences in the consolidated group. The reconciliation must be presented either in the comparison of budget and actual amounts or in the notes to the financial statements.

Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory.