Public

Sector
Accounting and
Finance

Compiled By Dauda Taofeeq

 Chapter One
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING

The term ―Public Sector‖ refers to all organizations

which are created, administered and financed by
Government, from the tax payers‟ money, on behalf
of the members of the public.
Public sector accounting is concerned with the
receipts, custody and disbursement and rendering of
stewardship on public funds.

OBJECTIVE OF PUBLIC SECTOR ACCOUNTING

 To provide the means by which actual performance may be
compared with the target set by the government.
 Ascertaining the legitimacy of transactions and their compliance
with the established norms, regulations and statutes.
 To evaluate the economy, efficiency and effectiveness with which
governance is carried.
 Highlighting the various sources of revenue receivable and the
expenditure to be incurred.
 Identifying the sources of funding capital projects.

THE CONSTITUTIONAL AND REGULATORY FRAMEWORK OF PUBLIC

SECTOR ACCOUNTING
 The Nigeria Constitution
 Audit Ordinance of 1956 or Act of 1956
 Financial Regulations
 Finance (Control & Management) Act of 1958, Cap 144, 1990
 Finance/Treasury Circulars
 Public Procurement Act, 2007
 Fiscal Responsibility Act, 2007
 Appropriation Acts

BASES OF ACCOUNTING IN PUBLIC SECTOR ACCOUNTING

CASH BASIS: It is the basis of accounting under which revenue is recorded
only when cash is received, and expenditure recognized only when cash is
paid, irrespective of the fact that the transactions might have occurred in the
previous accounting period. In other words, income is recognized as it is
received in the form of cash and expenditure is recognized as money is paid.
ADVANTAGES OF CASH BASIS
 It is very simple to understand and develop because it is based on the
mere recording of cash receipts and payments.
 It permits easy identification of those who authorize payments and
collect revenue.
 It saves time and is easy to operate.
DISADVANTAGES OF CASH BASIS
 It takes unrealistic view of financial transactions as only the settlement
of liabilities is recognized.
 Performance under this approach is poorly measured since recognition
is given to the use of limited cash in any service delivery.

ACCRUAL BASIS: Under this basis, revenue is recorded when earned and
expenditure acknowledged as liabilities when known or benefits received.
Accrual basis of accounting uses the notion of legal obligation to record
financial transactions. Once there is a legally binding contract for the receipt
of, or render of service, recognition will be given to the income or
expenditure arising out of the contract.
ADVANTAGES OF ACCRUAL BASIS
 It reveals an accurate picture of the state of financial affairs at the end
of the period.
 It could be used for both economic and investment decision-making as
all parameters for performance appraisal are available.
DISADVANTAGES OF ACCRUAL BASIS
 It is very difficult to understand, especially by Non-Accountants.
 It does not permit easy delegation of work in certain circumstances.

COMMITMENT BASIS: The accounting technique recognizes expenses as soon

as expenditure decisions are taken. It is a basis that records anticipated
expenditure evidenced by a contract or a purchase order. In public sector
financing, budgetary and accounting systems are closely related to the
commitment basis.

ADVANTAGES OF COMMITMENT BASIS

 Adjustments occurring when actual expenditure has been obtained
does not affect the final accounts.
 It is an aid to financial control. A commitment is regarded as a charge
which has been made on a budget provision.

DISADVANTAGES OF COMMITMENT BASIS

 The system involves extra work. Actual figures have to be substituted
for the commitment provisions to finally determine the running
balances under the sub-heads of expenditure.
 Over-expenditure is more under commitment basis in the expectation
that Government may finally release fund to settle the legal
obligations.

MODIFIED ACCRUAL BASIS: This is the basis under which revenue is

recorded when received and not earned while expenditure is recorded once
its liability is incurred. It means that cash basis is used for recording revenue
while accrual basis is adopted for expenditure.
 MODIFIED CASH BASIS: The modified cash accounting technique is
appreciated where the accounting books of the government institutions are
not closed at the end of a year, but are open for some period into the
beginning of the following year. Under this basis, the books of accounts are
left open for a maximum of three months after the end of the year, so as to
capture substantial amount of income or expenses relating to the year just
ended.

Users of Public Sector Accounting Information

Internal Users External Users

 The executive such as President,  The National Assembly;
Governors and Chairmen Local  The Members of the public;
Government Councils;  Foreign countries;
 The Federal Ministers and State  Foreign Financial Institutions such
Commissioners; as IMF
 Top administrators of  Creditors, both local and foreign;
Government departments e.g  Researchers; etc.
Permanent secretaries etc
 The organized labour union in
public sector etc.

Comparison between non-profit oriented organization (public sector) and profit

oriented organizations (private sector)
Basis Non-profit oriented Profit oriented
(public sector) (private sector)
Profit The main objective is to provide The main objective is to
adequate welfare to the people at maximize profit.
reasonable costs.
Revenue Revenue is derived from the Obtain their income principally
public in the form of taxation, from sales of goods and services.
fines, fees, etc.
Legal formation They are created by Acts of the Registered with Corporate Affairs
legislature i.e National / State Commission
Assemblies
Budget The public is more interested in The public is more interested in
the annual budget than the the annual reports than the
annual report. annual budgets.
Accounting They strictly operate on IPSAS They strictly operate on IFRS.
cash or accrual.
 Chapter Two
TOWARDS NATIONAL FISCAL RESPONSIBILITY
FISCAL RESPONSIBILITY ACT, 2007 (As amended by Fiscal Responsibility Act,
2010): The Act was enacted on the 30th of July, 2007, by the National Assembly
of the Federal Republic of Nigeria.

FUNCTIONS OF FISCAL THE RESPONSIBILITY COMMISSION

 To compel any person or government institution to disclose
information relating to public revenue and expenditure.
 To cause an investigation into whether any person has violated any
provisions of the Acts.
 To forward a report of any investigation against any person to the
Attorney-General of the Federation for possible prosecution.
 To monitor and enforce the provisions of this Act.
 To undertake fiscal and financial studies, analysis and disseminate
the results to the general public.

COMPOSTION OF THE COMMISSION

a) A Chairman, who shall be the Chief Executive and Accounting Officer of
the Commission.
b) One member from and representing
i. The organised private sector
ii. Civil society – engaged in cases relating to probity, transparency and
good governance.
iii. The organized labour.
iv. Federal Ministry of Finance – of a level not below the rank of a
Director.
v. Each geo-political zones of the country namely:- North Central, North
East, North West, South East, South South and South West.

QUALIFICATIONS AND APPOINTMENTS OF MEMBERS TO THE COMMISSION

 All members of the Commission shall be persons of unquestionable
integrity
 All members shall possess qualifications of not less than 10 years cognate
post-qualification experience.
 The Chairman and other members of the Commission, other than the ex-
officio members, shall be appointed by the President, subject to
confirmation by the Senate.
 The Chairman and members of the Commission representing the six geo-
political zones shall be full-time members.

TENURE OF THE MEMBERS OF THE COMMISSION: The Chairman and

members of the Commission shall hold office for a single term of six years.

POWERS OF THE COMMISISON

1. Power to provide general policy guidelines for the implementation of the
functions of the Commission
2. Power to supervise the implementation of the policies of the Commission
3. Power to appoint employees required for the Commission.
4. Power to determine and approve the terms and conditions of service,
including the disciplinary measures for the employees of the Commission.
5. Power to fix the remuneration, allowances and benefits of the employees of
the Commission.
6. Power to regulate its proceedings in respect of meetings, notices and keeping
of minutes as may be determined by the Commission.

CESSATION TO HOLD OFFICE BY MEMBERS OF THE COMMISSION

Irrespective of the provisions of section 5 (2) of the act, a member of the
Commission shall cease to hold office if:
a) he comes bankrupt
b) He reaches an official compromise with his creditors
c) He is convicted of a felony or any offence involving dishonesty, corruption
or fraud
d) He is incapable of carrying out the functions of the Commission either by
reason of ill-health, insanity or physical impairment
e) He is found guilty of serious misconduct in his line of duties
f) He resigns his appointment by a notice written by him
Medium-Term Expenditure Framework (MTEF)
MTEF is a medium term high level strategic plan of the government for over
three financial years, which forms the basis of annual budgeting taking into
consideration the law requirement that spending should not exceed revenue by
more than 3% of GDP.
It is also enshrined in the Part II, Section 11-17 of the Fiscal Responsibility Act
FRA), 2007 which mandates the Federal Government to develop a Fiscal
Strategy Paper (FSP) within an MTEF for the next three years.

Contents of MTEF
Contents of the medium–term expenditure framework (MTEF) are as follows:
1. A macro–economic framework setting out the three financial years, the
underlying assumptions and an evaluation and analysis of the macro –
economic.
2. An expenditure and revenue framework which will set out:
 Estimates of aggregate revenue for the federation for each financial year,
based on the pre – determined commodity reference price adopted and
tax revenue projections;
 Aggregate expenditure for each of the next three financial years;
 Minimum capital expenditure projection for the federation for each of the
next three financial years;
 Aggregate tax expenditure projection for the federation for each of the
next three financial years.
3. A consolidated debt statement indicating and describing the fiscal significance
of the debt liability and measures to reduce the liability.
4. A statement of the nature and fiscal significance of contingent liabilities and
quasi – fiscal activities and measures to offset the crystallization of such
liabilities.
5. Fiscal strategy document setting out:
 Federal Government‘s medium – term financial objectives.
 The policies of the Federal Government for the medium term relating to
taxation, recurrent expenditure, borrowings, lending and investment and
other liabilities;
 The strategies, economic, social and developmental priorities of
government for the next three financial years;
 An explanation of the financial objectives, strategic, economic, social and
developmental priorities and fiscal measures.

Objectives of MTEF
a) To improve macroeconomic balance, including fiscal discipline through
good estimates of the available resource envelope, which are then used to
make budgets that fit squarely within the envelope;
 b) To improve inter-and-intra-sectoral resource allocation by effectively
prioritizing all expenditure and dedicating resources only to the most
important ones;
c) To increase greater budget predictability as a result of commitment to
more credible sectoral budget ceilings;
d) To increase greater political accountability for expenditure outcomes
through legitimate decision making etc.
Annual budgets and the Medium-Term Expenditure Framework
The medium-term expenditure framework shall be the basis for the preparation
of the estimates of revenue and expenditure to be presented to the National
Assembly.
The annual budget must be accompanied by:
a) A copy of the underlying revenue and expenditure profile for the next two
years;
b) A report setting out actual and budgeted revenue and expenditure with a
detailed analysis of the performance of the budget for the 18 months up to
June of the preceding financial year;
c) A fiscal target broken down into monthly collection targets;
d) Measures of cost, cost control and evaluation of result of programmes
financed with budgetary resources;
e) A fiscal target document derived from the underlying medium-term
expenditure framework setting out the following targets for the relevant
financial year:
i. Target inflation rate
ii. Target fiscal account balances
iii. Any other development targets deemed appropriate
f) A fiscal risk document evaluating the fiscal and other related risks to the
annual budget and specifying measures to be taken to offset the occurance of
such risks

Preparation of the Medium-Term Expenditure Framework

The Minister of Finance will be responsible for preparing the medium-term
expenditure framework.
The consultation should be open to the public, the press, the citizens,
organizations, group of citizens, etc.
The Minister shall seek inputs from the following organizations:
i. National Planning Commission
ii. Joint Planning Commission
iii. National Commission on Development Planning
iv. National Economic Commission
v. National Assembly
vi. Central Bank of Nigeria
vii. National Bureau of Statistics
viii. Revenue Mobilization Allocation and Fiscal Commission
The Minister shall before the end of the second quarter of each financial year,
present the medium-term expenditure framework to the Federal Executive
Council for consideration and endorsement.
Risks to MTEF
 Global Development- Fragile Economic Recovery and the Emergence of New Political
Risks.
 Persistence of Oil Price Decline – Low oil prices expected to remain in the medium
term.
 Oil Production and Oil Sector Management – Oil production be deviled by crude oil
theft and oil pipeline vandalism.
 Non- Oil Revenue Risks- Due to low remittance by Government’s Owned. Enterprises
into Treasury due to lack of Transparency e. g Operating Surplus.
 Chapter Three
TRANSPARENCY AND ACCOUNTABILITY IN THE PUBLIC SECTOR

Accountability means the ability of the public officials to be

answerable for their behavior and responsive to the entity
from which they derive their authority. Also, Accountability
is an obligation to answer for the execution of one‘s
assigned responsibilities. It is the requirement to provide
explanation about the stewardship of public money and how
this money has been used.

Accountability comprises two distinct components:

Rendering of accounts: This is a process of given details and accurate
information to the public on the common resources entrusted on the public
officials. It is by rendering of accounts that the information about the behaviour
of a public organization can be obtained. This means that without rendering of
accounts, there can be no accountability.
Holding to accounts: This involves the exercise of judgment and power over
public officials. Holding to accounts allow the citizens to question the report
presented by the public officials. Public accountability can be achieved only if
those who receive the accounts have power and ability to take actions on the
basis of those accounts.

FISCAL TRANSPARENCY
Fiscal transparency refers to the publication of information on how governments
raise fund, spend and manage public resources. Also, this is the aspect of
accountability which requires government to carry out all aspects of budgeting
responsibilities with openness, trust, basic values and ethical standards so that it
will have nothing to hide from public. Where a government has something to
hide, public reporting is more likely to be unreliable and less comprehensive in
order to hide material facts.

IMF CODE OF GOOD PRACTICES AND FISCAL TRANSPARENCY

The IMF stipulates a number of codes of good practices and transparency. These
include:
( a ) Clarity of Roles and Responsibilities: The government sector should be
separated from the rest of the public sector and from the rest of the economy.
Also policy and management roles within the public sector should be clearly
stated and publicly disclosed.
(b) Open Budget Process: There should be clear procedures for budget
execution, monitoring and reporting. The budget preparation should be guided
by well-designed macroeconomic and fiscal policy objectives.
(c) Public Availability of Information: The public should be provided with
comprehensive information on past, current and projected fiscal activity on
major fiscal risks. The central government should publish information on the
level and composition of its debts and financial assets, significant non-debt
liabilities and natural resource assets. Fiscal information should be presented in
a way that facilitates policy analysis and promotes accountability.
(d) Assurances of Integrity:
(i) Fiscal data should meet accepted data quality standards and budget forecasts
and updates should reflect recent revenue and expenditure trends, underline
macroeconomic development.
(ii) Data in fiscal reports should be internally consistent and reconciled with
relevant data from other sources. Major revisions to historical fiscal data and any
changes to data classification should be explained.
(iii) Ethical standards of behaviour for public servants should be clear and made
public.

CONDITIONS THAT FACILITATE THE PROMOTION OF PUBLIC ACCOUNTABILITY

In addition to the two conditions of rendering of accounts and holding to
account, earlier discussed, the following conditions will also facilitate the
promotion of public accountability.
 Existence of democratic institutions that allow for changes in leadership
through free and fair elections. The assumption that public accountability will
be enhanced by a civilian government replacing a military government will
remain a mirage as long as the leadership can always ‗dance‘ to the
legislators ‗tunes‘ coupled with the ability to rig elections unabated. And as
such, public accountability can never be enhanced.
 The existence of leadership that genuinely believes in and committed to the
notion of public accountability and will therefore ensure that the laws to
safeguard public fund are enforced irrespective of the might of the public
officer concerned.
 Public accountability needs the presence of active investigative media that
will help to keep the leadership on their toes
 Public accountability will be enhanced if the generality of the populace do not
believe that embezzlement of public funds is parts of the ―political manifesto‖
which the political leaders must achieve while in office at the detriment of the
original manifesto.
 Urgently address the issue of poverty through poverty reduction targeted
government expenditures. The impoverished and unemployed persons that
rely solely on political leaders for survival are more likely to view
accountability of political leaders as ability to provide for their needs
irrespective of the source of the money.

Transparency International
The mission of Transparency International is to stop corruption and promote
transparency, accountability and integrity at all levels and across all sectors,
while the vision is a world in which government, politics, business, civil society
and the daily lives of people are free of corruption. The core values are:
transparency, accountability, integrity, solidarity, courage, justice and
democracy.
Achievement of Transparency International
 The creation of international anti-corruption conventions;
 The prosecution of corrupt leaders and seizures of their illicitly gained
riches;
 National elections won and lost on tackling corruption; and
 Companies held accountable for their behavior both at home and abroad.
 Chapter Four
FINANCIAL RESPONSIBILITIES OF PUBLIC SECTOR OFFICERS
ACCOUNTANT-GENERAL OF THE FEDERATION (AGF)
The Financial Regulation No. 107 of January, 2009, defines the Accountant-
General of the Federation as ―The Chief Accounting Officer of the receipts and
payments of the government of the Federation. He is saddled with the
responsibility of general supervision of the accounts of all ministries, extra-
ministerial departments and the preparation of annual financial statements of
the nation as any be required by the Honourable Minister of Finance.

POWERS/ DUTIES OF THE ACCOUNTANT- GENERAL OF THE FEDERATION

According to Government Financial Regulations 106 (2009 Edition), the
Accountant-General of the Federation has the following duties:
 Power of access to books and records of all Ministries at any reasonable
time.
 Power to request for information and explanation necessary for his duties.
 Power to carry out special/ad-hoc investigations in any Ministry.

APPOINTMENT OF THE ACCOUNTANT-GENERAL OF THE FEDERATION

He is appointed by the President, on the recommendation of the Federal Civil
Service Commission.

FUNCTIONS OF THE ACCOUNTANT-GENERAL OF THE FEDERATION

The functions of the Accountant-General of the federation as contained in the
Financial Regulations include:
 serve as the Chief Accounting Officer for the receipts and payments of the
government of the federation;
 supervising the accounts of Federal Government, Ministries and Extra-
Ministerial Departments;
 collate, prepare and publish statutory financial statements of the federal
government and any other statements of accounts required by the
Minister of Finance;
 Investigating cases of fraud, loss of funds, assets and other malpractices
in Federal Ministries and other public agencies;
 Manage federal government investment;
 Maintain and operate the accounts of the consolidated revenue fund,
development fund, contingencies fund and other public funds and provide
cash backing for the operations of the Federal Government;
 Maintain and operate the Federation Account etc.

THE AUDITOR-GENERAL FOR THE FEDERATION (AUGF)

The Office of the auditor-General for the Federation is a separate and
independent entity whose existence, powers, duties and responsibilities are
provided for under section 85 of the Constitution of the Federal Republic of
Nigeria 1999.
He is given free hand to examine the accounts in such a manner as he may
deem fit. At the end of the audit, he is expected to write a report, stating
whether in his opinion:
i. The accounts have been properly kept.
ii. All public funds have been fully accounted for, and the rules and
procedures applied are sufficient to secure effective check on the
assessment, collection and proper allocation of revenue.
iii. Monies have been expended for the purposes for which they were
appropriated and the expenditure have been made as authorised.
iv. Essential records are maintained, and the rules and procedures applied
are sufficient to safeguard public property and funds.

APPOINTMENT AND REMOVAL OF AUDITOR-GENERAL FOR THE FEDERATION

The appointment and removal of the Auditor - General for the Federation is
legally recognised in S.86 of the 1999 Constitution of the Federal Republic of
Nigeria. That is, he/she is:
 appointed by Mr. President, subject to confirmation by the National
Assembly;
 the above appointment is based on the recommendation of the Federal
Civil Service Commission;
 once appointed, he/she cannot be removed from office, except where
he/she can no longer perform the functions of the office due to ill-health,
death, gross misconduct or where the terms of his/her office has expired
(if he/she has served for 35 years or has attained the age of 60 years,
whichever is earlier).

POWERS OF THE AUDITOR- GENERAL FOR THE FEDERATION

In accordance with Government Regulations, the Auditor-General for the
Federation has the following powers:
a) Power of access to books and records of all Ministries and Extra-Ministerial
Departments, at reasonable times.
b) Power to request for information and explanations necessary for his
duties.
c) Power to carry out special/ad-hoc investigations in any Ministry and Extra-
Ministerial Department.

FUNCTIONS OF AUDITOR GENERAL FOR FEDERATION

(i) According to Government Financial Regulations 109 (2009 Edition) the
Auditor-General for the Federation shall carry out the following statutory
functions:
 Financial Audit in accordance with extant laws in order to determine
whether government accounts have been satisfactorily and faithfully kept.
 Appropriation Audit- to ensure that funds are expended as appropriated
by the National Assembly.
 Financial Control Audit – to ensure that laid down procedures are being
observed in tendering, contracts and storekeeping with a view to
preventing waste, pilferage and extravagance.
 Value-for-Money (Performance) Audit – to ascertain the level of economy,
efficiency and effectiveness derived from government projects and
programmes.

(ii) The scope of work of the Auditor-General include:

 audit of the books, accounts and records of federal ministries, extra-
ministerial offices and other arms of government;
 vetting, commenting and certifying audited accounts of all Parastatals and
government statutory corporations in accordance with the Constitution of
the Federation;
 audit of the accounts of federal government establishments located in all
states of the federation including all Area Councils in the Federal Capital
Territory, Abuja;
 audit of the Accountant-General‘s Annual Financial Statements;
 auditing and certifying the Federation Account;
 deliberation, verification and reporting on reported cases of loss of funds,
stores, plants and equipment as stipulated in the Financial Regulations;
  pre and post auditing of the payment of pensions and gratuities of the
retired military and civilian personnel;
 periodic checks of all Government Statutory Corporations, Commissions,
Authorities, Agencies, including all persons and bodies established by an
Act of the National Assembly; and
 revenue audit of all government institutions.

(iii) Section 85(2) of the Constitution of the Federation Republic of Nigeria 1999,
provides that the Public accounts of the Federation and of all Offices and Courts
of the federation shall be audited and reported on by the auditor-General who
shall submit his report to the National Assembly.

INDEPENDENCE OF THE AUDITOR-GENERAL

The constitutional provisions which insulate the Auditor-General from being
compromised are:
 S. 85(6): In the exercise of his constitutional functions, the Auditor-
General shall not be subject to the direction or control of any other
authority or person.
 S 87(2): The Auditor-General shall not be removed from office before his
retiring age as may be prescribed by law, except for inability to perform
the functions of his office or for misconduct.
 S 84(4): The remuneration of the Auditor-General shall be drawn from
the Consolidated Revenue Fund of the Federation.
 S 84 (3): His remuneration and salaries as well as conditions of service
other than allowances, shall not be altered to his detriment after his
appointment.

ACCOUNTING OFFICERS
In accordance with Government Financial Regulations, Accounting Officers are
the Permanent Secretaries of the Ministries and Heads of Extra-Ministerial
Departments. They are saddled with the responsibility of the day-to-day financial
affairs of the Ministries and Extra-Ministerial Departments.

FUNCTIONS OF AN ACCOUNTING OFFICER

The functions of an Accounting Officer include the following:
 ensuring that proper budgetary and accounting systems are established
and maintained to enhance internal control, accountability and
transparency;
 to ensure that proper books of accounts and system as specified by the
Minister of Finance, are kept;
 to ensure that all revenue accruable to his Ministry are collected and
accounted for as and when due;
 to ensure that there is provision for effective security system over all
government funds;
 to install adequate preventive measures against frauds and
misappropriation of funds etc.

In compliance with their special role under the Public Procurement Act, all
accounting officers of ministries, extra – ministerial offices and other arms of
government are hereby charged with the following responsibilities.
They shall:
a) preside over the activities of their Tenders Boards for the proper planning and
evaluation of tenders and execution of procurements;
b) ensure that adequate appropriation is available for procurements in their
annual budget;
c) integrate their entity‘s procurement expenditure into its yearly budget
 d) ensure the establishment of a procurement planning committee over whose
activities they shall preside;
e) constitute a procurement evaluation committee for the efficient evaluation of
tenders;
f) constitute a Procurement Committee;
g) render annual returns of procurement records to the Bureau of Public
Procurement etc.

THE SUB-ACCOUNTING OFFICER

This is an officer entrusted with the receipts, custody and disbursements of
public funds. He is required to maintain a recognised cashbook together with
such other books of accounts as may be required by the Accountant-General.
The transactions recorded in his cash book are included in the financial
statements presented by the Accountant-General.
Example includes Sub - Treasurer of the Federation, Federal Pay Officer (FPO),
Police Pay Officer (PPO), Custom Area Pay Officer(CAPO), Director of Finance
and Accounts(DFA), etc.

FUNCTIONS OF THE SUB-ACCOUNTING OFFICER

According to Government Regulations, the functions of the Sub-Accounting
Officer are as follows:
o Ensuring that the proper system of accounts as prescribed by the
Accountant-General is established.
o Exercising supervision over the receipts of public revenue and ensuring
prompt collection.
o Promptly bringing into account, under the proper heads and sub-heads of
the estimates or other approved classifications, all receipts, whether revenue
or otherwise.
o Ensuring that proper provision is made for safe keeping of public funds,
securities, stamps, receipts, tickets, licences and other valuable documents.
o Exercising supervision over all officers under his authority who are entrusted
with the receipts and expenditure of public funds and taking precautions by
putting in place efficient checks against the occurrence of fraud,
embezzlement and carelessness.
o Supervising the expenditure of Government and ensuring that no payment is
made without proper authorisation.
o Promptly charging in his accounts under proper Heads and Sub-Heads all
disbursements.
o Promptly preparing such financial statements as are required by law or the
Minister of Finance.

TREASURY CASH BOOK

The treasury cash book is a permanent record of accounts which is used to
record all receipts, revenue and payments made by an organization.
One of the main functions of Sub - Accounting Officer is the maintenance of
treasury cash book, which is expressly stated in FR 201, that a Sub - Accounting
Officer should keep a treasury cash book.

TREASURY CASH BOOK

TRV From Head Treasur Gross Cash Bank Treas To Hea Paye Cheq Gross Deducti Bank
NO/Date Whom & y ury wh d e ue amoun on or or
received Sub- Receipt PV om & bank NO t or cash Net
Head s NO Pai Sub Total
No d -
Hea
d
N N N N N N
REVENUE COLLECTOR
This is an officer, apart from a Sub-Accounting Officer, who keeps official
receipts and collects specified forms of revenue on behalf of the Government. He
is expected to keep a cash book. The Revenue Collector must not expend money
out of his collection. He, therefore, has to account for the collections received
intact.

FUNCTIONS OF THE REVENUE COLLECTOR

a) Exercising supervision over the receipt of public revenue and ensuring their
prompt lodgement into the banks.
b) Promptly reflecting in the accounts, under the proper Heads and Subheads of
the estimates, all monies collected by him on behalf of Government.
c) Seeing that proper provision is made for the custody of public funds and
securities.
d) Supervision of all the officers under his authority who are entrusted with the
receipts, custody and disbursement of public funds.
e) Maintenance of efficient internal checks against the occurrence of
malpractices.
f) He should ensure that adequate, up-to-date, accurate and reliable accounting
records are kept.
g) He should ensure that the cash limit balance that should be in his possession
is not exceeded.

FORMAT OF REVENUE COLLECTOR‘S CASH BOOK

Date Revenue Classification From Amount Date Treasury Amount
receipts Heads/sub- whom receipts
NO head received NO
₦ ₦

IMPREST HOLDER
According to Government Regulation, this is an officer other than a Sub-
Accounting Officer, who is charged with the disbursement of public money whose
vouchers cannot be presented immediately to a Sub-Accounting Officer. He has
to keep an Imprest Cash Book.

WHAT IS AN IMPREST?
An imprest is defined as a small amount of money set aside to meet petty cash
payments, the vouchers of which cannot be presented to a Sub-Accounting
Officer immediately. An imprest holder is therefore a petty cashier who handles
such float of money and keeps necessary records for restoration to the earlier
amount granted, at the appropriate time.

TYPES OF IMPREST
There are two types of imprest, namely:
 Standing Imprest: This imprest is operated from the commencement to the
end of a financial year (1 January to 31 December of each year). On the last
working day of the year, an account is rendered and all unspent balances
lapse.
 Special Imprest: This imprest is operated from the commencement of a
financial year until the objectives for which it is set up have been achieved.
Upon the attainment of such objectives, an account will be rendered and all
unspent balances shall lapse.

CONDITIONS FOR OPERATING AN IMPREST

(a) Any Ministry which intends to operate an imprest has to apply in writing to
the Accountant-General of the Federation, stating the amount and purpose for
which it is required.
(b) The Accountant-General of the Federation and the Accounting Officer of the
Ministry or Extra - Ministerial Department will issue imprest after the Minister of
Finance has conveyed the authority in the Annual General Imprest Warrant.

FUNCTIONS OF IMPREST HOLDERS

I. See that proper provision is made for the safe-keeping of public moneys,
securities, e.t.c
II. Promptly charge in his account under proper heads and sub-heads, all
disbursement made by him.
III. Check all cash and stamps in his care to verify the amounts with the
balances shown in the cashbook or stamp register.
IV. See that all books are correctly posted up to date.

OFFICER CONTROLLING EXPENDITURE

This is an officer in charge of the various vote-heads of each Ministry or Extra-
Ministerial Department, saddled with the responsibility of monitoring
Government expenditure and ensuring that there is no extra-budgetary
spending.
FUNCTIONS OF OFFICER CONTROLLING EXPENDITURE
1. Supervision of Government expenditure and ensuring that no payment is
made without proper authority.
2. Promptly charging in his account under proper Heads and Sub-heads all
disbursements.
3. Ensuring that all books are correctly posted and kept up to date.
4. Producing when required by the Accountant-General and the Auditor-
General, all cash, stamps, etc., in his custody.
5. Ensuring that funds are available under the appropriate Head and Subheads,
to meet payments of specific vouchers.
6. Effective monitoring of Government expenditure etc.

VOTE BOOK OR DEPARTMENTAL VOTE EXPENDITURE ALLOCATION BOOK

(DVEAB)
A vote book is a memorandum accounts book used for monitoring Government
expenditure and ensuring that there is no extra-budgetary spending. Which
means a vote book is an account book which is used to record and monitor
expenditure in the public sector. It is the duty of every officer controlling
expenditure to keep a vote book.

REASONS FOR KEEPING A VOTE BOOK

(a) For effective monitoring of Government expenditure.
(b) To show uncommitted balance at a glance.
(c) To highlight Government‘s creditors or liabilities.
(d) To ensure that funds are available in the appropriate Heads and Subheads
to meet payments due.
(e) To ensure that there is no extra-budgetary spending.

LAYOUT OF VOTE BOOK

 Head_______________________ Vote Book Authorized Appropriation:
Sub-head___________________ AGW________________________
Service_____________________
AIE_________________________
OTHERS_____________________ TOTAL______________________
EXPENDITURE LIABILITY
1 2 3 4 5 6 7 8 9 10 11 12 13 14 1
line Date P.V Particular Payment Cumm. Balance Liability Liability Liability Outstanding Remarks Uncom line li
NO payment reference incurred clear Liability mitted
Bal.

DEFINITION OF TERMS
Below-the-line accounts: These are the accounts created and controlled by the
Accountant-General of the Federation, of which at the time of preparation of the
budget, the exact amount of income receivable and expenditure incurable cannot
be reasonably ascertained. The expenditure under the accounts is not budgeted
for in the estimates. E.g Touring advance, motor vehicle advance, housing loan,
salary advance, and deposits. The term also includes remittances and cash
transfers in respect of the Nigerian Army, Police and Para-Military Organisations.

Above-the-line accounts: These are the expenditures budgeted for in the

estimate. At the time of preparation of the budget they can reasonably be
ascertained as to the exact amount of income receivable and expenditure
incurable. Examples of costs which may be budgeted for are salaries and
overhead expenses. Revenue items anticipated include collections for customs
and excise duties.

Federal pay officer: This is an officer who is in charge of a Federal Pay Office in
the State. He performs the same functions as those of a Sub-Accounting Officer.
However, although the Sub-Accounting Officer is at the headquarters of each
Ministry, the Federal Pay Officer handles the processing of all financial
transactions between the Federal and State Governments, the Local Government
Councils and all branches of the Federal Government Ministries in the States
wherever located.

Token vote: It is a notional provision for a head or sub-head of an expenditure

or revenue in an estimate. ―Token vote‖ is often represented by the symbol ‗ioe‘.
It is a reminder to provide for the activity function as soon as possible.

Account current: This is the balance on account between two or more persons
(principal and his agent), showing what is due from one person to another.
Account currents are often used to take care of transactions between the Federal
and State government and their agencies.

Children‘s separation domicile allowance (SDR): This is an allowance payable if

an officer is separated from his children as a result of the following
developments:
 If he is an expatriate officer; and
 Where an officer is being posted to serve overseas.
 Chapter Five
SOURCES OF GOVERNMENT REVENUE
Government revenue refers to the income generated by the government through
various incomes inside and outside the particular government. This means
Government revenues refer to all receipts the government gets, including taxes,
custom duties, fees, fines, sales of national assets, revenue from state-owned
enterprises, capital revenues and foreign aid.

REVENUE COLLECTION AGENCIES IN NIGERIA

Nigerian National Petroleum Corporation (NNPC): NNPC was
established on April 1, 1977 as a merger of the Nigerian National Oil Corporation
and the Federal Ministry of Petroleum and Resources.
NNPC has sole responsibility for upstream and downstream developments, and is
also charged with regulating and supervising the oil industry on behalf of the
Nigerian Government.
In 1988, the corporation was commercialized and broken into eleven (11)
strategic business units, covering the entire spectrum of oil industry operations;
exploration and production; gas development; refining; distribution;
petrochemicals; engineering and commercial investments.

Federal Inland Revenue Service (FIRS): Section 1 (1) of CITA vested

the administration of the taxation of profit of incorporated companies to FIRS
which is the operational arm of FBIR. However, Federal Inland Revenue Service
(Establishment) Act No. 13 of 2007 formally established the Federal Inland
Revenue Service. The same Act also established the Federal Inland Revenue
Service Board to have overall supervision of the Service. This Board replaced the
Federal Board of Inland Revenue.
The FIRS is to control and administer the different taxes (Companies Income Tax
Act, Petroleum Profits Tax Act, and Value Added Tax Act; Personal Income Tax
Act in respect of residents of the Federal Capital Territory, members of Nigeria
Police Force, members of Armed Forces of Nigeria as well as staff of ministry of
foreign affairs and non-residents; and Capital Gains Tax Act and Stamp Duty Act
in respect of residents of the Federal capital territory, corporate bodies and non-
residents) and laws specified in the First Schedule or other laws made from time
to time by the National Assembly or other regulations made there under by the
Government of the Federation and to account for all taxes collected.

Nigeria Customs Service (NCS): As its coming into being in 1891, Nigeria
Customs Service was saddled with the responsibilities of revenue collection,
accounting for same and anti-smuggling activities. The Nigeria Customs Service
is the second highest revenue source after crude oil. The Nigeria Customs
Service statutory functions can be broadly classified into two main categories
namely, core and other functions. The core functions include:

 Collection of Revenue i.e. Import and Excise Duties and Accounting for the
revenues collected
 Prevention and suppression of smuggling. Other functions are:

 Implementation of Government Fiscal Measures

 Generation of statistical data for planning purpose
 Trade Facilitation
 Implementation of bilateral and multilateral agreements entered into by
government
 Collection of levies and charges e.t.c
 SOURCES AND CL ASSIFICATIONS OF GOVERNMENT REVENUE IN
NIGERIA
The Federal Government derives its revenue from different sources, kept in the
Consolidated Revenue Fund. Prior to the 1989 budget, the Federal Government
derived its revenue through the following Heads:
Head 1: Direct Taxes.
Head 2: Indirect Taxes.
Head 3: Mining.
Head 6: Direct Allocation.
Head 7: Direct Taxes (PAYE).
Head 8: Licences and Land Revenue.
Head 9: Mining (Solid Minerals).
Head 10: Fees.
Head 11: Earnings and Sales.
Head 12: Rent of Government Property.
Head 13: Interests and Repayments (General).
Head 14: Interests and Repayments (State Government).
Head 15: Reimbursements.
Head 16: Armed Forces.
Head 17: Miscellaneous.

The above classification was modified in 1994 fiscal year, as follows:

(a) Federation Account Revenue Heads;
(b) Value-Added Tax (VAT), and
(c) Federal Government Account Revenue Heads.

FEDERATION ACCOUNT REVENUE HEADS

The Federation Account is one into which shall be paid all revenue collected by
the Government of the Federation, except the proceeds from the PAYE of the
personnel of the Armed Forces of the Federation, the Nigeria Police Force,
Foreign Service Officers and Residents of the Federal Capital Territory, Abuja.
The Federation Account is a distributable pool account from which
allocations are made to the Federal, State and Local Government
Councils on such terms and in a manner prescribed by the law. The
country‘s current sharing formula gives Federal Government 52.68%, States
26.72% and Local Government Councils 20.60%
Note that 13% of revenue derived from oil sources goes to the States from
which it is obtained, in consonance with the principle of derivation. Also, 7% and
4% of the gross revenue in the Federation Account are allocated to the Customs
Service and Federal Inland Revenue Services, respectively, as a cost of
collection.
The allocation to the 36 States and Abuja treated as a ‗State‘ for this purpose, is
redistributed from 1990 till date, using the following criteria;
40% on the equality of all States;
40% on population;
10% on independent revenue effort.
10% on social development-Education (4.0%), Health (3.0%), and Water (3.0%)
100%

Sources of Revenue Payable to the Federation Account-Heads:

Head 1- Direct Taxes: These are payable by the individuals and firms such as
company income tax, petroleum profit tax, capital gain tax, back duty
assessment, and personal income tax of foreigners residing in Nigeria.
Head 2 - Indirect Taxes: These are taxes on goods and services in the form of
custom and excise duties, forfeiture penalties, VAT, etc.
Head 3 - Mining: These are oil pipeline licence fees, rents of mining rights,
mining fees, royalties on minerals, NNPC earnings from direct sales, penalties for
gas flared, and rent of oil well.

FEDERAL GOVERNMENT ACCOUNT OR CONSOLIDATED REVENUE FUND

The Consolidated Revenue Fund (CRF) was established by Section 80 of the
Constitution of the Federal Republic of Nigeria, 1999. Except those revenue
items which are specifically designated to other funds, all others shall be paid
into the Consolidated Revenue Fund. Consolidated revenue fund is a central
government purse in which all government receipts are paid into and
expenditure allocate from this account is usually estimated in the
constitution.
Sources of Revenue Payable to the Consolidated Revenue Fund-Heads:
 Head 6-Direct allocation from the Federation Account at the prevailing
rate.
 Head 7-Direct Taxes: These include PAYE of the Armed Forces and
Police Personnel, Foreign Service Officers and Residents of the Federal
Capital Territory, Abuja.
 Head 8-Licence & Internal Revenue: These are realized from the
issues of licences, e.g. arms and ammunition licence fees, goldsmith
licence fees, radio & T.V Licence fees, gold dealer‘s licence fees.
 Head 9-Mining: These include mining fees, rent of mineral lands,
royalties on gold, tin, iron ore, and coal mines.
 Head 10-Fees: They are fees received on services rendered by
Government officials, e.g., court fees, court fines and medical fees.
 Head 11-Earnings and Sales: Earnings and sales are derived from the
use and subsequent disposal of Government property, e.g. sales of
stores, publications and stamps, commission on money order and
poundage on postal orders.
 Head 12-Rent of Government Property: The incomes include rent on
Government quarters, land and buildings.
 Head 13-Interest & Repayments (General): These are interest and
repayment of loans granted to individuals by the Government,
Corporations, and Government companies. An example is the repayment
of motor vehicle loans.
 Head 14-Interest & Repayments (State): They are interest and
repayment of loans granted to the State Governments.
 Head 15-Armed Forces: The sales of Armed Forces‘ property such as
old vehicles and stores constitute revenue.
 Head 16-Reimbursements: These are refunds for services rendered to
the State and Local Government Councils, Public Corporations and other
Statutory Bodies by the Federal Government officers. Examples are
reimbursements of audit fees and refunds of overpayments made to
Government workers.
 Head 17-Miscellaneous: These are other sources of revenue, apart
from those stated above. Examples are overpayments refunded, lapsed
deposits.

Charges to the Consolidated Revenue Fund

These are expenditure items chargeable to the Consolidated Revenue Fund. The
charges to the Consolidated Revenue Fund are grouped as follows:
a) All Recurrent Expenditure Heads in the approved estimates, e.g. personnel
cost, overhead cost and servicing of national debts.
b) Salaries and Consolidated Allowances of Statutory Officers: These are
expenditures chargeable directly to the Consolidated Revenue Fund,
irrespective of budget approval. Statutory Officers include: Chief Justice and
Justices of the Supreme Court, Auditor - General for the Federation, President
and Justices of the Federal Court of Appeal, Chairman Independent National
Electoral Commission e.t.c
c) Pension and Gratuity. These are the entitlements of both statutory and non-
statutory officers, including members of the Armed Forces.

CONSOLIDATED REVENUE FUND FOR THE YEAR ENDED -------------

₦ ₦
Statutory allocation (Share from federation account) x
VAT (Share from VAT) x
PAYE of Armed Forces x
Arms and Ammunition Licences x
Court fees x
Rent of government properties x
x
Overhead cost x
Transfer to development fund x
Transfer to contingency fund x
Payment of pension & gratuity x (x)
Balance c/d xx

VALUE-ADDED TAX (VAT): VAT is a tax imposed on value which the supplier
or seller of good/services add to the goods/services before selling it. VAT was
introduced in 1994 fiscal year with the promulgation of VAT Decree No. 102 of
1993 at the rate of 5% and is being administered by Federal Inland Revenue
Service (FIRS).
From VAT revenue, 4% cost of collection is allocated to Federal Inland Revenue
Service. After this, the net VAT revenue is shared among the three tiers of
government in the following proportion: Federal Government 15%, State
Governments 50% and Local Government Councils 35%.

DEVELOPMENT FUND
The existence of the Development Fund was solidified by the 1999 Constitution
of the Federal Republic of Nigeria, although created earlier by Section 25 of the
Finance (Control &Management) Act of 1958. The Fund was established for the
purpose of capital development projects.

DEVELOPMENT FUND ACCOUNT----------

₦ ₦
Sources of income:
Transferred from consolidated revenue fund x
External grants x
External loans e.g IMF x
Internal loans e.g development stock x
X
Charges or expenditure:
Capital expenditure e.g construction of road, dam, e.t.c x
General Administration e.g maintenance of Army Barracks x
External Financial Obligations x
Loans made to State Governments in Nigeria x (x)
Balance c/d x

CONTINGENCY FUND
The Contingency Fund has its legality under Section 81 of 1979, and 1989
Constitutions and Section 83 of the 1999 Constitution. The Fund is set up to
meet unforeseen expenditure urgent situations occasioned by natural disasters.
The Contingency Fund derives its income from the Consolidated Revenue Fund.

Federation Accounts Allocation Committee (FAAC)

Federation Accounts Allocation Committee (FAAC) was set up by Allocation of
Revenue (Federation Account, etc) Act, Cap. A15, LFN2004. The committee is to
deliberate upon and allocate funds from the Federation Account to the three tiers
of government (federal, state and local governments). The FAAC meeting is
normally divided into two sessions, namely:
 Technical session; and
 Plenary session.

Membership of Federation Accounts Allocation Committee (FAAC) technical

session
1. Accountant General of the Federation – Chairman
2. States‘ Accountant General
3. Representatives of the following Agencies:
a) Nigeria National Petroleum Corporation (NNPC)
b) Federal Inland Revenue Service (FIRS)
c) Nigeria Custom Service (NCS)
d) Department of Petroleum Resources (DPR)
e) Revenue Mobilization, Allocation and Fiscal Commission
f) Federal Ministry of Finance
g) Central Bank of Nigeria (CBN)
h) National Planning Commission
i) Office of States and Local Government Affairs
j) Office of the Vice-President
k) Directorate of Military Pension
l) Office of the Head of Service of the Federation
m) Department of Civil Pension

Functions of Technical Session

 To consider the accounting returns of revenue collecting agencies
 To deliberate and consider the revenue available for distribution
 To make recommendation to the plenary session for the adoption of the
revenue to be shared to the three tiers of the government
 To consider any other issues sent from the plenary session

Membership of Federation Accounts Allocation Committee (FAAC) plenary

session
a) The Honourable Minister of Finance – Chairman
b) The States‘ Commissioners of Finance
c) The Accountant General of the Federation
d) The States Accountant General
e) Representatives of the thirteen organizations mentioned under membership
of Federation Accounts Allocation Committee (FAAC) technical session
f) The Permanent Secretary of the Federal Ministry of Finance or such officer as
may be designated by the said Minister shall be the Secretary to the
committee.
Functions of FAAC
a) To ensure that allocations made to the states from the Federation account
are promptly and fully paid into the treasury of each component, on such
bases and terms prescribed by law.
b) To submit annual report of its performance/activities to the National
Assembly.

State Joint Local Government Account Allocation Committee (SJLGAAC)

The committee was set up to ensure equitable distribution of the statutory
allocations to local governments from the Federation Account and 10% of the
internally generated revenue of the appropriate state governments are shared to
the local governments in the states, in accordance with the 1999 Constitution,
using stipulated criteria which include Equity, Population, Primary School
Enrolment and Internally Generated Revenue.

Composition
i. The commissioner charged with the responsibility for local government in
the state to be the chairman thereof;
ii. The chairman of each local government council in the state;
iii. Two representatives of the Accountant General of the Federation;
iv. A representative of the Accountant General of the State;
v. Two persons to be appointed by the Governor of the State; and
vi. The Permanent Secretary of the State Ministry charged with responsibility
for local government or such officer as may be designated by the said
Commissioner shall be the Secretary to the Committee.

Functions
 Allocations made to the local government councils in the state from the
Federation Account and from the state concerned are promptly paid into
the State Joint Local Government Account; and
 Distributed to local government councils in accordance with the provisions
of any law made by the House of Assembly of the State

Revenue Mobilization, Allocation and Fiscal Commission (RMAFC)

Revenue Mobilization Allocation and Fiscal Commission Act 1989 established the
Commission.
The commission shall consist of a chairman and one member from each State of
the Federation and the Federal Capital Territory, Abuja, who are persons of
unquestionable integrity with requisite qualification and experience, to be
appointed by the President.

Powers of the Commission

 Monitor the accruals to and disbursement of revenue from the Federation
Account;
 Review, from time to time, the revenue allocation formulae and principles in
operations to ensure conformity with changing realities
 Advise the federal, state and local governments on fiscal efficiency and
methods by which their revenue is to be increased;
 Determine the remuneration appropriate to the holders of the offices as
specified in Parts A and B of the First Schedule to this Act;
 Make recommendations and submit its finding by a report thereto to the
government of the Federation or of the State, as the case may be, regarding
the formula for the distribution of the Federation Accounts and the Local
Government Accounts etc.
 Chapter Six
AUTHORIZATION OF GOVERNMENT EXPENDITURE, CONTROL OF GOVERNMENT
REVENUE AND FUND ACCOUNTING
All Government expenditures must be properly authorized and approved. The
authority which confers power on the Officer controlling expenditure or a vote, to
incur expenditure, is called ―Warrants.‖

Warrant is the only authority through which money is expended in government.

Which means Warrant is a document used by the Ministry of Finance to authorize
money for spending by government departments and agencies.
Warrants can be divided into two groups, viz:
(a) Recurrent Expenditure Warrants
(b) Capital Expenditure Warrants.

RECURRENT EXPENDITURE WARRANTS

These are authorizations for expenditure that is of revenue nature. It is
expenditure that is incurred regularly on items which are consumed within the
year.
Recurrent Expenditure Warrants are authorizations issued by the Minister of
Finance to disburse from the Consolidated Revenue Fund.
Recurrent Expenditure Warrants in use are as follows:
(a) Annual General Warrant (A.G.W.) of Recurrent Expenditure:
This authorizes the Accountant-General of the Federation to release funds for the
payment of personal emolument and other services provided for in the approved
estimate/budget. It also authorizes the officers controlling expenditure votes to
incur expenditure for these purposes.
However, the Minister of Finance may exclude from the Annual General Warrant
any item of expenditure on which he desires to exercise special control. The
original copy of the Warrant is addressed to the Accountant- General, while the
duplicate is forwarded to the Auditor- General.
(b) Provisional General Warrant (P.G.W.):This authorization is issued by the
Minister of Finance to the Accountant General, to enable money to be released
for expenditure for the early part of the year before the Appropriation Act is
passed. It provides for the continuation of services of Government on a scale not
exceeding the level of these services in the previous financial year. The Warrant
will be in operation for a maximum period of six months or until the
Appropriation Act comes into effect, whichever is shorter.
The amount expendable under the Provisional General Warrant must not be
more than the sum expended during the same period in the previous year.
(c) Supplementary General Warrant (S.G.W.): The Warrant is issued for
additional personal emolument and other services provided for in the approved
supplementary estimates. Moreover, the Minister of Finance may exclude from
the Supplementary General Warrant any item of expenditure on which he desires
to exercise special control.
(d) Reserve Expenditure Warrant (R.E.W.): This authorizes the release of
funds included in the approved annual or supplementary estimates but excluded
from the A.G.W. or S.G.W. It is the release of fund which the Minister of Finance
had initially withheld in order to exercise special control.
(e) Supplementary (Contingencies) Warrant: The warrant is issued for
money for unexpected but urgent expenditure that cannot be delayed.
Contingencies Fund Warrants must first be issued by the Minister of Finance,
authorizing the Accountant-General to transfer necessary funds from the
Contingencies Fund to the Consolidated Revenue Fund. Thereafter, a
Supplementary (Contingencies) Warrant must be issued, authorizing expenditure
from the Head and Sub-Heads concerned.
(f) Virement Warrant (V.W.): The virement is required for money to be
transferred from an estimate where there is surplus money to another
expenditure vote which requires financial support. Which means this is issued
when, as a result of unforeseen circumstances during the time the annual
estimates were being approved, an additional provision is required under a
particular Sub-Head and an equivalent amount can be saved under another Sub-
Head of the same Head. However, Virement Warrants should not be used to
create a new Sub-Head or for items disallowed by the Budget or Estimate
Committee.
To be successful, applications for virements should:
(i) be in writing;
(ii) state that a particular sub-head is in deficit;
(iii) state that another sub-head is in surplus;
(iv) indicate that both sub-heads are within the same economic Head;
(v) state that after the transfers, the other sub-heads will not be in deficit;
(vi) state that Virement Warrants are not sought to create new subheads.
(g) Supplementary (Statutory) Expenditure Warrants: Supplementary
(Statutory) Expenditure Warrants authorize additional expenditure over and
above that included in the Annual General Warrant and Supplementary General
Warrant, from votes chargeable to Consolidated Revenue Fund by legislation,
other than Appropriation Acts.
(h) Imprest Warrant :The Warrant is issued to authorize funds to be released
to any senior officer who has to spend the money and account for it periodically.

CAPITAL EXPENDITURE WARRANTS

The Warrant is issued for capital expenditure. A capital expenditure is the
amount used during a particular period to acquire or improve long-term assets.
Capital expenditure warrants are issued as authorizations for disbursement from
the Development Fund (DF).
The following are forms of Capital Expenditure Warrants:
(a) Development Fund Annual General Warrant (DFAGW): This authorizes
the Accountant-General of the Federation to issue funds for expenditure on
capital projects, as contained in the approved Capital Estimate, and mandates
the Officers controlling expenditure votes to disburse on the capital projects
envisaged.
The authority to incur expenditure will be conveyed after the National Assembly
has approved the Capital Expenditure Budget.
(b) Provisional Development Fund General Warrant(PDFGW): This is
issued before the approval of the Capital Estimates by then National Assembly at
the beginning of the financial year. It authorizes the payment from the
Development Fund of such amount that is necessary for carrying on the projects
for which expenditure have been authorized in the previous financial year, for a
period of six months or until the authority of the National Assembly has been
obtained, whichever is shorter.
(c) Development Fund Supplementary General Warrant (DFSGW):The
Warrant is issued to authorize the Accountant-General to release money and the
officers controlling votes concerned to incur expenditure, on projects as
sanctioned by the National Assembly in resolutions approving supplementary
capital estimates.
(d) Development Fund Reserved Expenditure Warrant (DFREW) : A
DFREW authorizes the release of funds in the approved Annual or
Supplementary Capital Estimates, but excluded from the DFAGW & DFSGW, i.e.
it is the release of funds which The Honourable Minister of Finance initially
withheld in order to exercise special control.
(e) Development Fund Supplementary Warrant (DFSW): A DFSW
authorizes additional expenditure over and above that which is included in the
DFAGW or DFSGW for purposes of revote capital expenditure which was
provided for in the previous financial year but not fully expended in that year,
accelerate the provisions of funds already formally allocated but not voted for a
project and also accelerate the completion of a specific capital project.
(f) Development Fund Special Warrant (DFSW): The Warrant is for the
release of money for projects which are urgent and whose estimates had been
submitted to, but are yet to be approved by, Parliament.
Note that a DFSW is issued in exceptional cases where:
(i) Virement is not possible
(ii) Provision for the release of additional funds reveals such high degree of
urgency that the release of funds cannot be postponed until a Supplementary
Capital Estimate is approved. If the issue of fund is postponed, it will cause
serious injury to the public interest. The amount to be expended under this
Warrants must not exceed the balance of the Development Fund remaining after
all other expenditures provided for in the Capital Estimate have been incurred.
(g) Development Fund Virement Warrant (DFVW):The Warrant permits the
issue of additional funds necessary for the completion of a capital project, for
which money already allocated in the Estimate is not enough to complete the
project.
There must however be sufficient offsetting savings in the amounts appropriated
for other projects in the same Economic Programmed Section. The limitations
imposed for the issuance of the Development Fund Virement Warrant include:
(i) Re-allocation can be made only within the same Head of expenditure in the
Capital Estimates.
(ii) The re-allocation must not give rise to a new principle or policy.
(iii) It cannot be used to provide funds for new projects.

REVENUE CONTROL
The term ―Revenue Control‖ describes the various checks put in place to ensure
that all moneys due are received and accounted for. The revenue control system
in the public sector is designed to have the following elements:
 Revenue collections and accounts receivable should be monitored in a
timely manner. Both actual and budgeted or forecast revenues should be
monitored. Any significant variance of actual from the forecast or
budgeted revenue should be investigated thoroughly
 Policing the Revenue Administration System to ensure that services are
not rendered without charges being levied.
 Timely issuance of demand notices and follow-up action to track down
debts.
 Timely issuance of all revenue documents.
 Prompt lodgment into the bank of all moneys received.
 Establishment of authority limits for revenue handling.
 Establishment of functional system of internal controls and constant
review of procedures.

FUND ACCOUNTING: The word ‗Fund‘ has been defined as ―a separate fiscal and
accounting entity in which resources are held, governed by special regulations,
separated from other funds and established for specific purposes.‖ The fund
system of accounting is operated through series of rules and laws that are
passed by the Legislature, to ensure that the resources are well utilized by the
relevant government institutions.
 CLASSIFICATION OF FUNDS
Funds can be classified into three categories, namely:
i. Government Funds: They are used to accrue for resources which are
derived from the general tax and revenue powers of Government.
Examples are debt service fund, special fund and revolving fund.
ii. Proprietary Funds: These are funds used to account for the resources
derived from the business activities of Government and its Agencies such
as the Parastatals.
iii. Fiduciary Funds: These are used to account for resources held and
managed by Government in the capacity of a custodian or trustee. Such
funds are Petroleum Technology Development Fund, Trust and Agency
Fund and Pension Trust Fund.

TYPES OF FUNDS
a) General Fund: It is a fund established for resources which are devoted to
financing the general administration or services of Government. It is also
called Consolidated Revenue Fund. Section 5 of the Finance (Control and
Management) Act of 1958) Cap 144, 1990 stipulates that the management of
the Fund shall be in accordance with the requirements of the Constitution of
Nigeria.
b) Capital Project Fund: This is a Fund created to accommodate resources
meant for the acquisition of capital assets or facilities. It is also known as
Development Fund. It came into existence by virtue of Section 18 of Finance
(Control and Management) Act of 1958.
c) Special Fund: It is a Fund created for specific purposes, e.g. South African
Relief Fund, African Staff Housing Scheme Fund(A.S.H.S.).
d) Trust Fund: It is a Fund whose resources are held by Government as a
trustee. It is used for the purpose stated in the Trust Deed, e.g. Petroleum
Technology Development Fund and Research Foundation Fund.
e) Contingency Fund: It is a Fund whose resources are meant for expenditure or
anticipated expenditure of uncertain amounts. An example is the expenditure
on natural disaster. Section 15 of the Finance (Control and Management) Act
1958 brought the Fund into existence.
f) Inter-Governmental Service Fund: This is established to provide service to
other Funds, e.g. Government Clearance Fund which helps to maintain
(transitionally) the balance between the Federal Government and other State
Governments in respect of transactions.
g) Revolving Fund: Revolving Fund is also known as Working Capital Fund. It is
created to finance services provided by a designated unit to other
Departments within a single Governmental set-up. An example of a Revolving
Fund is Revolving Loan Fund.
h) Self-liquidating Fund: This is a Fund into which resources are transferred
periodically and out of which any money or amount left has to be transferred
to a current fund, e.g. Deposit Fund. Deposits are moneys held on behalf of
third parties.
 Chapter Seven
EXPENDITURE CONTROL
Expenditure control could be defined as the strings of coordinated actions which
have to be taken to ensure that all expenditures are ‗wholly‘, ‗necessarily‘,
‗reasonably‘ and ‗exclusively‘ incurred for the purposes for which they are
meant. Expenditure control is an important element of budget execution and
financial resources management accountability system. Through effective
expenditure control system, the agencies will not only be able to maintain high
level of fiscal discipline but will also be able to implement planned activities
within the approved appropriations. The objective of assessment of expenditure
control is to determine whether all expenditures have been approved and utilized
for the intended.
The following are the basic controls exercised over Government expenditure:
(a) The Executive Control.
(b) The Legislative Control.
(c) The Ministry of Finance Control.
(d) The Treasury Control (Office of the Accountant - General of the Federation)
(e) The Departmental Control.
(f) Office of the Auditor - General for the Federation.

THE EXECUTIVE CONTROL: The Executive comprises the President and his
cabinet members who have the responsibility for the efficient and effective
control of the administration of the country – politically, socially and
economically. Which means the cabinet of Nigeria is the Executive Branch of the
Government of Nigeria.
The Cabinet oversees Federal Ministries, each responsible for some aspect of
providing government services, as well as a number of parastatals.
The President, in order to satisfy the provisions of the Constitution also appoints
a Cabinet Committee on Estimates, to advise him on the contemplated policy
measures. The policy measures contemplated are then transmitted to the
Budget Department in the Presidency. This development in turn leads to the
issuance of guidelines on the preparation of the Budget. As a result, effective
supervision is exercised on all the Agencies involved in budget operation. Any
Unit of the Government whose requirements are higher than the ‗control figures‘
already issued, is invited to defend the excess request.
In summary, the executive control government expenditure through the
following means:
I. Determination of monetary policies generally;
II. Compilation and tentative approval of the nation‘s budget at the Federal
Executive Council;
III. Appointment of the Auditor-General for the federation;
IV. Issuance of budgetary guidelines; and
V. Introduction of due process principle.

THE LEGISLATIVE CONTROL: The National Assembly is the Supreme Authority

on matters of the Nation‘s finance. The control exercised by the Legislature is
both ‗antenatal‘ and ‗post-natal‘. The ‗ante-natal‘ control is in the sense in which
the Legislature considers and approves the Estimates submitted to it by the
President. ‗Post-natal‘ control is the review of transactions after payment. No
amount of public fund may be spent without the approval of the National
Assembly.
In summary, the National Assembly control government expenditure through the
following means:
I. Approval of the monetary and fiscal policies adopted and submitted by the
executive;
II. The ultimate approval of the nation‘s budget;
III. Ratification of the appointment of the Auditor-General for the Federation;
IV. Appointment of the Public Accounts Committee (PAC);
V. Appointment of Audit Alarm Committee (AAC);
VI. Monitoring the implementation of the budget;
VII. Ensure that money is expended for the purpose for which they were
meant;
VIII. Monitoring of the actualization of the budget; and
IX. Refusal to approve the nation‘s budget constitutes a vote of no confidence
on the executive.

PUBLIC ACCOUNTS COMMITTEE: This is one of the highly-empowered

committees established by the standing orders of both houses to examine
federal government accounts showing the appropriation of the sum granted to
meet the public expenditure. The 1979 and 1989 Constitutions brought into
existence the Public Accounts Committee. The purpose of the Committee is to
expose waste, corruption or inefficiency in the handling of public funds or
projects. It is empowered to examine the audited accounts of the Federation and
those of public offices as well as the Auditor-General‘s report thereon.

Roles of Public Accounts Committee

 To examine the accounts showing the appropriation of the sum granted by
the Legislature to meet the public expenditure together with the Auditor-
General‘s report thereon;
 The committee not only ensures that ministries spend money in
accordance with Legislature approval, it also brings to the notice of the
Assembly instances of extravagance, loss, infructuous expenditure and
lack of financial integrity in public services.
 The committee shall, for the purposes of discharging that duty, have
power to send for any person, papers and records and to report from time
to time to the legislature and to sit notwithstanding the adjournment of
the Assembly.
 To examine any accounts or report of statutory corporations and boards
after they have been presented to the State House of Assembly and to
report thereon from time to time to the Assembly.
 To enquire into the report of the Auditor-General with respect to any pre-
payment audit query, which had been overruled by the Chief Executive of
the ministry, extra-ministerial department, agency or courts of the
government and to report it to the Assembly.

AUDITOR-GENERAL FOR THE FEDERATION

The Auditor-General for the Federation scrutinizes all accounts and records of
the money collected and spent and reports to the National Assembly
appropriately on the instances of waste, extravagance, inefficiency or fraud. It is
observed that the Auditor-General‘s duty is post-payment audit, except in the
matters relating to pension and gratuity payments on which he performs pre-
payment audit. This is in addition to the regularity and compliance audit that he
carries out as a duty.

MINISTRY OF FINANCE CONTROL

When Ministries/Departments require money to pay for services, they normally
apply to the Minister of Finance, for such funds. The Minister passes the
Consolidated Revenue and Expenditure Estimates to the President who will
present them to the Federal Executive Council for approval before they are
forwarded to the National Assembly as Appropriation Bill.
Controls by Warrants
Although the Estimates and Appropriation Acts guide the disbursement of public
funds, the release of money is subject to issuance of relevant Warrants by the
Finance Minister, for the expenditure. The Warrant authorizes the Accountant-
General to release fund from the Consolidated Revenue Fund or Development
Fund.
In summary, the Minister of Finance control government expenditure through
the following means:
I. Issuance of financial authorities;
II. Compilation and tentative approval of the nation‘s budget;
III. Issuance of budgetary guidelines;
IV. Issuance of Financial Regulations; and
V. Issuance of Financial Circulars.

THE TREASURY CONTROL - OFFICE OF THE ACCOUNTANT- GENERAL OF THE

FEDERATION (OAGF)
The Accountant-General has overall responsibility for the total expenditure of
Government. His office would keep necessary books of accounts to record all the
receipts and expenditure of the various Ministries and Departments. The Treasury
Department exercises some measure of supervision and checks over the accounting
records of the Non-Self Accounting Units.
INSPECTORATE DIVISION
Inspectorate Officers from the Office of the Accountant - General of the
Federation visit the various Ministries and Departments to evaluate the system
of internal control. They do this to ensure that the accounting system and
maintenance of various books of accounts conform to the approved regulations
and procedures.
INTERNAL AUDIT
This is another aspect of control exercised in any organisation. The Treasury
dispatches Internal Auditors to the Ministries and Self-Accounting Departments
to appraise the effectiveness of the existing internal checks and report upon any
inadequacy discovered.
DEPARTMENTAL CONTROL OVER THE BUDGETED EXPENDITURE
A Departmental Vote Expenditure Allocation Book (D.V.E.A. Book) is a record of
payments made and liabilities incurred under the Votes or Funds approved for
each Ministry or Extra-Ministerial Department. A Vote Book is maintained for
each Head or Sub-Head of expenditure. It is an integral part of the Budgetary
Control System. The Book is designed to facilitate vote watching to ensure that
expenditure incurred are not in excess of appropriation. Over expenditure of
departmental vote amounts to reckless use of public funds and is seriously
frowned at by Government.
It is the duty of the Officer who is controlling the Vote to thoroughly investigate,
without delay, payments or charges which appear in the schedules drawn up by
the Accountant-General, which do not appear in the Vote Books particularly with
a view to the prevention and detection of fraudulent payments.
 Chapter eight
FUNCTIONS OF THE CASH OFFICE
The duties of the Cash Office are receiving and paying cash, posting cash
transactions into the cash book, opening a bank account on which cheques are
drawn and providing information on the cash position at a given time. Security is
essential in the management of the cash office. This includes the provision and
partitioning of a cashier‘s cage to ensure that only authorized persons are
allowed to move in and out. Effective internal check is also of utmost importance
in the operations of the Cash Office, to minimize fraud and detect errors. Up-to-
date recording of transactions and regular supervision are therefore required.
Maintenance of adequate cash control with respect to establishment of cash
limit, daily banking of all takings, periodic surprise cash count, installation of raid
alarm, establishment of authority limit,. etc.

CASH BOOK ENTRIES

Cash book entries in respect of cash/cheque payments and receipts are to be
made and postings should be balanced each day. The ruling of the cash book
provides columns for cash and bank transactions and total amount on the
receipts (or debit) side. Gross amount, deductions and net amount payable
appear on the payment (or credit) side. Receipts issued are to be posted on the
left hand side of the cash book. The particulars of the serial numbers, the payees
and classifications are also to be entered. Amount received through bank tellers
or advices should be entered in the bank column and extended to the total
column. Where the amount received is in cash, it is entered in the cash column
and extended to the total column. For payments, the voucher numbers, payees‘
names, nature of transactions and cheque details are entered, showing the
gross amounts and deductions (if any).

CHEQUE SUMMARY REGISTER

The cheque summary register serves as a useful record for the verification of
bank transactions in the cash book. All cheques issued, money lodged into the
bank account, vouchers raised to cover bank advices, teller particulars and other
transactions, which are already recorded in the cash book, should be posted into
the Cheque Summary Register. The register is balanced daily. The balances in
the register have to agree with those in the cash book. As an internal check, the
person posting the Summary Register should not be the same person handling
the cash book. The Head of Accounts should check the register daily before the
cashier accepts any voucher for payment. He has to ensure that all the
accounting regulations are kept.

SECURITY AND CUSTODY OF ACCOUNTING BOOKS AND DOCUMENTS

Security documents carry monetary values. Such documents can be used to
defraud the Government if they fall into unauthorised hands or make
government suffer loss if accidentally destroyed. Examples of security
documents are:
(a) Cheque Book.
(b) Treasury Receipt Books 6A and 6B.
(c) Cheque Summary Register.
(d) Cash Book.
(e) Payment Voucher.
(f) Local Purchase Order.
(g) Postal Order.
(h) Money Order.
MAINTENANCE OF ADEQUATE CASH CONTROL MEASURES
Cash control relates to the co-coordinated actions which have to be taken in
order to ensure that all income due to the Government are collected on a timely
basis, and that fraud is prevented. The cardinal objective is to ensure that funds
are not mismanaged or misappropriated.
The following are the various cash control measures adopted in the Ministries
And Parastatals, viz:
(a) Establishment of cash limits.
(b) Daily banking of all takings.
(c) Periodic surprise cash count (cash survey).
(d) Provision of a safe that has to be under dual control.
(e) Installation of ‗raid alarm‘.
(f) Installation of counting/sorting machines and mercury light.
(g) Ensuring that sufficient and adequate insurance cover is taken over the
cash limit.
(h) Investment of idle funds.
(i) Establishment of ‗authority limit.‘
(j) Balancing of Cash book.
(k) Preparation of bank reconciliation statements

PREPARATION OF BANK RECONCILIATION STATEMENTS

Reconciliation is the process of resolving the difference between the balance as
per cash book and the balance as per bank statement on the same date and in
respect of the same items of transactions. A bank reconciliation statement is
prepared to reconcile the figures in the bank column of the cash book with those
on the bank statements for the period under review.

ILLUSTRATION OF BANK RECONCILIATION STATEMENT

N N
Balance as per Cash Book X
Add: Unpresented Cheques X
Receipts in Bank not in Cash Book X X
X
Less: Uncredited Cheques X
Payments in Bank not in Cash Book X X
Balance as per Bank statement X

Note: There is no need to prepare adjusted cashbook using the above format

Dr. Adjusted Cash Book Cr.

₦ ₦
Balance b/d x Bank charges x
Dividend x Standing order x
Credit transfer x Dishonoured cheques x
Receipts side under cast x Receipts side overcast x
Payment side overcast x Payment under cast x
Balance c/d x
X x
Balance b/d x
 IMPORTANCE OF BANK RECONCILIATION
 It discloses any unauthorized cheque issued and cashed
 It reveals any dishonoured cheques for which receipts have been issued
and entered into the cash book;
 It discloses fraudulent/fake pay-in-slip purported to have been obtained
for paying into government account;
 It reveals any lodgements not credited by the bank either by omission or
commission.
 Chapter Nine
EMERGING ISSUES IN NIGERIAN PUBLIC SECTOR
DEFINITION AND OBJECTIVES OF TREASURY SINGLE ACCOUNTING (TSA)
The Treasury Single Account (TSA) is part of the Public Financial Management
(PFM) Reforms approved in 2004.

The TSA is a bank account or set of linked accounts through which Government
transacts financial operations. It is a unified structure that gives consolidated
view of Government Cash resources with a view to strengthening effective
budget implementation, check idle cash balances, make planning easy and allow
for effective decision making.

OBJECTIVES OF TSA
The cardinal objective of TSA is to facilitate the implementation of an effective
Cash flow Policy with a view to:
a) Ensuring that sufficient cash is available as and when needed to meet
payment commitments;
b) Controlling the aggregate of cash flows within fiscal, monetary and legal
limits;
c) Improving the management of Government‘s domestic borrowing
programmes;
d) Enhancing operating efficiency through the provision of high quality services
at minimal costs;
e) Investing of excess or idle cash;
f) Ensuring greater accountability in public expenditure.

TSA MODELS
1. The ―Pure‖ TSA – Model 1 - No account sub-structure; all deposit and
payment transactions processed through a single bank account. This is
relatively rare
2. The Decentralised TSA -Model 2
 Separate accounts, in commercial banks or central bank, zero balanced
overnight (ZBAs)
 More normal in a decentralised environment where commercial banks
process transactions
 Each ministry/agency makes its own payments and directly operates the
respective bank account under the TSA system.
 Ministry of Finance sets the cash disbursement limits (based on unit of
appropriation) for control purposes

REASONS FOR THE INTRODUCTION OF TSA

 Inability of government to determine cash position at any point in time
 Unlimited Commercial bank accounts maintained by MDA
 Growing domestic debt and borrowing not aligned to need
 Idle cash balances/unspent balances in MDA accounts
 Excessive use of ways and means in financing budget expenditure
 Inability to undertake effective cash planning and management as
required by the Fiscal Responsibility Act
 No reliable basis to prepare Warrants to MDA, delays in Budget Execution
and perennial existence of unspent balances by the year end.
Warrants/AIEs releases were not based on cash plan
 BENEFITS OF TREASURY SINGLE ACCOUNT (TSA)
i. Help government unify banking arrangements;
ii. Assist the Federal Government in the efficient utilisation of government funds
for approved projects;
iii. Promote transparency and accountability in government operations;
iv. Reduce the amount, and cost of government borrowing by maximising the
use of available government resources to deliver projects.
v. Ensure centralized control over revenue through effective cash management.
vi. Enhance accountability and enables government to know how much is
accruing to it on a daily basis.
vii. Reduce fiscal criminality and help tame the tide of corruption.

COMPONENTS OF TSA
a) E-Payment- The Federal Government of Nigeria commenced the
implementation of Treasury Single Account (TSA) in April, 2012, with the e-
payment component. It is a direct payment through electronic transfer to an
individual or an organisation using the medium of computer technology.

b) E- Collection- The e-Collection component of TSA commenced in January,

2015. The first Treasury Circular on e-Collection was issued on the 19th of
March, 2015 followed by Guidelines in September, 2015. It is a comprehensive
electronic solution for the remittance, management and reporting for all Federal
Government receipts (revenues, donations, transfers, refunds, grants, fees,
taxes, duties, tariffs, etc.) into the TSA and Sub Accounts maintained and
operated at the CBN.

OBJECTIVES OF TSA (E- PAYMENT)

i. To avoid borrowing and paying additional charges to finance the
expenditure of MDA while some MDA keep idle funds in their respective
bank accounts
ii. To ensure effective aggregate control of cash in monetary and budget
management
iii. Minimizing transaction cost;
iv. Making rapid payments of expenses;
v. Facilitating reconciliation
vi. Efficient control and monitoring of funds allocated to MDA
vii. Support monetary policy implementation.

BENEFITS OF TSA (E- PAYMENT)

a) Provides complete and timely information on government cash resources
b) Improve operational control on budget execution
c) Enables efficient cash management
d) Reduces bank fees and transaction costs
e) Facilitates efficient payment mechanisms
f) Improves bank reconciliation
g) Improves liquidity of government
h) Issuance of Warrants and AIEs based on cash plan
i) No more commercial bank accounts maintenance by MDA

OBJECTIVES OF TSA (E- COLLECTION)

a) To ensure total compliance with the relevant provision of the 1999
Constitution of the FRN (Section 162 & 80)
 b) To collect and remit all revenue due to the Federation Account and
Consolidated Revenue Fund (CRF)
c) To block all leakages in government revenue generation, collection and
remittance.
d) To enthrone a new regime of transparency and Accountability in the
management of government receipts.
e) To improve on availability of funds for the development programs and
projects.
f) To align with CBN Cashless Policy.
g) To ease the burden of revenue payers.

BENEFITS OF TSA (E- COLLECTION)

i. It helps in controlling and monitoring of receipts and payments of FGN
funds
ii. It prevents and detects potential and actual frauds
iii. It improving planning through MTEF
iv. It avoid double payments and likely build- up of payment in arrears;
v. Creating an accurate cash flow statements to help governments obtain
appropriate line of credit,
vi. It implements cash collection acceleration techniques,
vii. It integrates policy priorities into annual budgets and thereby ensure that
available resources are channelled to priority sectors;
viii. Minimize deficits and borrowings within limits set by government
ix. Improves transparency and accountability of all FGN receipts.

ROLE OF OFFICE OF ACCOUNTANT-GENERAL OF THE FEDERATION

i. Ensure effective implementation of e-collection reform
ii. Proper monitoring of the e-collection gateway
iii. Prompt reconciliation of all collections
iv. Provide MDAs with periodic report of collection
v. Support MDAs, banks and payers on the operation of e-collection
vi. Regular monitoring of all collections to ensure prompt remittance and
accounting for collection
vii. Continuous update of e-collection guidelines and processes
viii. Abide by the provisions of the MoU with Stakeholders

ROLE OF DFAS OF THE MDAS

i. Ensure that proper books of Revenue Accounts are maintained.
ii. Ensure prompt issuance of receipts for remittances paid through the e-
collection.
iii. Ensure that Internally Generated Revenue is not diverted
iv. Ensure that returns on revenue performance are rendered promptly.
v. Ensure that sharp practices emanating from collusion among dishonest
revenue officers are discouraged and stopped forthwith.
vi. Ensure that idle funds are invested and accrued interest there from are
transferred into the CRF promptly in line with the extant laws.
vii. Maintain the culture of revenue monitoring visits to all MDAs, FPOs,
Government Companies and Parastatals
ROLES OF CENTRAL BANK OF NIGERIA (CBN)
i. Deployment of Gateway for use by other stakeholders
ii. Ensure that Remita platform facilitates the transmission of all instructions.
iii. Design the payment and collection process across all Banks based on
operational standards
iv. Maintain the Treasury Single Account (TSA) of the FGN
v. Ensures maintenance, security and optimum performance of the Gateway
to meet its obligations
vi. Issue guidelines (circular) to DMBs on the operation of the TSA.
vii. To abide by all Terms and Conditions for the Operation of TSA

ROLES OF THE DEPOSIT MONEY BANKS (DMBS)

i. Ensure that payments to government are given prompt service.
ii. Ensure that all collections in favour of FGN are promptly remitted and
complaints are lodged with OAGF, CBN and REMITA without delay.
iii. Liaise regularly with OAGF to ensure smooth operation of the TSA.
iv. Liaise with relevant Departments of OAGF and CBN in the TSA operations.
v. Ensure that Terms and Conditions enshrined in the MoU are effectively
discharged.

AUTOMATED ACCOUNTING TRANSACTION RECORDING AND REPORTING

SYSTEM (ATRRS)
It is an ICT based Accounting Software application which facilitates the input of
Accounting Transactions, its reconciliation and the generation of Standard
Accounting Reports that meet the required Standard of the Treasury. The
software is developed by the Treasury (OAGF).

It provides a leverage solution to automate the manual recording of the

accounting transactions in the Line Ministries, Agencies and Parastatals of
Government.

The introduction helps in the prompt rendition of financial and accounting

returns; accurate presentation of financial reports; enhanced capacity to
generate complex analytical reports; enhanced ability to cope with large volume
of transactions; automatic mode of processing transactions and ability to
eventually operate on-line real time processing, thereby ensuring that solution is
provided to most of the challenges posed by the manual accounting process.

BENEFITS OF THE ATRRS ACCOUNTING SOFTWARE

1. Familiarize the workforce with the use of IT equipment at an early stage of
Government Integrated Financial Management Information System (GIFMIS)
implementation, which would enable a smoother transition to the GIFMIS
Software.
2. Potentially reduces training period and requirement for GIFMIS.
3. Potentially reduces GIFMIS implementation cost.
4. Shortens Business Process re-engineering period (i.e. it is faster to transit
from a semi-automated process than a manual process.
5. Facilitates ease of reconciliation of the various bank accounts maintained by
Government agencies.
INTEGRATED PERSONNEL & PAYROLL INFORMATION SYSTEM (IPPIS)
IPPIS was conceived by the Federal Government of Nigeria (FGN) to improve the
effectiveness and efficiency in the storage of personnel records and
administration of monthly payroll in such a way as to enhance confidence in staff
emolument costs and budgeting.

OBJECTIVES OF IPPIS
The objectives of IPPIS are as follows:
a) Facilitates planning: Having all the civil service records in a centralized
database will aid manpower planning as well as assist in providing
information for decision- making.
b) Aid Budgeting: An accurate recurrent expenditure budget on emolument
could be planned and budgeted for on a yearly basis.
c) Monitors the monthly payment of staff emolument against what was provided
for in the budget.
d) Ensures database integrity so that personnel information is correct and intact.
e) Eliminates payroll fraud such as ghost workers syndrome.
f) Facilitates easy storage, updating and retrieval of personnel records for
administrative and pension processes.

FUNCTIONS OF COMPONENT OF IPPIS

These are summarised as follows:
a) Data captive equipment with fingerprint scanners for biometric enrolment and
camera for employee photographs.
b) Each of the pilots MDA can capture, update and process its personnel
records.
c) There are at present about 30,000 public servants from the pilot MDAs whose
records and biometric data have been captured, verified and stored in the
centralized personnel database of IPPIS.
d) Salaries are now paid directly into the bank accounts of public servants
whose records exist in the IPPIS database
e) Third party agencies such as FIRS, SBIR, PENCOM and Cooperative Societies
also receive their payments directly.

GOVERNMENT INTEGRATED FINANCIAL MANAGEMENT INFORMATION SYSTEM

(GIFMIS)
GIFMIS is a sub component of the ERGP (Economic Reform and Governance
Project) which will support the public resource management and targeted
anticorruption initiatives area through modernizing fiscal processes using better
methods, techniques and information technology.

The Government Integrated Financial Management Information System (GIFMIS)

is an IT based system for budget management and accounting that is being
implemented by the Federal Government of Nigeria to improve Public
Expenditure Management processes, enhance greater accountability and
transparency across Ministries and Agencies.

GIFMIS is designed to make use of modern information and communication

technologies to help the Government of Nigeria to plan and use its financial
resources more efficiently and effectively. The Government recognizes
nevertheless that additional challenges remain and that Public expenditure
management needs to be further strengthened to:
 build an integrated budget based on programs that are clearly linked to
key development objectives;
 ensure greater accountability from budget holders;
 allow greater emphasis on budget outcomes and impact; and
  identify and address remaining sources of leakage in budget execution in
order to strengthen efficiency of public expenditures.

PURPOSE OF GIFMIS
The purpose of introducing GIFMIS is to assist the FGN in improving the
management, performance and outcomes of Public Financial Management (PFM).
The immediate purpose of
this project is to enable an executable budget, i.e. a budget which can be
implemented as planned by addressing the critical public financial management
weaknesses including:
- Failure to enact the budget before the start of the financial year.

- The budget is not based on realistic forecasts of cash availability.

- Lack of effective cash management – multiple bank accounts within Treasury

and MDAs that make effective control impossible; when combined with the lack
of cash forecasting this leads to inefficient and unplanned borrowing.

- A lack of integration between different financial management functions and

processes, e.g. budget is prepared in a way that makes it difficult to manage
budget execution through the chart of accounts.

OBJECTIVES OF GIFMIS
The overall objective is to implement a computerized financial management
information system for the FGN, which is efficient, effective, and user friendly
and which:
i. Increases the ability of FGN to undertake central control and monitoring of
expenditure and receipts in the MDAs.
ii. Increases the ability to access information on financial and operational
performance.
iii. Increases internal controls to prevent and detect potential and actual
fraud.
iv. Increases the ability to access information on Government‘s cash position
and economic performance.
v. Improves medium term planning through a Medium Term Expenditure
Framework (MTEF).
vi. Provides the ability to understand the costs of groups of activities and
tasks.
vii. Increases the ability to demonstrate accountability and transparency to the
public and cooperating partners.
 Chapter Ten
PREPARATION OF VOUCHERS
A voucher is a documentary evidence of payment or receipt of money which is
available for future reference, accounting and auditing purposes. It is the
document that serves as evidence of receipt or disbursement of government
money, with adequate authority and procedures. Specifically, Government
Financial Regulation states that all payments must be by means of the
prescribed form.
TYPES OF VOUCHERS
Vouchers may be classified into three major categories, viz:
(a) Payment Vouchers.
(b) Receipt Vouchers.
(c) Adjustment Vouchers.

PAYMENT VOUCHERS: These are vouchers that serve as evidence for the
disbursement of government fund. It is to prove that there has been payment
for goods supplied and services provided for any Ministry, agency or department.
Vouchers are prepared at the point where payments are to be effected.

RULES GUIDING ISSUANCE OF PAYMENT VOUCHERS

According to Financial Regulations, a Sub-Accounting Officer may not make
payment against a voucher unless:
a) The voucher is certified for payment by the officer who is authorized to do
so.
b) The voucher is stamped ―checked and passed‖ for payment and duly signed
by the checking officer, stating the name of his station.
c) The voucher is stamped, ―Entered in the Vote Book‖ and the Officer keeping
the Vote Book duly signs it.

Government Financial Regulations specify the rules which should be strictly

observed in the preparation of payment vouchers, as follows:
 Vouchers shall be made in ink or ball point pens or indelible pencils or
shall be type-written. All copies must be legible.
 No erasure of any kind, whether in typescript or manuscript. Use of
correcting fluid is not allowed.
 A single thick horizontal line shall be drawn immediately before and
immediately after the Naira (N) figure. Where it appears in words, space
shall not be allowed.

Essential Features of a Valid Payment Voucher

A valid payment voucher must contain the full particulars of such services
rendered or goods purchased like date, serial number, quantity and price. The
following are the essential features of a well-prepared payment voucher:
i. Date of the voucher, which indicates its life span;
ii. Classification code, i.e. head and sub-head of expenditure;
iii. Amount in words and figures;
iv. Voucher number;
v. Description of payment;
vi. Name and address of payee/beneficiary;
vii. Supporting documents, such as local purchase orders, invoices, store
receipt vouchers and contract agreement;
viii. Authority, such as the signature of the officer controlling expenditure and
the type of warrant which will release the money;
ix. Signature of the cashier;
x. Signature of the payee;
 xi. Voucher certificate;
xii. Cheque number, where the payment is by cheque; and
xiii. Cashier‘s stamp ―PAID‖ which prevents re-presentation of the voucher for
payment.

LOSS OF A PAYMENT VOUCHER

Where a raised payment voucher is missing and confirmed lost, the following
procedures should be followed:
o The Accounting Officer must be notified immediately.
o The loss should be investigated, considering all circumstances leading to
that effect.
o The investigation should confirm whether payment against the voucher
has been effected or not.
o Where payment has been made, it should be confirmed whether the cash
withdrawn is still in possession of the payee or not.
o Where fraud is suspected and confirmed, the Accounting Officer should
consider all the necessary factors to determine whether a Board of
Enquiry should be raised or not.
o Where it is established that there is no loss of cash or fraud has not taken
place, the Accountant-General should be forward a detailed report
concerning the circumstances of the loss, in the first place by the
Accounting Officer of the Ministry or Department.

RECEIPT VOUCHERS
A receipt voucher is a documentary evidence that the sum stated thereon has
been received. Any receipt into the Government purse must be supported with
―Treasury Form 15‖ (Pay-In-Form) with attached ―Treasury Receipt Book 6‖
before it is regarded as an authentic receipt voucher.
The Revenue unit of the Accounts section of a Ministry or Department will render
stewardship for all revenue generated during the year, by issuing receipts,
counterfoil books, licences and emblems.

ADJUSTMENT VOUCHERS
Adjustment voucher is a documentary evidence of formal entries which enables
transfers to be made from one account to another without actual receipt or
payment of Cash.
Adjustment voucher is used in any of the following circumstances:
(a) Payment for Inter-Ministerial Services.
(b) Correction of accounting errors arising from misclassification.
(c) Ultimate allocation of unallocated stores.
(d) Carrying out adjustments or transfers between accounts.
Adjustments are usually initiated by the creditor department and sent to the
debtor department for acceptance of the charge.

The following particulars are required on an adjustment voucher:

a) Reason for the transfer or adjustment, with full reference to the original
debit or credit being adjusted.
b) Voucher number.
c) Month of Account.
d) Particulars of Treasury or Audit Query, where the adjustment is as a result
of such an investigation.
SALARY VOUCHERS
The documents and records required to be prepared and maintained in the
Personal Emolument Section of the Ministry or Department as regards payment
of salaries and wages are as follows:

PERSONAL EMOLUMENT FORM

This is the form that confirms that an officer is still in service as at the beginning
of a year. The Personal Emolument Forms are competed and forwarded by
Sectional Heads to all departmental Heads at the beginning of a year. It contains
the grade levels and posts of the officers.

PERSONAL EMOLUMENT RECORD CARD

This is kept in respect of every officer in the civil service. Any change that affects
the remuneration of an officer will be entered in the Personal Emolument Record
Card. It contains the new salary scale in the event of promotion or increment. It
also contains deductions as regards servicing of advances.

GROUP REGISTER
It is maintained to record the names of all civil servants within a Ministry or
Department. It serves as a control against the insertion of ghost workers in the
payrolls. It register‟ the Personal Emolument Card Number, the name of the
officer, rank and date registered. The number in the register should correspond
with the control number in the Personal Emolument Card.

SALARY VARIATION ADVICE

This is used by the Personal Emolument Department of the Ministry to inform the
Accounts Section about any changes affecting the salary of an officer. It is
issued when an officer is being promoted, retired, suspended, dismissed or
transferred. Five copies of the paper are prepared and distributed to the
following sections/files:
I. Payroll Section
II. Variation Control Section
III. Internal Audit Section
IV. Variation Control File
V. Officer‘s Personal File.

VARIATION CONTROL SHEET

This is prepared by the Variation Control section to serve as check over the
payroll prepared by the salary preparation unit. It is a record that is maintained
to show each variation in the month of emoluments, taxable allowances and the
deductions made for each officer. The aggregate of these variations are summed
up or subtracted from the relative aggregate of that of the previous month. The
figure arrived at after the addition or subtraction will determine the total
emoluments, taxable allowances and other types of deductions to be effected in
the current month‘s salary.

PAYROLL SUMMARY VOUCHER

It is the form used to sum up the various columns or the separate payrolls. The
total obtained is compared with that on the Variation Control Sheet.

ADVICE OF DEDUCTION FROM SALARY

This is a form used to cover any deduction made from the salary of an officer,
e.g. taxes, union dues and advances. It is prepared by the Sectional Head and
forwarded to the salary section. The purpose is to notify the salary preparation
section of the deductions to be made from the salary of an officer for the period.
ON-PAYMENT VOUCHERS
These are vouchers raised at the personnel department of the salary preparation
section, in respect of deductions that have been made from salary and are
payable directly to other authorities such as NSITF, National Housing Fund,
Union Dues and Federal Inland Revenue Service. etc.

CHEQUE OR CASH ORDER FORM

This is a form that usually accompanies a prepared payroll and payment voucher
when cash is to be obtained from the Federal Pay Office for the payment of
salaries.
 Chapter Eleven
PREPARATION OF MONTHLY TRANSCRIPTS OF A SELF-ACCOUNTING UNIT
MONTHLY TRANSCRIPT
A transcript can be defined as the summary of the total receipts and payments
as posted in the cash book. The preparation of monthly transcripts is an
important aspect of the functions of a Self-Accounting Ministry. It is the only
means by which the information on the cash transactions of a Ministry are
forwarded to the Treasury. A transcript is the final accounts of a Self-Accounting
Unit or a sub Self-Accounting Unit.
The first step in the preparation of transcript is to obtain the cash book and all
the receipt and payment vouchers that have been posted for a particular month.
Then, the classification code must also be checked to ensure that the vouchers
are correctly coded. The monthly transcript is then prepared from the figures in
the analysis and the voucher schedules.

TYPES/CLASSES OF TRANSCRIPT
Transcript can be classified into three, namely: (a) Main Transcript; (b)
Supplementary Transcript; and (c) Subsidiary Transcript.
Main transcript is the transcript prepared by the Self-Accounting units and
submitted to the Accountant-General of the Federation on monthly basis. It is
also referred to as cash transcript.
Supplementary transcript is the main adjustment to the main transcript prepared
in conformity with the principle of Double Entry.
Subsidiary transcript is prepared to complement the main transcript. It is used
to correct errors or omissions in the Main Transcript.

DOCUMENTS REQUIRED TO ACCOMPANY TRANSCRIPT

The transcript prepared by a Self-Accounting Unit should be forwarded to the
Treasury with the following documents:
(a) Certificate of cash and bank balances.
(b) Schedule of vouchers pre-listed.
(c) Bank reconciliation statement.
(d) Schedule of expenditure.
(e) Schedule of outstanding vouchers.

SELF-ACCOUNTING UNIT
A Self-Accounting Unit is a Ministry or Extra-Ministerial Department which has
full control over all its accounting records. The Unit relates to the Treasury (i.e.
the Accountant-General‘s office), through the preparation of transcripts.
Examples of Self-Accounting Units are: (a) Ministry of Finance (b) Ministry of
Works (c) Ministry of Education e.t.c

Advantages of a Self-Accounting Unit

These are:
 It relieves top management of work overload.
 It speeds up operational decision-making.
 It increases flexibility and reduces communication problems.
 It increases motivation of the work force and encourages usage of
initiative.
 It provides better training for junior management.

Disadvantages of the Operation of Self-Accounting Units

These are:
 Co-ordination may be difficult to achieve.
 The extended lines of communication could lead to information overload.
 It may be difficult to achieve consistency.
  There may be duplication of certain services.
 There is the problem of sub-optimality. That is, the maximization of
ministerial goals could be at the expense of the overall objective of
Government.

SUB-SELF ACCOUNTING UNITS

A Sub-Self Accounting Unit performs the same functions as those of a Self-
Accounting Unit. However, the difference between the two is that the former
forwards its transcripts to the Treasury, with the following:
(a) Original copy of cash book.
(b) Duplicate copies of payment vouchers.
(c) Certificate of cash and bank balances.
(d) Schedule of vouchers pre-listed.
(e) Bank reconciliation statements.
An example of a Sub-Self Accounting Unit is the Federal Pay Office located in
each States of the Federation.

NON-SELF ACCOUNTING UNIT

A Non-Self Accounting Unit is a Ministry or Extra-Ministerial Department which
has no control whatsoever over any of its accounting records. The Unit prepares
vouchers, but has to make payments through the Treasury. An example of such
a unit is the Code of Conduct Bureau in a State. A Non-Self Accounting Unit
neither keeps the Treasury Cash Book nor renders transcripts to the Accountant
General.
 Chapter Twelve
STORES AND STORES ACCOUNTING
The Federal Government Financial Regulation defines stores as ―All moveable
items purchased from public fund or otherwise acquired by the Government‖.
Stores in Public Sector Accounting simply refer to stock of materials purchased
with Government money for official use. All purchases of and indents for stores
have to be authorised by the Officer controlling expenditure, and the local
purchase orders or indents signed by him.
The Accounting Officer is responsible for the loss of stores and other
Government property in his care. Stores control is an aspect of management.
STORES CLASSIFICATION
Allocated Stores: These are stores which the money used for their procurement
are already provided or budgeted for in the approved estimates. The cost of
allocated stores is charged to the sub-head that is responsible for its
expenditure. They may be either purchased directly or obtained from the
Unallocated stores‘ stock.

Purposes of Allocated Stores: These include the following:

 To make provision for acquisition of quality stores and make them
available always when required.
 To create the required storage space always. This is by adhering to the
policy of holding the minimum stocks required.
 To ensure that those stores which are always needed are made available.
 To incur minimum cost as regards the acquisition of stores.

Unallocated Stores: -Unallocated Stores are those purchased for general stock
rather than for a particular work or service, for which the final vote of charge
cannot be stated at the time of purchase. The cost of unallocated stores is
chargeable to the unallocated stores sub-head in the approved estimate of
expenditure, and later treated as allocated stores when issued.

The Purposes of Unallocated Stores

Unallocated stores are acquired for the following purposes:
a) Acquiring stores of a standard design and in constant demand.
b) Saving storage space by holding minimum stock requirements, to avoid
‗stock outs‘.
c) Making the stocks immediately available when required for a project or
service.
d) Allowing the vote of the relative project, department or service to be charged
with the value of the stores when issues are made from the unallocated
stores.
e) Reducing overall cost and maximizing benefit.
The above two classifications of stores are further sub-divided into three as
follows:

Expendable Stores: - These are stores that are used in the day-to-day activities
of an organization. They have a life span of about 2 to 5 years. They include
Computer, Television, and Farm implements such as cutlasses, shovels and
Calculators.

Non-Expendable Stores: - These are stores that can be used for a long period of
time. They need only maintenance and repairs when required. They have a life
span of 5 years and above. Examples of the stores are plant and machinery,
building, motor vehicles, and furniture.
Consumable Stores:- They are used in the day-to-day running of an
establishment. They are used up immediately demand is made for them. An
example of consumable stores is Stationery.

DOCUMENTATION OF STORES
Store records are contained in the stock ledger accounts which are extracted
from vouchers. In the case of unallocated stores, the quantities, values and
balances are recorded in the stock ledgers and vouchers.
It is worthy of note that a storekeeper is not responsible for the maintenance of
store ledgers. This duty is assigned to the store officer.
The store officer is required to keep separate ledgers for different items of
stores. All items of stores should be serially recorded and arranged. All stores
that belong to the same class should be recorded in one single ledger.

Minimum Records to be maintained by each Ministry/Extra-Ministerial

Department and other arms of Government must include:
a) Purchases Journal or Stores Cost Book
b) Issues Journal or Stores Issues Summary
c) Stores Ledger which must include an account for each category of store,
and a separate account for:
o Shortfalls and Excesses (or Price Adjustments)
o Claims.

RECEIPTS OF AND PAYMENTS FOR STORES

When stores are received, the authorized officer in charge should ensure that
they meet the specifications, are of the required quality and quantity. All store
receipt documentation procedures should be duly observed.
The storekeeper should ensure that all received items are entered in the store
ledger and charged to the appropriate expenditure sub-head.
The payment voucher for all items received should be supported with valid local
purchase order (LPO‟s), invoices and copies of stores receipt vouchers (SRV‟s).
The SRV number should be clearly stated on the certificate issued by the
storekeeper.

TRANSFER OF STORES
There may arise a situation where one store in a department is out of stock of a
particular item. In this case, items may be transferred from other store. The
transfer is carried out by raising a stores transfer requisition (STR) by the first
store making the request. The STR will be prepared in duplicate and the original
forwarded to the issuing store. The latter then issues a store issue voucher
(SIV), also in duplicate, a copy of which will accompany the transferred stores.
The other copy will serve as a receipt voucher.

ISSUE OF STORES
Before the storekeeper issues out any requisition for stores, a store requisition
form (SRF) will have to be prepared and signed by the authorized officer of the
department or unit where the material is needed. All stores issue voucher
(SIV‟s) will be prepared to support all store issues on the prescribed forms. An
SIV is to be prepared in duplicate. The storekeeper will update his records by
posting the tally or bin cards, with the information on the quantity and dates of
issues.

STORE PROCUREMENT PROCEDURE

The Accounting Officer is responsible for the determination of the maximum,
minimum and re-orders levels for the unallocated stores. When the re-order
level is reached, the storekeeper is expected to make purchase requisition to the
Purchasing Department. The following procedure will then be followed by the
Purchasing Department in the acquisition of new stores: -
 Seek and obtain authority to make purchases from the officer controlling
expenditure.
 Advertise for quotations from suppliers or request for tenders from
contractors, specifying the closing date for submission.
 A Departmental Tenders Board will then be constituted to determine the
lowest, most reliable and dependable bidder.
 Recommendation of award of the contract to the successful bidder by the
Departmental Tenders Board.
 Approval by the Head of Department or Permanent Secretary.
 Issue of Local Purchase Order (LPO) specifying the quantity, rate and time
of delivery of the stores to the successful bidder who is the contractor.

STORES HANDOVER
This may arise where an officer is re-deployed to another department or station
entirely. It could also be due to an officer embarking on annual or casual leave.
The following procedure is to be observed in the handover of stores: -
1) The officer taking over the stores should ensure that items in the store tally
with the records in the store ledger or bin card.
2) Where the out-going officer is not available, an appointment of a stock
verifier is effected to hand-over the store to the in-coming one.
3) Where there are no differences between the physical stores and those of the
ledger records, the incoming and outgoing officers will sign Treasury Form 10
certificate.
4) Where there are differences resulting in the loss of stores, the outgoing
officer will be held responsible.

CONDEMNED STORES
Where a Board of Survey has condemned some items of stores and approval
given to write them off, a store issue voucher has to support the issue of the
stores, duly authenticated.

PROCEDURES FOR REPORTING LOSS OF STORES

Loss of stores may be written off under the personal authority of the Accounting
Officer, provided that:
a) The original cost of each item is not more than N5,000 and the total sum of
the value of the items does not exceed N20,000.
b) There is no weakness in the internal control system.
c) There is no evidence of fraud or theft.
d) Where negligence is involved, the offending Officer has been disciplined
according to the laid down rules and regulations.

Actions to be Taken by the Store Keeper (Officer In-Charge)

In the event of any loss of Government store, the officer in charge of the store
should:
a) Report to the Head of Department.
b) Report to the nearest Police station, if there is any possibility of fraud or
theft.
c) Initiate action on Treasury Form, 146 ―Report on Loss of Funds or Stores‖.
The Officer will complete part I of the form and forward it to the Head of
Department.
d) Ensure that if there are weaknesses in the internal control system, immediate
action is taken to prevent a re-occurrence of the loss.
Actions to be Taken by the Head of Department
On receipt of the report of loss of store, the Head of Department will:
a) Forward brief details of the loss to the Accounting Officer of the Ministry.
b) Investigate the loss and complete parts II & III of Treasury Form 146.
c) Recommend, to the Accounting Officer, the convening of a Board of
Enquiry where the circumstances warrant an investigation.
d) Ensure that if there is weakness in the internal control system, measures
are taken to plug the existing loopholes.
e) Obtain copies of Police report or court proceeding and transmit them to
the Accounting Officer of the Ministry.

Actions to be effected by the Accounting Officer

Upon receipt of the report of the loss, the Accounting officer will proceed,
as follows:
a) If the loss is not significant, complete part IV of the Treasury Form
146 and transmit a copy each to the underlisted officers:
i. The Accountant-General.
ii. The Auditor-General.
iii. The Head of the Accounts Department/Section

b) However, if the loss is material, the Accounting Officer will:

i. (Forward brief details of the loss to the Accountant-General and the
Auditor-General, for necessary follow-up.
ii. Convene a Board of Survey, where the circumstances call for such an
investigation.
iii. Recommend the suspension of the Officer concerned, where the
circumstances call for a disciplinary action.
iv. Examine critically the full details of the loss and inform the Accountant-
General, the Auditor-General and the Federal Civil Service Commission,
through a letter accompanied with the police report and Treasury
Form146.
v. Review the internal control system and tighten loose ends.
vi. Recoup the loss as stipulated by procedures.

Actions to be Taken by the Accountant-General

On receipt of the report of the loss, the Accountant-General will ensure that:
a) The Accounting Officer has followed full procedures.
b) An Accounts Officer or Internal Auditor is a member of the Board of Enquiry
set up to investigate the loss.
c) Adequate measures are taken to correct all lapses in the internal control
system.
d) All practical measures are taken to recoup the loss.

Procedures for Store Survey/Stock-Taking

The procedures are:
a) Instruct the Storekeeper to update entries in the bin cards for all receipts and
issues of materials up to the point of closure of the store.
b) Make physical count of the stock of sampled items of each category.
c) Note physical count on the survey sheet.
d) Compare the physical stock count with the tally card balance and the stock
balance as shown in the store accounts.

BOARD OF SURVEY
In Government Accounting, ―survey‖ refers to a situation where one Officer or a
group of Officers are charged with the responsibility of making the examination
of something and submitting a report on it thereafter. A Board of Survey on cash
and bank is made up of members appointed by the Accountant-General to
ascertain the balances to be surrendered by each Ministry or Extra-Ministerial
Department at the end of each financial year.
A Board of Survey is convened by the Accountant-General of the Federation,
mostly at the end of each financial year.
Classes of Boards of Survey:
Boards of Survey can be classified into:
(i) Survey of cash and bank balance
(ii) Survey of stamps balance
(iii) Survey of stores, plant, buildings and equipment.

Procedural Activities for the Conduct of Surveys

Each Board should take the following procedures:
(a) Check the cash and stamp register by casting the entries for the last month
of the year and comparing the balance at hand with one disclosed by the record.
(b) Ensure that for a bank account, a certificate of bank balance is obtained and
reconciled with the one shown in the cash book.
(c) Ensure that all currency notes and coins (if any) are counted and
denominated.
(d) Certify the cash and bank balance on both the original and duplicate copies
of the cash book.
(e) Bring any surplus disclosed to account in the cash book as a credit to
Revenue Head. Any shortage must be made good. A serious shortage should be
reported to the Accountant-General.
(f) On completion of the survey, a report is rendered in triplicate on treasury
form 42 and the certificate signed by all members of the Board. Copies of the
report are transmitted to the Auditor-General and Accountant-General.

BOARD OF ENQUIRY
A ‗Board‘ can be defined as a group of one or more persons set up for a specific
purpose. The word ―enquiry ‖ means a ―question‖, an ―investigation‖ as to make
inquiries about something. These two separate definitions put together therefore
suggest a situation in which one or more persons are constituted into a Board to
conduct an investigation.

Circumstances which warrant setting up a Board of Enquiry

In the Public Service, an enquiry may be set up to investigate the circumstances
leading to an abnormality such as a loss of fund or stores.
In considering whether a Board of Enquiry should be held, evaluation is always
given to the following points:
(a) If fraud could have taken place.
(b) If the loss is significant.
(c) If the fraud or loss has taken place through a syndicate.
(d) If the responsibility of officers is not well spelt out.
(e) If the loss took place systematically, over time.
The Board of Enquiry should invariably be invited in the cases enumerated
above.

When is a Board of Enquiry not necessary?

A Board of Enquiry may not be necessary in the following developments:
(a) If the loss involves small amount of money.
(b) If it is peculiar and ‗one-of‘ item.
(c) If the officer responsible can be located and identified.

The Convener of the Board of Enquiry

Whenever a loss of fund occurs, the Head of the Division, where the officer
concerned is serving will:
(a) Transmit brief information of the case to his Permanent Secretary or Head of
Extra-Ministerial Department.
(b) Carry out an investigation into the whole incident at the earliest possible
moment and complete Parts II and III of Treasury Form 146, forwarding one
copy to each of the following officers:
(i) The Permanent Secretary of his Ministry.
(ii) The Accountant-General of the Federation.
(iii) The Auditor-General for the Federation, and
(iv) The Secretary, Federal Civil Service Commission.
(c) Evaluate whether or not a Board of Enquiry is necessary. If so, he will
request the Secretary, of the Permanent Board of Survey and Enquiry based in
the Federal Ministry of Finance, to convene a Board.

CONTENTS OF THE BOARD‘S REPORT

The contents of the Enquiry shall include the following:
(a) A statement on the exact amount of loss incurred.
(b) Expression of idea as to whether or not the accounting system was faulty
and suggestions as to any remedy which may be instituted in the peculiar
circumstance.
(c) Recommendations for improving the physical security measures, to remove
current inadequacy.
(d) Recommendations for the evaluation of the extent of negligence of the
Officers who are responsible for the loss.
REMISSION OF COPIES OF THE BOARD‘S REPORTS
The President of the Board of Enquiry is responsible for transmitting five copies
of proceedings and reports. Where practicable copies of supporting documents
such as, Police reports and Court proceedings have to be forwarded to each of
the following:
(a) The Permanent Secretary of the Ministry or Head of Extra-Ministerial
Department;
(b) The Accountant-General of the Federation;
(c) The Secretary, Federal Public Service Commission; and
(d) The Auditor-General for the Federation.

ACTION TAKEN ON THE BOARD OF ENQUIRY‘S REPORT

On the receipt of the Board‘s report, the Permanent Secretary or Head of Extra-
Ministerial Department concerned will collate all information and urgently submit
his comments to the following persons:
(a) The Accountant-General of the Federation.
(b) The Secretary, Federal Public Service Commission, and
(c) The Auditor-General for the Federation.
His comments have to include the pinning down of responsibility for the loss and
the amount, if any, to be surcharged.
 Chapter Thirteen
ACCOUNTING REQUIREMENTS FOR THE LOCAL GOVERNMENT
Local Government relates directly with the people in a community. Which means
the Local Government is the ‗third-tier‘ Administration in Nigeria.
While the Federal Government has control over them, State Governments too
have considerable influence over Local Governments.

FUNCTIONS OF LOCAL GOVERNMENTS

The functions of Local Governments are contained in the Fourth Schedule of the
1999 Constitution. These functions include:-
 The consideration of economic planning and the making of recommendations
to State Commission on the development of the Local Government areas.
 Establishment and maintenance of cemeteries, burial grounds and homes for
destitutes or the infirmed.
 Licensing of bicycles, trucks, motor cars, etc.
 Establishment and maintenance of markets, car parks and public
conveniences.
 Construction and maintenance of roads, streets, drain, parks and other public
facilities prescribed by the State Legislature.
 Naming of roads and numbering of houses.
 Provision and maintenance of public conveniences and facilities for refuse
disposal.
 Registration of deaths, births and marriages.
 Control and regulation of outdoor advertising, movement and keeping of
pets, shops, kiosks, restaurants and other places for sale of food to the public
and laundries.
 Licensing regulation and control of sale of liquor.
 In addition, Local Government Councils in conjunction with the State
Governments, make
i. Provision for primary education.
ii. Provision for primary health care services.
iii. Provision for rural water supply.
iv. Provision for rural feeder road.
 All such other functions as may be conferred on a Local Government
Council by the House of Assembly of the State.

SOURCES OF REVENUE OF A LOCAL GOVERNMENT COUNCIL

Statutory Sources of Revenue; These includes:
a) Statutory allocations from the Federation Account. 20.60% of the federally
collected revenue accrue to the Local Government Councils, paid directly by
the Federal Government.
b) 10% of the State‘s internally generated revenue.
c) Fees and other charges imposed by the Council under its instrument of
creation and Acts of Parliament promulgated from time-to-time.

Permissive Sources of Revenue;

According to Act No. 21 of 1998, Local Government Councils may collect the
following taxes and levies, only:
(a) Shop and kiosk rates.
(b) Tenement rates.
(c) On and Off Liquor fees.
(d) Slaughter slab fees.
(e) Marriage, birth and death registration fees.
(f) Naming of street registration fees, excluding any street in the State Capital.
(g) Right of Occupancy fees on land in the rural areas, excluding those
collectable by the Federal and State Governments.
(h) Market taxes and levies, excluding any market where State finance is
involved.
(i) Motor park levies.
(j) Domestic animal licence fees.
(k) Bicycle, truck, canoe, wheelbarrow and cart fees, other than a mechanically
propelled truck.
(l) Cattle tax payable by cattle farmers only.
(m) Merriment and road closure levies.
(n) Radio and television licence fees (other than on radio and television
transmitter).
(o) Vehicle radio licence fees (to be imposed by the Local Government
Council of the State in which the car is registered).
(p) Wrong parking charges.
(q) Public convenience, sewage and refuse disposal fees.
(r) Customary burial ground permit fees.
(s) Religious places establishment permit fees.
(t) Signboard and advertisement permit fees.

Incidental Sources of Revenue; These includes:

(a) Proceeds from economic projects undertaken, such as farming.
(b) Grants from the Federal or State Government.
(c) Investment incomes, e.g. interest and dividends received.
(d) Proceeds of sale of seized goods, boarded vehicles, etc.
(e) Donations.

ADMINISTRATION OF LOCAL GOVERNMENT COUNCILS

The Local Government Council are administered by both the Executive and
Legislative arms of government.
The Executive arm is made up of the following:
(a) The Chairman;
(b) The Vice - Chairman;
(c) Supervisors;
(d) Treasurer;
(e) Secretary and
(f) Head of Personnel Management.

Functions of the Chairman

These include the following:
a) He is responsible for decision-making as regards finance and accounting in
the local government. Consequently, he is the Chief Executive and
Accounting Officer.
b) He is to preside over all Council meetings and cast vote when the situation
demands.
c) He is responsible for the custody of all funds and property entrusted in his
care.
d) He is to prepare the Local Government‘s annual budgets and submit to the
legislative arm for approval.
e) He is to prepare monthly statements of accounts to the Legislative House for
examination and comment.
f) He is required to have documentary evidences of all receipts and
disbursements of public funds.

Functions of the Vice-Chairman

(a) He is to preside over Council meetings in the absence of the Chairman.
(b) He is to be closely involved in the running of the Local Government by
assisting the Chairman.
(c) He is to attend to matters of utmost urgency where the Chairman is not
available and relate same to the Chairman for decision-making.

FUNCTIONS OF COUNCIL SUPERVISORS

By paragraph 30 of the 1976 Guidelines on the Reforms of the Local
Government, Supervisors perform the following functions:-
a) As the political Heads of Departments, they are Vote Controllers and are
accountable to the Council Chairman.
b) They are members of the Cabinet of the Local Government Council and
automatic members of the Finance and General Purposes Committee.
c) Supervisors give directives to the executive Heads of Departments on general
policy issues. They do not interfere in the day-to-day running of the
departmental affairs.
d) They assist the Chairman in supervising the execution of Local Government
Council projects under their purview.

Treasurer
A Local Government Treasurer office is established by law and is empowered to
control and manage the Council‘s finances. The functions of Local Government
Council Treasurer, as contained in the Civil Services and Local Government
Reform of 1988, include:
(a) Rendering financial advice to the Council;
(b) Serve as the Secretary to the Budget Committee;
(c) Receiving and disbursing money for the authorized ends;
(d) Keeping proper accounting records of money collected or utilized;
(e) Verifying the accuracy and integrity of all accounting records;
(f) Ensuring compliance with all financial instructions or laws for safe custody of
the Council money;
(g) Ensuring that vouchers are correctly made out and that funds are available in
the appropriate vote of charge;
(h) Rendering necessary contemplated statutory returns to the State and Federal
Governments;

Functions of the Secretary

As the Secretary to the Local Government,
1. He intimates the Chairman, Vice-Chairman and the Council with the notice
of meetings.
2. He records the minutes of the Council meetings.
3. He is to settle amicably differences between Officers in the Local
Government and the Councillors.
4. The Secretary is to deliberate on financial, social and political issues with
―The Council‖, i.e. the legislature, as they affect the Local Government.
5. Liaises with the Secretary to the State Government and other important
dignitaries on matters of interest to Local Government Councils;

Functions of the Head of Personnel Management (Director of General Service –

Administration)
a) All vouchers and cheques shall be signed by the Head of Personnel
Management.
b) All contractual agreements, local purchase orders, works and such other
documents relating to contracts and supplies shall be signed by the Head of
Personnel Management, subject to the approval of the Council Chairman.
c) The Head of Personnel Management is a facilitator to the Audit Alarm
Committee of the Local Government Council.
d) He is the recognized second signatory to all the disbursements of the Council.
e) Based on Federal Government circular of May, 1991, he assumes the position
of the Clerk of the Council Legislature, even if temporarily.
 Funds Allocation Committee (FAC)
The Funds Allocation Committee (FAC) comprising the Council Chairman, the
Vice-Chairman, All Supervisory Councillors (Supervisors), the Secretary to
the Local Government, the Treasurer and the Head of Personal Management.

Functions of FAC
 Receiving and considering monthly expenditure proposals of all
Departments as collated by the Treasurer;
 Arranging the payment of contractors‘ fees and approving all
disbursements from the coffers of the Council, especially for the
settlement of personnel emolument; and
 Deliberating on the monthly financial statements prepared by the
Treasurer.

THE COUNCIL LEGISLATURE

The Legislature consists of the Leader of the House, his Deputy and the elected
Councillors. The Local Government Council is the Legislative Arm of the Local
Government.
Functions of the Council Legislature
(a) To promulgate laws guiding the administration of the Local Government as
may be allowed by the Constitution.
(b) To analyse, debate, approve and amend the Local Government annual
budgets.
(c) To critically examine, consider, approve and monitor the execution of all
capital projects and programmes in the annual estimate.
(d) To examine and make comments on the monthly financial statements of the
Council as presented by the Chairman.
(e) To consult, intimate and advise the Chairman on matters affecting the
development of the Council.
(f) To serve the Chairman notice of impeachment and thereafter proceed on the
procedures for the exercise, where he is found to have committed an
impeachable offence.

FINANCIAL CONTROL OF LOCAL GOVERNMENT COUNCILS

The financial control of the Local Government Councils can be divided into two:
‗Internal Control‘ and ‗External Control.‘
Internal Controls
The internal control measures are:
(a) Issuance of financial authorities, e.g Supplementary Warrants.
(b) Appointment of Committees for different services.
(c) Centralization of all payments.
(d) Preparation of standing orders and instructions on the signing of
cheques issued, payments on accounts, etc.
(e) Establishment and maintenance of Internal Audit.
(f) Preparation of estimates of income and expenditure for the year.
(g) Budgetary control and feedback processes.

External Controls
The following are the external control measures:
(a) Legislative control (National Assembly and State Assembly)
(b) Federal Government and State Executive Control.
(c) Control by the general public comments by individuals on Local
Government Councils.
(d) External auditor control. Control from:
(i) Auditor-General for the Local Government;
(ii) Auditor-General for the State; and
(iii) Auditor-General for the Federation of Nigeria.
PROBLEMS/LIMITATIONS OF LOCAL GOVERNMENT COUNCILS
The problems facing local government councils are as follows:
a. Local Government Councils are not allowed to raise tax or introduce a new
form of tax without express permission from the State Government.
b. They have limited revenue sources.
c. They cannot raise loans or maintain loan funds without permission.
d. Because they cannot raise loans, Councils find it difficult to execute essential
capital development projects.
e. Poor revenue collections may cause delay in the payment of staff salaries and
difficulty in executing essential capital development projects.
f. The non-payment or delay in payment of Federal/State Government grants or
shares of oil revenues to the local authorities.
g. The non-viability of certain local authorities, especially those whose areas
have small population figures.
h. Rising cost and increasing demand for improved services.
i. Ineffective financial and management controls, internally and externally.

Local Government Council‘s Spending Limit

In order to curtail wasteful spending, the regulation pegs the expenditure
approval ceilings of each principal officer of local government council, as
follows:
Internal Council Vice Head of Head of
Generated Chairman Chairman Personnel Department
Revenue Management
Above 2M 250,000 50,000 10,000 5,000
1-2M 100,000 20,000 5,000 3,000
Below 1M 50,000 10,000 3,000 2,000

CONDITIONS/PROCEDURES FOR DISBURSING MONEY

i. All expenditure approvals by an official shall be reported within a week
to a higher officer.
ii. Every officer authorizing expenditure will be personally liable for
expenditure approved by him.
iii. Approval of expenditure is subject to the normal budgetary
appropriation.
iv. Contracts above local government council limit should be approved by
the Ministry of Local Government.

Typical Local Government Council Final Accounts under Cash IPSAS

The ―cash basis‖ of accounting is generally used, just as it applies to the first
and second tiers of government. Income is recognized only when the cash is
received. Expenditure is recognized when the liability is paid for.
The typical final accounts are made up of;
A. A Statement of Income and Expenditure, for the year ended December 31, ….
B. A Statement of Assets and Liabilities as at the year ended December 31, …..

Typical Format of a Statement of Revenue and Expenditure

Jibowu Local Government Council
Note Approved Estimates Actual
₦ ₦
Revenue:
Local rates x x
Local licence fees and fines x x
Earning from commercial undertakings x x
Rent on local government property x x
Interest payment and dividend x x
 Grant x x
Statutory allocation x x
A x x

Expenditure:
The council x x
Office of the secretary x x
Education department x x
Works housing x x
Traditional office x x
Education x x
Environmental sewage x x
Agricultural and rural development x x
Transportation x x
Workshop x x
B x x
General Revenue Balance (A-B) X X

FORMAT OF STATEMENT OF ASSETS AND LIABILITIES AS AT DECEMBER 31, ---

₦
Advance/Debtors x
Cash and bank x
X

General Revenue x
Liabilities x
X

The new statutory financial statement to be prepared and published by each

local government
Cash flow statement for the year ended December 31, -------
Current Year Previous Year
₦M ₦M
Operating Activities:
Receipts:
Internal generated revenue x x
Grants/Subventions x x
VAT x x
Statutory revenue allocation x x
Miscellaneous receipts x x
Total Receipts a x x
Payment:
Personal emolument x x
Pensions and gratuities x x
Consolidated revenue fund charge x x
Overhead costs x x
Public debt cahrges x x
Recurrent grants and subventions x x
Subsides x x
Miscelleneous expenses x x
Total Payment b x x
Net cash flow from operating activities
(a-b) A x x

Investing Activities:
Purchase/Consolidated of assets (x) (x)
Purchase of financial market instruments (x) (x)
Proceeds from sale of assets x x
Net cash flow from investing activities B x x
Financing Activities:
Proceeds from loans and others x x
Borrowings x x
Repayment of loan (x) (x)
Net cash flow from financing activities C x x
Net increase/(decrease) in cash and cash
equivalent (A+B+C) x x
Cash and cash equivalent at the beginning x x
Cash and cash equivalent at the end x x

Assets and Liabilities for the year ended December 31, ……….
Local Government Council
Current year Previous Year
₦M ₦M
Assets:
Liquid assets x x
Cash and bank balances x x
Investments and other cash assets:
Investments x x
Advances x x
Others x x
Total investment and other cash assets x x
Liabilities:
Public funds:
General revenue balance x x
External and Internal loans:
External and internal loans x x
Deposits x x
Loans x x
Total liabilities x x

Revenue and Expenditure for the year ended December 31, ---------
Actual Budget Actual Variance
Previous Year Current Year Current Year
₦M ₦M ₦M %
xx Opening balance xx xx xx
xx Add: Revenue
xx Rates xx xx xx
xx Fines, fees and licenses xx xx xx
xx Earning and sales xx xx xx
xx Rent on government properties xx xx xx
xx Interest and dividend xx xx xx
xx Taxes xx xx xx
xx Statutory revenue allocation xx xx xx
xx Total Revenue a xx xx xx
Less: Expenditure
xx General administration xx xx xx
xx Health and environment xx xx xx
xx Works and housing xx xx xx
xx Education xx xx xx
xx Agric. And social development xx xx xx
xx Grants and subsides xx xx xx
xx Capital projects xx xx xx
xx Miscellaneous expenses xx xx xx
xx Total expenditure b xx xx xx

xx Balance (a-b) xx xx

Budgeting and budgetary control

The executive arm of government prepares the budget for the approval of the
Legislature, which is assented to by the Council Chairman. The following are the
budgetary control procedures:
a) Approval: Payments must be approved before spending;
b) Monthly reports: These are prepared to compare actual figures with the
budgets and extract variations;
c) Actual actions are taken to correct the errors or reflect variations;
d) Internal audit: From time to time, the internal auditors verify the integrity of
the accounts and write reports appropriately;
e) External audit: The Auditor General for Local Government verifies the records
of all local government councils in the state; and
f) Limit of expenditure: Individual local government officers have limits of
expenditure payments which they must not exceed.

The contents of Local Government Financial Memoranda

The contents of Local Government Financial Memoranda may be summarised, as
follows:
o The format of budget and budgetary control;
o The financial responsibilities of the Chairman and other accounting officers of
a local government;
o The responsibilities of the local government Secretary, Treasurer and Heads
of Departments;
o The powers and functions of the Auditor General for Local Government;
o The various financial offences and their respective sanctions;
o The means of revenue collection and control;
o Main books of accounts kept in the local government; and
o The custody, accounting and control of stores.
 Chapter Fourteen
LOSS OF GOVERNMENT FUND
Loss or shortage of fund is a depletion of government fund at a given time.
Which means is the deficiency or lack of amount expected or due to government
at a particular time as a result of negligence or dubious act of the officers in
charge of public fund.
TYPES OF LOSSES
The type of losses that can arise in a public sector are as follows
(a) Misappropriation of funds
(b) Falsification of records
(c) Conversion of funds to personal use.
(d) Fraudulent payments
(e) Theft.
(f) Negligence
(g) Abandonment of revenue receivable.
(h) Abandonment of advance granted from recurrent expenditure
(i) Loss of Cash

RESPONSIBILITY OF ACCOUNTING OFFICER IN THE EVENT OF LOSS OF FUND

Where a cash loss to the value of N 50,000 or less has occurred without fraud
being involved, Accounting Officers are personally empowered to surcharge the
officers responsible up to the full amount of the loss.
Accounting officers are personally responsible for ensuring that all responsible
officers for losses are surcharged.
For officers above G.L.10, the loss should be reported to the Accountant –
General of the Federation.
Where a loss is treated under this regulation, Accounting Officer must
immediately send a brief report of the circumstances in deciding the value of the
loss to:
(a) The Chairman, Federal Civil Service Commission
(b) The Auditor – General for the Federation
(c) The Accountant – General of the Federation
(d) The Federal Ministry of Finance.
According to the FR 1502, a loss shall be charged as a personal advance against
the officers responsible for the loss pending a decision by the Federal Losses
Committee.
The officer in charge of the office in which the loss occurs shall take the following
actions:
(a) Report immediately to Head of the Unit or Division by the fastest means if
the loss occurs away from the Headquarter.
(b) Report to Police if fraud or theft is suspected.
(c) Initiate immediate action by completing Treasury form 146 part 2 and
forward same in quintuplicate to Head of Units or Division.
(d) Ensure that if a weakness in the system of control or in security is
established, measures have been taken to prevent a re-occurrence ofthe loss.
(e) Ensure that accounting entries have been made.

THE FEDERAL LOSSES COMMIT TEE

The Federal Losses Committee is a Standing Committee responsible for
considering all cases involving loss of cash, stores and vehicles.
Composition of the Federal Losses Committee
(a) A Representative of the Auditor-General as Chairman
(b) A representative of the Accountant General
(c) A representative of the Administration Department of the Ministry/
Extra Ministerial office and other Arms of Government concerned.
(d) A representative of the Inspector-General of Police
(e) A representative of the Economic and Financial Crimes Commission.
(f) The Inspectorate Department of the office of the Accountant-
General shall provide the Secretariat.

ACCOUNTING TREATMENT OF LOSS OF GOVERNMENT FUND

Where it is confirmed or established that there has been loss of cash due to
embezzlement, armed robbery, fraud or failure to receive an advance granted or
collect revenue for service rendered, adjustment vouchers are not raised.
Such losses are charged to Non-Personal Advance account by preparing payment
voucher.
The Non- Personal Advance Account is prepared by the Accountant-General after
authorization by the Minister of Finance. The financial accounting entries
required for the treatment of such losses however depend on the following;
(a) Date the transaction which led to the loss occurred
(b) Date the loss is discovered
(c) Date of passing the entries
(d) Nature of the loss
(e) Type of fund involve
 Chapter Fifteen
BUDGETING AND BUDGETARY CONTROLS
A budget is a financial and/or quantitative statement prepared and approved
prior to a defined period of time for the purpose of attaining a given objective.
Government budget shows an authorized appropriated and estimated revenues.
A budget is normally for a year. It is therefore a short-term plan.

THE PURPOSES OF BUDGET

 A budget is an economic and financial document.
 Through the legislature, the executive arm uses the budget as a means of
accountability for the money earlier entrusted.
 It is a useful guide for the allocation of available resources.
 It is to give authority to future spending; it is an expenditure
authorization means.
 It aims at setting standards to enable performance to be monitored and
evaluated.
 It is to assist policy makers to develop policies that will assist a Nation to
achieve its main objectives.

TYPES OF PLANNING OR BUDGETING

ANNUAL PLAN OR ANNUAL BUDGET: This is also known as a short-term plan. It
is a kind of plan that last for or spans a period of one year. It spelt out the main
sources of current revenues and outgoings of government expenditure for the
period of one year.
ROLLING PLAN OR ROLLING BUDGET: This is the medium-term plan usually has
a time span of 3 to 5 years within which the development objectives of a nation
are expected to be met. The medium term plan articulates the strategies and
policies for the achievement of the stated objectives. Achievements made are
documented and compared with the yearly targets set. Reports on the progress
made are furnished by the Ministry or Extra-Ministerial Department concerned to
the National Planning Commission.
THE PERSPECTIVE PLAN: This is also referred to as long-term plan. Its period
spans over and above 10 years. It is expected to articulate the vision of a
country and the long-term view of the growth and structure of the economy. It
serves as a framework for designing and implementing Rolling Plans. A
Perspective Plan is always split into many short-term plans of four or five years,
in order to achieve long-term objectives.
FLEXIBLE BUDGET: This is a budget that recognizes the difference between the
fixed and variable costs and gives room for result determination and evaluation
under the varying levels of activities. Thus, it accommodates changing levels of
production and facilitates the production of control reports for the prevailing
levels of activities. It is a budget which takes cognizance of cost behaviour and
adjusts according to the level of activities attained. It is used for control
purposes.

METHODS OF PREPARING BUDGETS BY GOVERNMENT IN NIGERIA

Traditional/Line Items/Incremental Budgeting: It provide a side-by-side
comparisons of past accounting periods next to the current or forecast period.
Which means it involves picking last year‘s figures and adding a percentage to
arrive at this year‘s budget. The percentage added is based essentially on three
factors, namely:
(a) Trend of economic event;
(b) Inflation; and
(c) The available funds.
Advantages of Line-Item Budgeting Method
 It is simple to understand and operate.
 It ensures that money is used for assigned uses.
 Changes can be made in the ―line items‟ easily.
 It encourages the continuity of projects.
 The method ensures that budget is translated in monetary language and
relates to the relevant activities/operations

Disadvantages of the ‗Line-Item‘ Budgeting Method

 The budget is concerned more with conforming to legal requirements
rather than proper planning and development.
 The method allows past errors to be carried forward. It is therefore not
efficient in its operations.
 It encourages inefficient spending habits by public officers.
 It results in continual growth budget totals leading to inflation, as opposed
to serious economic needs.

‗Zero-base budgeting‘ technique (ZBB): The technique requires every item of

expenditure to be justified as if the particular activity or programme is taking off
for the first time. The budgeting process starts from a base of zero, with no
reference being made to the prior period‘s budget or actual performance. ‗Zero-
Base‘ budgeting seeks to avoid perpetuating obsolete expenditure items.
In government, the three key users of the ‗zero-based‘ budgeting
technique are:
 The legislature;
 The executive; and
 The various ministries, extra-ministerial departments and parastatals.

DECISION PACKAGE: A decision package includes a description of services and

related costs. As well as the budget, each package contains a statement of the
project goals.
‗Zero-Base‘ budgeting involves the use of decision-package approach, based on
the identification of activities which may be classified into the following five basic
events:
(a) Identification of ‗decision units‘ and formulating operational plans. The entire
Ministry or Parastatal is divided into smaller components called `decision units.‘
(b) Analysing the whole budget into ‗decision packages‘, based on the ‗decision-
units‘, to which costs are assigned and to the alternative ways of executing the
same operation.
(d) Determination of the ‗cut-off‘ point, to choose the packages which can be
included and those to be rejected.
(e) Prioritisation of the packages, to highlight the ones which fit in with the
available resources.

Advantages of Zero-Base Budgeting

 Items of expenditures are reviewed and justified before they are
accepted.
 It creates questioning attitude instead of assuming that current practice
maximizes expected money value. Wasteful spending is thereby reduced.
 It provides a better yardstick for the measurement of performance.
 The process involves all the personnel in the units, departments or
organisation which is commendable, since it enables every person to feel
as being part of decision making.
 Under ‗Zero-Base‘ budgeting, important projects can continue to receive
funds, owing to their viability.
Disadvantages/Problems of Zero-Base Budgeting
 The technique requires a lot of time and resources to identify.
 Bureaucrats often do not trust the approach and hence frustrate its
effectiveness.
 The decision packages or programmes cannot be arranged easily in order
of priority; such actions are very subjective. Politicians can decide to carry
out certain activities which may be costly.
 It involves the task of analyzing and ranking a lot of data and information
which a number of civil servants find difficult to manage. This situation is
further complicated by lack of qualified and competent personnel in the
public sector, to handle the application of this technique.

Planning, programming and budgeting system (PPBS): Planning, Programming

and Budgeting Systems is a budgeting approach which is based on systems
theory, output and objective orientation, with substantial emphasis on resource
allocation on the principle of economic analysis.
The technique can be viewed from the followings:
(a) Planning: This involves the development of long range objectives and goals
of the public sector institutions. Such goals and objectives are at times
prioritised for the purposes of their achievement.
(b) Programming: Programmes are developed to achieve the objectives or goals
as identified under the planning. Alternative programmes are identified here and
compared.
(c) Budgeting: This involves placing money values on the programmes, putting
together the costing of the programmes and the relevant benefits that will be
derived.

The Main Steps in Planning, Programming and Budgeting System

a) Identification and enumeration of goals and objectives of the organisation.
b) Defining the total system in detail, including objectives, environment,
available resources, the programmes and their objectives, etc.
c) Planning and analysis: These involve continuous process of developing,
comparing and analyzing alternative programmes, so as to evolve the
most appropriate package for the organisation.
d) Development of the appropriate measures of performance for
theprogrammes of the organisation.
e) Programming and Budgeting: The agreed package of ―programmes‖
complete with resource requirements and expected results are expressed
in the form of ―programmed budgets‖.
f) Reporting and Controlling: Planning, Programming and Budgeting System
requires sophisticated information service which is able to monitor the
progress made towards meeting the organisational objectives.
Performance evaluation, therefore, emphasizes the attainment or non-
attainment of the desired objectives, rather than the amount spent which
is the focus in traditional budgeting system.
g) Development, each year, of a multi-year programme and financial plan

Advantages of Planning, Programming and Budgeting System

 It enables budget authorities to evaluate programmes to determine their
efficiency and effectiveness;
 The technique achieves effective use of budgeted resources and anticipated
performance;
 It ensures rational decision-making and forces those seeking budgetary
allocations to consider alternatives;
  It stresses more on the future, since planning involves projecting.

Disadvantages of Planning, Programming and Budgeting

 Natural resistance to change, particularly among the very Senior Officers
in the Governmental hierarchy.
 Planning cannot be done well since most of the goals or objectives in the
public sector system cannot be physically identified and measured easily.
 The process requires a lot of time, money and personnel who can do good
analyses financially and technically.
 The uncertainty of the future makes long term planning difficult.

Performance budgeting: Performance budgeting can be defined as a technique

used for presenting public expenditure in form of functions or projects to be
undertaken, highlighting the cost involvements. The anticipated costs are
compared with the expected income. The focus of the technique is on results or
output achieved, rather than how much has been expended.
The essential features of a Performance Budgeting System, are as follows:
 Classification of budgets in terms of functions and activities.
 Measurement of work done or output provided, by each activity.
 Expression of the budget in a way which allows direct comparison between
a project‘s cost and the anticipated income or benefit.
 Monitoring of actual cost and performance against the budgeted results or
expectations.

Advantages of Performance budgeting

 Inputs and outputs are both shown and measured,
 It is a monitoring device, since the results of each activity are noted and
measured;
 Emphasis is on the activities of the organisation, as well as on controlling
costs.
Disadvantages of Performance budgeting
 Personnel for project costing and analysis are difficult to obtain in the
public sector.
 The process of allocation of cost estimates over the activity or programme
elements is difficult.

FACTORS WHICH MILITATE AGAINST THE BUDGETING SYSTEM IN THE

PUBLIC SECTOR
(a) Human Element: Top management members see budgeting as restraining
and challenging. They tend to develop a lot of apathy towards its adoption and
implementation.
(b) The Type of Project for which Budget is Prepared: How successful a budget
will be depends on the type of project to which it relates. Some projects are
popular while others are not. Those which are not popular may face stiff
implementation problems.
(c) The Problem of Inflation: Inflation tends to reduce the purchasing power of
money. When the value of money is falling, budget implementation may run into
problems. The revenue available will not be able to cover the expenditure.
(d) Political, Social and Cultural Elements: Each segment of the Nation has its
own cultural beliefs and taboos which may take time to change. Introducing
innovation may be met with stiff opposition. For example, a section of the
Country may not be willing to provide land for development purposes. Secondly,
where there is political instability, budget implementation is at risk.
e) Changing Government Policies: To implement a budget, a lot depends on the
policy of Government. For effective budget implementation, Government policies
have to be harmonized and consistent. Frequent changes of government policies
affect budget implementation.

BUDGETARY CONTROL: This is a whole system of control, financial or otherwise,

to ensure that revenues and expenditures are in line with the budgets and that
wastage is reduced to the barest minimum. Budgetary control is an important
tool to achieve a stated objectives.
OBJECTIVE OF BUDGETARY CONTROL
 The budgetary control coordinates the various activities of the firm and
secures co-operation of all concerned so that the common objective of the
firm may be successfully achieved.
 To helps in channeling the capital expenditure in the most profitable
manner.
 To provide a yardstick against which actual results can be compared.
 To act as a guide for management decision when unforeseeable conditions
affect the budget.

THE BUDGET CYCLE

The budget cycle is the period which begins with the initiation of the preparation
of the central government budget for any new financial year. The cycle starts
with the budgetary estimates preparation stage, through the authorisation of
estimates into budgets for spending, the processes of spending such amounts
authorised, and the final accountability of such spending to parliament as
confirmed by the audit of the financial reports revealing the spending.
For an efficient budget cycle and budget preparation, there is the concept of
Public Expenditure Survey (PES) that adds more value to the annual budgeting
process. PES in government financial administration is a process that involves
the examination of spending activities of public sector organisations and how
such expenditures have been felt through projects and developments in the
economy.

PERSONNEL COST BUDGET (PCB)

Personnel Cost Budget is the total of the basic salaries and allowances of the
various categories of staff in each Ministry/Extra-Ministerial Department. The
procedure is as follows:
(a) Identification of various positions ranging from GL 01-17;
(b) Identification of the number of staff in each post, which may include newly
promoted, new recruitment and the existing staff.
(c) Identification of grade level of each position;
(d) Identification of basic salary and the annual incremental rate.
The format for the preparation of PCB is as follows:
Salaries (Gross pay): {incremental rate (x - 1) + Basic Salary} n
Where:
x = new step each of the officer will be,
1 = constant
N = number of staff in each position.

OVERHEAD COST BUDGET

Overhead Cost Budget is prepared using the principle of incremental or
traditional budgeting approach, by increasing the previous year is budgeted
expenditure by inflation rate.
There are two ways examiners can test overhead cost budget under traditional
budgeting system:
(a) Where the increase is given in values, the formula to apply is
bi = (bo x i) + ( co x i)
Where;
bi = budgeted activities level;
bo = base year activity;
i = inflation factor
co = current year activity
(b) Where the increase is given in percentages (%), bi=bo x i x %.

REVENUE BUDGET
This is computed by aggregating all the various incomes accruing to a particular
ministry, state or local government. The revenue of the government is derived
from Oil and Non–Oil sources. It refers to all government revenue, which accrue
into the Federation Account, Consolidated Revenue Fund, Contingency Fund and
Development Fund.
Purposes of Revenue Budget
The following are the purposes of revenue budget.
(a) To determine the level of aggregate income receivable by the government;
(b) To determine the level of expenditure acceptable to the government;
(c) To determine areas of weakness in terms of revenue generation;
(d) To identify the major sources of income to the government;
(e) To evolve policies that will enhance revenue generation to the government.

CASH BUDGETING
The preparation of cash budgets is part of the budgetary control exercise. It
forecasts the cash inflows (receipts) and outflows (payments) of a Ministry or
Parastatal, usually over three to six months at a time. Cash budgeting is
designed principally to stave off liquidity problems.

Advantages of Preparing Cash Budgets

The advantages may be highlighted, as follows:
a) A cash budget assists in the availability of cash to pay debts owing as they
fall due.
b) It facilitates the appreciation of the amount of liquid cash available to
execute capital projects.
c) The Organisation may invest surplus and idle fund and consequently earn
some return.
d) Conversely, the cash budget monitors when the establishment is likely to be
short of fund, so that some loan or overdraft can be raised or marketable
securities sold.

FUNCTIONS OF THE MINISTRY OF BUDGET AND PLANNING/DEPARTMENT OF

PLANNING, IN THE PRESIDENCY
 Developing reasoned economic assumptions and forecasts.
 Issuing budget guidelines to the Ministries and Extra-Ministerial Departments.
 Acting as the liaison between the Presidency, Ministries and Extra-Ministerial
Departments during the budget preparation.
 Compiling total revenue and expenditure estimates.
 Drafting the budget speech.
 Supervising and controlling the implementation of the budget.
 Monitoring and evaluating the performance of programmes funded through
the Government budget.
 Chapter Sixteen
STANDARDIZATION OF FEDERAL, STATE AND LOCAL GOVERNMENT REPORTING
FORMATS IN NIGERIA
National Chart of Accounts (NCOA) For General Purpose Financial Reporting
(GPRS) and Budgeting
The National Chart of Accounts (NCOA) may be defined as a complete list of
budget and accounting items where each item is uniquely represented by a code
and grouped into tables of related data for the purposes of tracking, managing
and reporting budgetary and accounting items in an orderly, efficient and
transparent manner. It is also a created list of codes which can be represented
by numeric, alphabetic or alphanumeric symbols.

Objectives of NCOA
 To give ample opportunity for comparability
 Unification and harmonization of coding, budgeting, accounting and
reporting system
 To bring about global interpretation of Nigeria General Purpose Financial
Statements (GPFS)
 Nationally consistent financial reporting
 Improvement in transparency and accountability
 To facilitate ease of computerization of accounting system

Features of NCOA
i. NCOA was designed after due consultations with all Local Government
Councils, State and Federal Government of Nigeria taking into
consideration their peculiar needs;
ii. Expandable/Flexible
iii. Each item has a unique code
iv. Used for both budgeting and accounting
v. IPSAS cash and accrual basis compliant
vi. Government financial statistics (GFS) 2001 compliant; and
vii. Incompliance with the classification of functions of government

Structure of National Chart of Accounts

i. Administrative Segment: The Administrative Segment assigns
responsibility for each transaction whether revenue centre (receipt) or
cost centre (payment)
ii. Economic Segment: Every receipt must be from a particular source e.g
contractor registration fee. Likewise, every expense must be on a
particular item or object e.g. purchase of drugs and medical supplies. It
answers ―What” question of every transaction.
iii. Functional Segment: Functional classification categories expenditure
according to the purposes and objectives for which they are intended.
Functional Classification by Functions of Government is defined as a
detailed classification of the functions, or social-economic objectives that
general government units aim to achieve through various kinds of outlays.
Functional classification organizes government activities according to their
broad objectives or purposes.
iv. Programme Segment: The programme classification identifies various set
of activities to meet specific policy objectives of the government e.g. Pre-
primary education, poverty alleviation and food security.
v. Funds Segment: The Fund Segment addresses the ―Finance by‖ element
of a transaction. Fund refers to the various pools of resources for
financing government activities. It will fast track the implementation of
IPSAS particularly with respect to the full disclosure of government
revenue including external assistance.
vi. The Geographic Segment: Addresses the ―Where‖ (location,station)
element of every transaction. It is for location or physical existence of
transaction so that an analysis of government budget and expenditure
along the various geo-political zones, states, and local government
councils in the country can be done.

Advantages of NCOA
i. NCOA harmonized all the various COA of Federal, States and Local
Government Councils to a standardized COA that will enhance the
attainment of minimum reporting requirement that is in line with
international best practices.
ii. NCOA comprises the coding of items used for classification, budgeting,
accounting and reporting within the financial year.
iii. It serves to facilities the recording of all transactions and is directly linked
to General Purpose Financial Statements (GPFS)

Financial Reporting Format – Cash IPSAS

Cash basis GPFS are financial statements prepared based on cash basis
accounting. Cash Basis of Accounting is the recognition and recording of
income and expenses only when cash (income) is actually received and the
expenses are actually paid.

Objectives of Cash Basis IPSAS

 Cash basis IPSAS prescribes the manner in which the GPFS on the cash
basis should be presented;
 Accountability about the cash receipts, cash payments and cash
balances;
 Transparency about the allocation of cash resources;
 Assessment of the ability of the entity to generate adequate cash in
the future;
 Enhances comparability; and
 Provides a sound base for transition to the accrual basis.
COMPONENTS OF CASH BASIS IPSAS
At present, the following financial statements are prepared as Financial Reports
in the public sector in Nigeria:
1. Statement of consolidated revenue fund: This is a statement of recurrent
income and expenditure of an entity over a financial period. The CFR will
eventually be replaced with Statement of Financial Performance when
migrated to accrual basis IPSAS.
2. Statement of assets and liabilities: Statement of assets and liabilities
presents the government‘s financial position at a specific point in time. It
includes assets and liabilities. Assets are grouped into two categories
namely liquid assets and investments and other cash assets. Liabilities are
grouped into two; namely public funds and external and internal loans.
3. Statement of capital development fund: This is one of the Statutory
Financial Statements of the three tiers of government. It shows funds
transferred from the Consolidated Revenue Fund and other borrowings
(loans) to finance capital oriented projects for an accounting period. It is
also known as the Capital Income Statement.
4. Cash flow statements: Cash flow statements (statement of receipts and
payments) is one of the statements required under cash IPSAS. 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.
5. Notes to the accounts: Notes are additional information to support items
disclosed in the statements presented in the GPFS
6. Performance reports: These reports show the performance of a reporting
entity. It compares actual performance of an entity with approved budget.
7. Statistical reports: They are also useful to certain categories of users of
GPFS for their decision making. Statistical reports include: functional
report; programme report and geo location report
8. Accounting policies: Accounting policies are the specific principles, bases,
conventions, rules and practices adopted by an entity in preparing and
presenting financial statement.

Financial Reporting Format – Accrual IPSAS

Accrual based GPFS are financial statements prepared based on accrual basis of
accounting. It is a basis of accounting under which transactions and other events
are recognized when they occurred (not only when cash or its equivalent is
received or paid)

Differences betwwen GPFS – Cash and GPFS – Accrual

i. Under Accrual basis transactions and other events are recognized when they
occur, while cash basis recognized transactions and lother events when cash
or its equivalent is received or paid.
ii. Accrual based GPFS discloses information on tangible assets, accounts
receivables and payables while cash based GPFS doesn‘t disclose them.
iii. Accrual based GPFS also differs from cash based GPFS in terms of its
components. Principal statements in accrual based GPFS are different from
that of cash based.
COMPONENTS OF ACCRUAL BASED GPFS
i. Statement of financial position: Statement of financial position is a
statement that shows assets, liabilities and net assets/equity of an entity.
Both assets and liabilities are categorized as current and non-current in
the statement of financial position.
ii. Statement of financial performance: The statement of financial
performance (income and expenditure accounts) shows income accrued to
the entity from all sources and expenditure incurred during the period.
iii. Statement of cash flow: This is one of the statements required by IPSAS 1
to be presented in GPFS. The cash flow statement identifies the sources of
cash in flows, the items on which cash balance as at the reporting date.
iv. Statement of changes in net assets/equity: Net assets/equity simple
refers to assets less liabilities. Net assets/equity is financed by reserves,
accumulated surpluses/(deficit), minority interest etc. the statement is
important in GPFS because it enables users to ascertain causes for
movement in net equity of an entity.
v. Notes and other disclosures to GPFS: Notes and other disclosures to GPFS
are additiona information presented in GPFS to enables users understand
the financial statements better and compare them with those of other
entities.
vi. Statement of accounting policies: Accounting policies are the specific
principles, bases, conventions, rules and practices adopted by an entity in
preparing and presenting financial statements.
 Chapter Seventeen
GOVERNMENT ADVANCES
Advances can be defined as cash credits granted to an employee in a firm,
establishment or institution where he is employed. Generally, advances are cash
sums as short-term loans granted to the employees in the service of an
organization. Advances are granted by the three-tiers of government, public and
private enterprises. In the Federal Government Service, granting advances is
guided by Chapter 17 of the Financial Regulations of Year 2006.

TYPES OF ADVANCES
Non-Personal Advances: They are authorized by the Minister of Finance
through the Accountant-General of the Federation. Specifically, a non-personal
advance is one granted to an officer to carry out certain tasks for the
organisation. This type of advance has to be retired within a reasonable time;
otherwise, the total sum advanced shall be deducted from the officer‘s salary.
Also, they are advances used to write off loss of public funds through theft,
overpayment, misappropriation, fraud or revenue written off.

Personal Advances: These are advances of cash to individual officers in the

employment of the Federal Government of Nigeria for their personal benefits.
These include:
Salary and Rent Advances
Salary and rent advances are granted to officers under the following
Condition:
(a) If an officer is returning from leave of not less than 21 days duration, and/or
he is to proceed on transfer and bear the cost of his transportation.
(b) If an officer is assuming first appointment and is not living in Government
residential quarters.
(c) If an officer is returning to Nigeria by sea and is to be stationed elsewhere
other than in Lagos.
(d) If an officer is on posting to an overseas office of the Ministry of External
Affairs.
(e) He has just been transferred to a new department or Ministry outside his
station.
Repayment: A salary/rent advance of one month shall be repaid in three (3)
instalmental monthly deductions. Advances of up to two (2) and three (3)
months salary shall be repaid in six equal instalments, respectively.

Motor Vehicle Advance

This is granted to senior public officers for the purchase of motor vehicles. It is
granted to officers from Grade Level 8 and above. Officers who are on Grade
Level 7 whose duties involve travelling are also eligible to motor vehicle
advance. Officers who have obtained motor vehicle advance approval can also be
given a refurbishing loan of N20,000.
Conditions for granting Motor Vehicle Advance
a) Any officer who has obtained Motor Vehicle Advance will not be granted
another one until after 3 years of the former one. However where the vehicle in
his possession has been completely written down and certified so by an
insurance company, he will be granted.
b) Payments as regards purchase of motor vehicle are to be made directly to the
dealer.
c) An agreement must be signed by the officer that all outstanding on the
advance shall be deducted from his gratuity or salary on retirement or
resignation from office. Where such is not enough, the vehicle should be
recovered and sold.
Repayment: - Motor Vehicle advance is payable on monthly instalments for a
period of 3-4 years.

Correspondence Advances
This is an advance granted for taking correspondence courses. It is interest free.
Conditions for granting Correspondence Advance
i. The officer must be competent and have the required qualification to
proceed on the course.
ii. The course to be taken must be relevant to his job.
iii. The course on completion must be able to improve his efficiency and
effectiveness.
iv. The course must be taken in an approved and recognized institution.
v. That the officer will enter into agreement for repayment.
vi. That the officer produces receipts to show that the whole advance has
been appropriately utilized.
Repayment: It is payable on monthly instalments for a period of 1-2 years.

Spectacle Advance
This is granted to an officer for the procurement of spectacles which has been
prescribed by government medical officer and an optician.
Repayment: - Minimum period of 6-months instalmental payment.

Advances for Estacode for Overseas Tours

Cash advances may be granted to meet estacode allowance due to an officer
travelling overseas. It will normally be drawn in Nigeria in the form of
traveller‘scheques made payable to the officer travelling singly or to a
designated officer travelling with a delegation. The traveller‘scheques will be
obtained from the Central Bank of Nigeria, against a cheque drawn on
Government Account.
At the end of any duty tour, officers shall submit all the receipts and air tickets
in order to account for the amount received as travelling expenses for the duty
tour. This will serve as a proof that the journeys were undertaken for the
number of days approved.
 Chapter Eighteen
PENSIONS AND GRATUITY
Pension: It is a monthly payment made to a retired officer who has served for a
statutory period. Pension is payable for a minimum period of five years or till
death. In other words, a pension is a form retirement plan that provides monthly
income to employees of companies or governments.
Gratuity: It is a lump sum of money paid once to a retired officer who has served for
the minimum of 5 years in service. It is a defined benefit plan and a mark of
recognition to the employee's service.
Pensionable Emolument: This is the gross salary made up of basic salary and
allowances payable to a retiring officer in his substantive post.
Withdrawal of service: This is the ceasation of service after an officer has served
for a minimum period of 5 years, but below 10 years, qualifying him only for
gratuity.
Retirement: It is the ceasation of service after an officer has served for a
minimum of 10 years, qualifying the person for gratuity and pension.
Next-of-kin: This terminology refers to those individuals whose names were
stated by the deceased officer, on his record of service kept in the Records Office
of the Establishment or furnished by him to the Ministry, in writing, at any time
before his death.
Conditions For Granting Retirement Benefits
The conditions for granting retirement benefits may be listed, as follows:
(a) On voluntary retirement, after a qualifying service of 10 years.
(b) On compulsory retirement for the purpose of facilitating improvement in the
Department or Ministry.
(c) On compulsory retirement upon attaining the retiring age of 60 years or 35
years in service, whichever comes earlier.
(d) On total or permanent disablement while in service.
(e) Public Interest.
(f) Abolition of Office, e.g. for the reasons of re-organisation and redundancy.

STATUTORY AGE OF RETIREMENT

All officers shall retire upon attaining the age of 65 years, or having served for
35 years in service, whichever comes earlier. However, an officer may be retired
at any time, on reaching the minimum age of 50 years, subject to 3 months‟
notice in writing or 3 months‟ salary in lieu of notice, being paid.
The statutory age of retirement for public officer is 60 years.
The pension's right of judges Decree 5 of 1985 puts the retirement age of judges
at 65 years.
The retirement age of judges of Appeal Court and Supreme Court is 70 years.
In the case of Academic Staff of Universities, 65 years is the retirement age.
Any public officer who has attained 60 years of age or 35 years of service should
be compulsorily retired from the service. Any service rendered after the
attainment of the statutory limits is null and void and not pensionable.

NOTICE OF WITHDRAWAL OR RETIREMENT

Officers who have served for less than ten (10) years give one month‘s notice or
pay a month‘s salary in lieu. Those who have put in ten (10) or more years
service give three months‘ notice or pay three (3) months‘ salaries in lieu of
notice.
DOCUMENTS THAT SHOULD ACCOMPANY APPLICATION FOR RETIREMENT
BENEFITS
 Completed Pension form.
 Letter of first appointment.
 Certified true copy of record of service.
 Photocopy of letter of promotion to the last grade level.
 Original and photocopies of death and burial certificate.
 Debt clearance certificate.
 Sworn affidavit as to next of kin or legal representative.
 Letter of administration issued by the probate registry if he dies intestate.
 Two recent passport photograph of each next of kin or legal
representative.
 Notice of disengagement from service and approval (on retirement).

CONDITIONS AND REQUIREMENTS FOR PROCESSING OF GRATUITY AND

PENSION
Gratuity and pension will be granted to an officer on his retirement from the
public service in any of the following circumstance.
 Voluntary retirement after qualifying service year
 Compulsory retirement upon attaining the age of 60 years
 Compulsory retirement for the purpose of facilitating improvement in the
organization of the officer's department or ministry so that greater
efficiency or economy may be affected.
 Advise of a properly constituted medical board certifying that the officer is
no longer mentally or physically capable of carrying out the functions of
his office.
 Total or permanent disablement while in the service
 Abolition of office occupied by the officer
 He is required by the civil service commission to retire on the ground that
his retirement is in the public interest.

DETERMINANTS OF ENTITLEMENTS
The data required for determining entitlements are;
 Length of service
 Terminal salary and pensionable allowance
 Rates of entitlement to gratuity and pension
 Rules on deferred pension and exception thereto
 Rules on special pension e.g. incapacity or injury pension
 Eligibility of wife and children to pension.

COMPUTATION OF PENSION AND GRATUITY

(i) PENSION
{(N-1)2} % + 30%

Where N is the number of years spent

(ii) GRATUITY
Within the range of 5-9years of qualifying service years
{(N-5)8} % + 100%
From 10 years to 35years of qualifying service years
{(N-10)8} % + 100%
PENSION REFORM ACT 2014
By virtue of the Act both the Public and Private Sectors Pension Schemes are
now contributory. The employers and employees are expected to contribute a
minimum of 18% (a minimum of 10% by employer and minimum of 8% by
employee) in aggregate towards the retirement of the employee. The rate is
subject to review as may be agreed between the employer and employee.

Objectives of the New Pension Reform Act, 2014

a. To provide a sustainable and well managed pension to employees both in the
public & private sectors.
b. To ensure that all and sundry in the working class save in order to make
provision for life after retirement.
c. To ensure that all and sundry is entitled to and receive terminal benefits as
and when due.
d. To ensure that all regulations and guidelines available for administration and
payment of retirement benefits are applicable to both public and private
sector officers.
e. To sustain a worthwhile standard of living of all employees after retirement.
f. To ensure that a pension contributions are fully protected till maturity before
the retirement of the contributor

S 5(1) Exemption from New Pension Reform Act 2014

The categories of persons exempted from the Contributory Pension Scheme are:
 The categories of persons mentioned in Section 291 of the Constitution of
the Federal Republic of Nigeria 1999 (as amended) including the members
of Armed Forces, the intelligence and Secret Services of the Federation.
 An employee who is entitled to retirement benefits under any Pension
Scheme existing before 25th day of June, 2004 and has 3 or less years to
retire.
 Fully Funded Pension Scheme

National Pension Commission

The principal objective of the Commission, according to the Pension Reforms Act,
2004, is ―to regulate, supervise and ensure the effective administration of
pension matters in Nigeria.‖

Functions of the Commission

The functions of the Pension Commission as stated in S.20 of the Act are:
(a) To regulate and supervise the scheme established under this Act.
(b) To issue guidelines for the investment of pension funds.
(c) To approve, license, regulate and supervise Pension Fund Administrators,
Custodians and other institutions relating to pension matters as the
Commission may from time to time determine.
(d) To establish standards, rules and guidelines for the management of the
pension funds under this Act.
(e) To ensure the maintenance of a National Data Bank on all pension
matters.
(f) To carry out public awareness and education on the establishment and
management of the scheme.
(g) To promote capacity building and institutional strengthening of pension
fund administrators and custodians.
(h) To receive and investigate complaints of impropriety levelled against any
pension fund administrator, custodian or employer or any of their staff or
agent.
(i) To perform such other duties which, in the opinion of the commission, are
necessary or expedient for the discharge of its functions under the Act.
Payment of Retirement Benefits
A holder of retirement savings account upon retirement or attaining the age of
50 years, whichever is later, shall utilize the balance standing to the credit of his
retirement saving account for the following benefits:
 Programmed monthly or quarterly withdrawals calculated on the basis of
an expected life span.
 Annuity for life purchased from a life insurance company licensed by the
National Insurance Commission with monthly or quarterly payments.
 A lump sum from the balance standing to the credit of his retirement
savings account, provided that the amount left after that lump sum
withdrawal shall be sufficient to procure an annuity of fund programmed
withdrawals that will produce an amount not less than 50 per cent of his
annual remuneration as at the date of his retirement.
 Where an employee retires before the age of 50 years, the employee may
request for withdrawal of lump sum of money of not more than 25% per
cent of the amount standing to the credit of the retirement savings
account, provided that such withdrawals shall only be made after four
months of such retirement and the retired employee does not secure
another employment.

Death of Employee
Where an employee dies:
 The entitlement under the life insurance policy maintained shall be paid to
his retirement savings account.
 The pension fund administrator shall add the amount paid from life
insurance policy in favour of the beneficiary under a will or the spouse and
children of the deceased or the child, or to the recorded next of kin or any
person designated,

Where an Employee is missing

Where an employee is missing and is not found within a period of one year from
the date he was declared missing, and a Board of Inquiry set up by the
Commission concludes that it is reasonable to presume that he has died, normal
payment of pension proceeding should be followed. That is to say that the
employee‘s entitlements under the life assurance policy maintained shall be paid
to his retirement savings account.

Exemption from taxes

1. Contributions to the scheme are exempted from taxes under this Act and
shall form part of tax deductible expenses in the computation of tax
payable by an employer or employee under the relevant income tax law.
2. All interests, dividends, profits, investment and other income accruable to
pension funds and assets under this Act shall not be taxable
3. Any amount payable as a retirement benefit under this Act shall not be
taxable
4. Any voluntary contribution shall be subject to tax at the point of
withdrawal where the withdrawal is made before the end of 5 years from
the date the voluntary contribution was made.

Retirement Savings Account (RSA)

a) Every employee to whom this Act applies shall maintain an account, (in
this Act referred to as ―Retirement Savings Account‖ in his name with
any Pension Fund Administrator of his choice.
b) The employee shall notify his employer of the Pension Fund
Administrator chosen and this identity of the retirement savings
account opened under (a) above.
 c) The employer shall:
i. Deduct at source the monthly contribution of the employee; and
ii. Not later than 7 working days from the day the employee is paid
his salary; remit an amount comprising the employee‘s
contribution under paragraph (i) of his subsection and the
employer‘s contribution to the Pension Fund Custodian specified
by the Pension Fund Administrator of the employee.

d) Upon receipt of the contributions remitted under (c) (ii) above, the
Pension Fund Custodian shall notify the Pension Fund Administrator
who shall cause to be credited the retirement savings account of the
employee for whom the employer had made the payment;
e) Where an employee fails to open such Retirement Savings Account
within a period of six months after assumption of duty, his employer
shall, subject to guidelines issued by the Commission, request a
Pension Fund Administrator to open a nominal retirement savings
account for such employee for the remittance of his pension
contribution;
f) An employer who fails to deduct or remit the contributions within the
time stipulated in subsection (c) (ii) above shall, in addition to making
the remittance already due, be liable to a penalty to be stipulated by
the Commission;
g) The penalty referred to in (f) above shall not be less than 2 percent of
the total contribution that remains unpaid for each month or part of
each month the default continues and the amount of the penalty shall
be recoverable as a debt owed to the employee‘s retirement savings
account, as the case maybe;
h) An employee shall not have access to his retirement savings account or
have any dealing with the Pension Fund Custodian with respect to the
retirement savings account except through the Pension Fund
Administrator; and
i) The commission shall determine the cost of recovery of un-remitted
contributions and the sources to defray the cost, which may include
the amount recovered as penalty pursuant to subsection (6) of this
section.

Withdrawal from retirement savings account

The conditions, which govern withdrawal from the scheme, are as follows:
a) Withdrawal is not allowed until the attainment of 50 years of age;
b) An officer who retired and is less than 50 years, on the advice of a
suitably qualified physician or properly constituted Medical Board,
certifying that the employee is no longer mentally and physically capable
of carrying out the function of his office, may withdraw;
c) If the officer is retired due to his total or permanent disability either of
mind or body;
d) Where the employee retires before the age of 50 years in accordance with
the terms and conditions of his employment, he shall be entitled to make
withdrawals;
e) The Medical Board or suitably qualified physician, at the request of the
employee, be made once in every two years to review the fitness of the
employee and where the Medical Board certifies that he is now mentally
and physically capable of carrying out the functions of his office, he may
re-enter the scheme upon securing another employment; and
f) Without prejudice to (a) above, any employee who disengages or is
disengaged from employment before the age of 50 years and is unable to
secure another employment within four months of such disengagement
 may make withdrawal from his retirement savings account in accordance
with the provisions of Section 7(2) and (3) of this Act.
PENSION FUND ADMINISTRATOR (PFA)
A Pension Fund Administrator must possess the following:-
 A practicing license issued by National Pension Commission
 Be a Limited Liability Company set up to manage pension fund only
 A minimum of N150m paid-up capital
 Professional capacity to manage funds and administer retirement benefit.
 Has never been a manager or administrator of any fund which was
mismanaged or has been in distress due to any fault, either fully or
partially, of the Pension Fund Administrator or any of its subscribers,
directors or officers

FUNCTIONS OF PENSION FUND ADMINISTRATOR (PFA)

a) Operation of retirement Savings Account with Personal Identification Number
(PIN)
b) To invest and manage pension funds as Assets through Pension fund
custodian
c) To provide relevant information as regards investment strategy, market
returns and financial empowerment.
d) Professional capacity to manage funds and administer retirement benefits.
e) To provide customer services support
f) To process the calculations and payments of retirement benefits.

Prohibited Transactions
A Pension Fund Administrator shall not:
i. Hold any pension fund or asset;
ii. Keep any pension fund or asset with a Pension Fund Custodian in whom
the Pension Fund Administrator has any business interest, share or any
relationship whatsoever;
iii. Engage in any business transaction or trade in any manner with the
Pension Fund Administrator as a counterpart or with the subsidiary in
relation to pension fund or assets; and
iv. Divert or convert pension funds and assets as well as any income or
brokerage, commission arising from the investment of pension fund or
asset or by any other means.
Prescribed Structure of Pension Fund Administration
The following Standing Committees are required to carry out the Fund‘s
functions and ensure compliance with the Act:
a) Risk Management
i. To determine the risk profile of the investing portfolios of the
Pension Fund Administrator
ii. Draw up programmes of adjustments in the case of deviations
iii. Determine the level of reserves to cover the risk of the investment
portfolios
iv. Advise the Pension Fund Administrators in maintaining adequate
internal control measures and procedures.
v. Carry out such other functions relating to risk management as the
Pension Board may direct.
 b) Investment Strategy Committee
i. Formulate strategies for complying with investment guidelines
issued by the Commission
ii. Determine an optimum investment mix consistent with risk profile
agreed by the Board of the Pension Fund Administration
iii. Evaluate the value of the daily ‗mark-to-market‘ portfolios and
make proposals to the Board of the Pension Fund Administration
iv. On a periodic basis, review the performance of the major securities
of the investment portfolios of the Pension Fund Administration.
v. Carry out such other functions relating to investment strategy as
the Board may determine from time to time.

PENSION ASSETS CUSTODIAN (PAC)

A Pension Asset Custodian must possess the following:-
(a) Issued licence to hold pension funds and assets in trust.
(b) Minimum net worth of Twenty Five Billion Naira (25Bn)
(c) A balance sheet position of N125m
(d) Execute the orders of the PFA as regards holding pension funds and assets.

FUNCTIONS OF PENSION ASSET CUSTODIANS (PAC)

a) To receive contribution on behalf of the PFA
b) To hold pension funds and assets in safe custody
c) To executive investment activities on behalf of the PFA
d) To make reports to the National Pension Commission on all matters
relating to its operation.
e) Undertaking statistical analysis on the investments and returns on
investments with respect to pension funds in its custody and provide data
and information to Pension Fund Administrator and the Commission

Statutory Reserve Fund

Every Pension Fund Administrator shall maintain a Statutory Reserve Fund as
contingency fund to meet any claim for which the Pension Fund Administrator
may be liable as may be determined by the Commission. The Statutory Reserve
Fund shall be credited annually with 12.5% of the net profit after tax or such
other percentage of the net profit as the Commission may, from time to time,
stipulate.

Pension Protection Fund shall consist of:

a) An annual subvention of 1% of the total monthly wage bill payable to
employees in the Public Service of the Federation towards the funding of
the minimum guaranteed pension;
b) Annual pension protection levy paid by the commission and all licensed
pension operators at a rate to be determined by the Commission, from
time to time; and
c) Income from investment of the Pension Protection Fund.

The Commission shall utilize the Pension Protection Fund for

 The funding of the minimum guaranteed pension pursuant to section 84 of
this Act;
 The payment of compensation to eligible pensioners for shortfall or
financial losses arising from investment activities; and
 Any other purpose deserving protection with the Pension Protection Fund
as the Commission may, from time to time, determine.
 Investment of Pension Funds
All contributions are to be invested by the PFA with the objectives of safety and
maintenance of fair returns. Pension funds and assets shall be invested in any of
the following:-
(a) Bonds, Bills and other Federal Government and CBN Securities
(b) Ordinary Shares of Public Liability Companies (PLC)
(c) Bank Deposits and Bank Securities
(d) Real Estate Investment.
(e) Investment certificates of closed-end investment fund or hybrid investment
funds listed on a securities exchange registered under the Investments and
Securities Act with good track records of earnings

Restricted Investments
a) A Pension Fund Administrator shall not invest pension fund or assets in
shares or restricted investment securities issued by the Pension Fund
Administrator or its Pension Fund Custodian; and a shareholder of the
Pension Fund Administrator or its Pension Fund Custodian.
b) A Pension Fund Administrator shall not sell:
i. Pension fund assets to itself, any shareholder, director, affiliate,
subsidiary, associate, related party or company of the Pension Fund
Administrator, any employee of the Pension Fund Administrator,
affiliates of any shareholder of the Pension Fund Administrator, or the
Pension Fund Custodian holding pension fund assets to the order of the
Pension Fund Administrator and any related party to the Pension Fund
Custodian;
ii. Utilize pension fund to purchase assets from the persons mentioned in
subsection (a) of this section; and
iii. Apply pension fund assets under its management by way of loans and
credits or as collateral for any loan taken by a holder of retirement
savings account or any person whatsoever.

Offences, penalties and enforcement powers

a) A person who contravenes any of the provisions of this Act commits an
offence and where no penalty is prescribed, shall be liable on conviction to
a fine of not less than N250,000 or to a term of not less than one year
imprisonment or to both fine and imprisonment
b) Any person or body who attempts to commit any offence specified in this
Act commits an offence and is liable, on conviction, to the same
punishment as is prescribed for the full offence in the Act
c) A Pension Fund Administrator, Pension Fund Custodian that reimburses or
pays for a staff, officer or director directly or indirectly a fine imposed
under this Act commits an offence and is liable on conviction to a fine of
not less than N5,000,000 and also forfeits the amount repaid or
reimbursed to the staff, officer or director.

Penalties for misappropriation of pension fund

a) Prison term of 10 years plus fine of 3 times the amount misappropriated.
b) Forfeiture of the entire asset and properties or fund with accrued interest
or the proceeds of any unlawful activity under the Act in his/her
possession.
c) The Act also criminalises any re-imbursement or payment by a PFA or by
Pension Fund Custodian (PFC), to a staff, officer or director upon whom a
fine has been imposed (the minimum fine being N5m).
d) For Pension Fund Custodian (PFC), the minimum fine is N10m (upon
conviction) where the PFC falls to hold the funds to the exclusive preserve
 of the Pension Fund Administrative and National Pension Commission
PENCOM, or where if applied the funds to meet its own financial
obligations (in the case of Direct-N5m or 5 years imprisonment or both)
e) A Pension Fund Administrator, Pension Fund Custodian, any person or
body who refuses to produce any book, account, document or voucher;
give any information or explanation required by an examiner; or with
intend to defraud, produces any book, account, document or voucher, or
gives any information or explanation, which is false or misleading in any
material particular; or supplies information which he knows to be false or
supplies the information recklessly as to its truth or falsity, commits an
offence under this Act and shall on conviction be liable to a fine not less
than N20,000 or to imprisonment for a term of not less than three years
or to both such fine and imprisonment for every false or misleading
information given and where the offence continues to a fine not less than
N10,000 for every day the offence continues

Deficiencies of Pension Reform Act, 2014

i. Scope and coverage: The scheme applies to employees in both the public
and private sectors. Mandatory contribution is applicable to organizations
in which there are 15 or more employees (previously 5 employees). This
effectively reduces the number of employers and employees that are likely
to benefit from the scheme.
ii. Rates of contribution: The rates of contributions to be made under the
new scheme by both the employer and employee are a minimum of 10%
and 8% respectively. This will increase the cost of employment and may
force many employers to take drastic measures such asa rationalization of
staff strength.
iii. Commencement date: the Pension Reform Act, 2014 was signed into law
by the President on 1 July 2014 with the same date as commencement
date, does not give room for transition arrangement and proper planning
by affected employers.
iv. Gaps in coverge: Only employers with a minimum of 15 employees are
required to contribute to the new scheme. The Act provides that in the
case of private organizations with less than 3 employees participation in
the scheme would be governed by guildlines issued by the National
Pension Commission (PenCom). However, the Act is silent on the
applicability of the scheme to private organizations with more than 3 but
less than 15n employees. Also, what happens to employers with 5 to 14
employees regarding their past contributions under the old Act?
v. Sole contribution by empolyers: The Act provides that an employer can
take full responsibility of the contribution but in that case, the contribution
shall not be less than 20% of the employee‘s monthly emolument. This
provision contratdicts the combined contribution by both parties of 18%.
Employers will therefore be discourage from taking full responsibility.

Pension Transitional Arrangements Directorate (PTAD)

Pension Transtional Arrangement Directorate (PTAD) is responsible for the
pension administration of the Defined Benefit Scheme (DBS). PTAD was
established to address the numerous pensioners‘ complaints that border on
issues such as non-payment of monthly pension, short payment of pension and
gratuity, removal of name on pension payment voucher, non-payment of
harmonized pension arrears, irregular payment of federal pensions and non-
receipt of pension after retirement, etc.
MICRO PENSION PLAN
In accordance with the provisions of section 2(3) ―Micro Pension Plan‖ which
refers to an arrangement for the provision of pensions to the self-employed and
persons operating in the informal sector.

Objectives of the guidelines

These guidelines are set out to achieve the following objectives:
i. Set eligibility criteria for participation in Micro pension plan;
ii. Establish the process of registration for prospective micro pension
contributors;
iii. Provide the criteria for managing the micro pension plan;
iv. Define the process of making contributions by micro pension contributors;
v. Outline the modes of accessing benefits under micro pension plan;
vi. Define the mode of conversion from micro pension plan to mandatory
contribution; and
vii. Set the minimum ICT requirements for licensed pension fund
administrators and custodians.

Operational Modalities for Micro Pension Plan

The following persons not below 18 years of age with source of income shall be
eligible for participation in micro pension plan under Section 2(3) of the Pension
Reform Act, 2014:
a) Self-employed persons that belong to trade, profession, co-operative or
business association
b) Self-employed persons with a business registration as a company,
partnership or enterprise
c) Employees operating in the informal sector who work with or without formal
written employment contract
d) Other self-employed individuals
e) Micro Pension Contributors shall be resident in Nigeria

Contributions
a) Contributions shall be made in Nigerian currency(Naira)
b) Micro pension contributors may make contributions daily, weekly, monthly
or as may be convenient to them provided that contributions will be made
in any given year
c) Every contribution shall be split into two comprising 40% for contingent
withdrawals and 60% for retirement benefits
d) The amount of contribution shall be dependent on the micro pension
contributor‘s pension aspiration and financial capacity
e) Both PFAs and PFCs are required to inform the Economic and Financial
Crime Commission of any single lodgment of N5 Million and above.
f) Contributions shall be made by cash deposit, electronically, through any
payment instrument/platform or other financial service agents approved
by the Central Bank of Nigeria.
g) The PFC shall immediately advise the PFA upon receipt of value of
contributions
h) Upon receipt of notification from the PFC, the PFA shall immediately notify
the micro pension contributor
i) PFAs shall charge a maximum administration fees of eight naira (N80) for
contributions of Four Thousand Naira (N4,000) and above while a
maximum administration fees of twenty naira (N20) shall be charged on
RSAs for contributions below the sum of Four Thousand Naira (N4,000)
 Contingent withdrawal
i. The micro pension contributor shall be eligible to access the portion of
his/her contribution available for withdrawal 3 months after making the
initial contribution.
ii. Subsequently, the micro pension contributor can only make withdrawals
once in a week from the balance of the contingent portion of the RSA.
iii. The micro pension contributor may withdraw the total balance of the
contingent portion of his/her RSA including all accrued investment income
thereto.
iv. The micro pension contributor may choose to convert the contingent
portion of the contributions to the retirement benefits portion at the end
of every year.
v. The time frame for processing and payment of contingent withdrawals
shall not exceed two working days.
vi. Payment shall be made only to the Micro Pension Contributor‘s designated
bank account.
vii. The PFA shall approve and pay all requests for contingent withdrawals.
viii. The PFA shall notify the commission of all payments made monthly
ix. Contingent withdrawals shall be subject to applicable tax laws in
accordance with the provisions of Section 10(4) of the PRA 2014.

Minimum requirements for participation by licensed Pension Fund Administrators

and Custodians
1) PFAs/PFCs shall established adequate structure for the effective and
efficient operation of micro pension plan
2) The minimum ICT requirements shall be in line with the ICT guidelines
issued by the Commission.
3) Licensed PFAs/PFCs shall provide multi-channel platforms for registration,
collection, and customer service and benefits administration.
 Chapter Nineteen
GOVERNMENT CONSTRUCTION CONTRACTS AND PROCUREMENTS
A contract is an agreement between two or more persons which is legally
binding and for financial consideration. It is important that all issues in respect
of a contract are known and adequately documented. This is to ensure that the
terms of the contract are adhered to strictly before payments are effected.
According to the Statement of Accounting Standard No. 11 (SAS 11) and the
International Public Sector Accounting Standards No. 11 (IPSAS 11),
Construction Contract refers to the execution of a building and civil engineering
projects, mechanical and electrical engineering installations and other
fabrications normally evidenced by agreements between two or more parties.
In Government, a construction contract is a capital project which is normally
financed by appropriations from the Capital Development Fund.

CONTRACT PAYMENT VOUCHERS

All payment vouchers relating to contract awards should contain the following
information:
(a) The names and addresses of the contractors.
(b) Contract numbers.
(c) The votes of charge.
(d) Description of projects.
(e) Certificate numbers being paid.
(f) The gross amounts and retention fees (if any) of the contracts.
(g) The authority for payment.

Payments for contracts and procurements

The federal Government‘s policy from January 2009 is that public fund would
henceforth be made electronically; payments are henceforth to be effected to
the contractors by electronic transfers to their bank accounts. The objective of
the new system is to eliminate delay in effecting payments to the creditors,
contractors, etc. of government and minimize undue interaction between the
agents of government and third parties. The ultimate objective is to reduce, if
not completely put a stop to, corruption and other vices.

IMPLEMENTATION OF THE E-PAYMENT PROCEDURE

Treasury Circular Ref. No. TYR/A8 &B8/2008, reference OAGF/CAD/026/
Vol. 11/465 of 22nd October, 2008 conveys the guidelines for the
implementation of the ‗e-payment‘ procedure, as follows:
a) All forms of payments from all government funds are to be made through the
banks, either Commercial Banks or Central Bank of Nigeria.
b) All organs of Government, Ministries, Departments and Agencies are to stop
using cheques to make payments to contractors.
c) All bank accounts in respect of all Government funds shall cease to be cheque
accounts.
d) Government contractors must indicate their current accounts particulars with
Commercial Banks on the invoices submitted for payment under their
corporate seals.
e) Mandates containing details of payments shall be issued to Banks authorizing
them to pay into the contractors‘ designated bank accounts, the proceeds of
executed contracts and supplies.
f) In addition to the existing monthly financial returns, every organization of
Government, Ministry, Department or Agency must forward copies of
mandates issued to Banks to the Office of Accountant-General of the
Federation.
g) Henceforth, all employees of the Federal Government of Nigeria must open
accounts with the commercial banks into which all payments due to them as
individuals would be made.
h) On no account should Central Pay Officers (CPO) collect cash from the bank
for the purpose of disbursement to any government official.

Attachments to contract payment vouchers

Before a contract payment voucher is processed for payment, the following
items should be ascertained and attached:
i. A copy of the minutes of the Tenders Board awarding the contract: it
should be ascertained that the amount of the contract is within the
Board‘s power;
ii. A completion certificate of work done, signed by a competent authority in
the field, such as an engineer, a surveyor or an architect;
iii. A copy each of the letter of award and contract agreement;
iv. In the case of supplies, original copies of delivery notes and store receipt
vouchers issued;
v. A bill or invoice submitted by the firm requesting for payment;

Contract registers
Copies of all contract agreements must be forwarded to the Accounts Division of
relevant ministry or extra-ministerial department. They should be entered in a
contract register maintained.
The register will contain the following information
a) Name and address of contractor;
b) Contract sum;
c) Contract number;
d) Contingency and variation (if any);
e) Payment terms;
f) Completion period of contract work;
g) File number;
h) Particulars of payment and balance outstanding;
i) Signature of officer controlling expenditure.
In the case of a big project in respect of which there are many contracts a
project register may be maintained as a summary of various contracts, to
ascertained at any given time how much has been paid.

THE TENDERS‘ BOARD ON CONTRACTS

A tender is a proposal for the supply of some services or goods. It is usually
made and presented as a result of an invitation. It is legally accepted as an offer
for acceptance. Which means it is legally binding as an offer.
The Tenders Board is the assemblage of public officers constituted to handle
public tenders in respect of all government contract works and/or services.

Types of Tenders‘ Boards

The Departmental Tenders Board and the Federal Tenders Board have
been abrogated. The Permanent Secretaries and Ministerial Tenders Board
now assume the functions, respectively. Contracts of works, services and
purchases of up to five million naira (N5,000,000) can be approved by the
Permanent Secretary/Chief Executive without open competitive tendering.
However, at least three relevant written quotations should be obtained
from suitably qualified contractors/suppliers. All expenditure incurred
under this policy should be documented and reported to the Honourable
Minister on quarterly basis for information.
Ministerial Tenders Board
(a) Composition: The Chairman is the Permanent Secretary/Chief Executive of
the Ministry or Extra-Ministerial Department, respectively. Other members are
all Directors/Heads of Departments in the Ministry or Establishment.
(b) Limit of Expenditure: The Ministerial Tenders Board is empowered to award
any contract which its value exceeds N5,000,000.00 (Five million naira) but not
more than N100,000,000.00 (One Hundred million naira).
(c) Approval: The decision of the Ministerial Tenders Board (MTB) shall be
confirmed by the Honourable Minister.

Armed Forces/Ministry of Defence Tenders Board

The composition of the Board is:
(a) The Chairman of the Armed Forces/Ministry of Defence
Tenders Board shall be the Permanent Secretary, Ministry of Defence.
(b) Other members are representatives of the Army, Navy, Air Force and the Director
of Finance and Accounts of the Ministry of Defence.
Approval: The decision of the Armed Forces/Ministry of Defence Tenders Board
shall be subject to the confirmation of the Minister of Defence.

Nigeria Police Tenders and Purchasing Board (Ministerial)

According to Government Financial Regulations and the Ministry of Finance‘s
circular No. F15775 of 27 June, 2001, the Composition of the Board is:
(a) The Chairman shall be the Permanent Secretary, Police
Affairs.
(b) Other members are:
(i) The Deputy Inspector-General of Police (Finance and Administration).
(ii) All the Heads of Departments.
(iii) The Head of Finance and Accounts Department.
Approval: Each contract awarded by the Nigeria Police Tenders and Purchasing
Board shall be subject to the confirmation of the Minister of Police Affairs.

Powers of boards of corporations and parastatals over tenders

a) The chief executive of a parastatal is empowered to make purchase or award
a contract, the value of which does not exceed N2,500,000 (Two million five
hundred thousand naira) only, without open competitive tendering. However
at least three relevant written quotations should be obtained from suitably
qualified contractors or suppliers.
b) Any contract exceeding N2,500,000 (Two million five hundred thousand
naira) but not more than N50,000,000 (fifty million naira) shall be referred to
the Parastatals Tenders Board, for approval.
c) Any contract whose value exceeds N50,000,000 (Fifty million naira) but not
more than N100 million (One hundred million naira) shall be referred to the
Ministerial Tenders Board (MTB) of the relevant supervising Ministry or
Corporation/Parastatal, for consideration.

FEDERAL EXECUTIVE COUNCIL

Any contract, the value of which exceeds 100,000,000.00 (One hundred million
Naira) shall be approved by the Federal Executive Council.

TENDER SPLITTING
Government‘s Financial Regulation regards it as ―an offence for any public officer
to deliberately split tenders, contracts of works, purchases procurement or
services so as to circumvent the provisions of this chapter and the circular
earlier referred to. Such breach of the rules will be severely dealt with by a
competent disciplinary authority‖.
Invitation to bids
Invitations to bid may be either by way of National Competitive Bidding or
International Competitive Bidding and the Bureau shall from time to time set the
monetary thresholds for which procurements shall fall under either system, in
addition, the following procedures and practices should be adopted;

National Competitive Bidding

The invitation for bids must be advertised on the notice board of the procuring
entity, on any official websites of the procuring entity, in at least two national
newspapers and in the procurement journal not less than six weeks before the
deadline for submission of the bids.

International Competitive Bidding

The invitation for bids must be advertised in at least two national newspapers,
and one relevant internationally recognized publication, any official websites of
the procuring entity and the Bureau of Public Procurement as well as the
procurement journal not less than six weeks before the deadline for the
submission of the bids.

Bid Opening
The procuring entity shall:
i. Permit attendees to examine the envelopes in which the bids have been
submitted to ascertain that the bids have not been tampered with;
ii. Cause all the bids to be opened in public, in the presence of the bidders or
their representatives and any interested member of the public;
iii. Ensure that the bid opening takes place immediately following the
deadline stipulated for the submission of bids or any extension thereof;
iv. Ensure that a register is taken of the names and addresses of all those
present at the bid opening and the organizations they represent which is
recorded by the Secretary of the tenders board; and
v. Call-over to the hearing of all present, the name and address of each
bidder, the total amount of each bid, the bid currency and shall ensure
that these details are recorded by the Secretary of the Tenders Board or
his delegate in the minutes of the bid opening.

Procurement plan
A procuring entity shall plan its procurement by:
a) Preparing the needs assessment and evaluation;
b) Identifying the goods, works or services required;
c) Carrying appropriate market and statistical surveys and on that basis
prepare an analysis of the cost implications of the proposed procurement;
d) Aggregating its requirements whenever possible, both within the procuring
entity and between procuring entities, to obtain economy of scale and
reduce procurement cost;
e) Integrating its procurement expenditure into its yearly budget;
f) Prescribing any method for effecting the procurement subject to the
necessary approval under this Act; and
g) Ensuring that the procurement entity functions stipulated in this Section
shall be carried out by the Procurement Planning Committee.

Procurement Implementation
A procuring entity shall in implementing its procurement plans:
a) Advertise and solicit for bids in adherence to this Act and guidelines as
may be issued by the Bureau from time to time;
b) To invite two credible persons as observers in every procurement
process, one person each representing a recognized;
 i. private sector professional organization whose expertise is
relevant to the particular goods or service being procured, and
ii. non-governmental organization working in transparency,
accountability and anti-corruption areas, and the observers
shall not intervene in the procurement process but shall have
right to submit their observation report to any relevant agency
or body including their own organizations or association.
c) Receive, evaluate and make a selection of the bids received in
adherence to this Act and guidelines as may be issued by the Bureau
from time to time;
d) Obtain approval of the approving authority before making an award;
e) Debrief the bid losers on request;
f) Resolve complaints and disputes if any;
g) Obtain and confirm the validity of any performance guarantee;
h) Obtain a ―Certificate of No Objection to Contract Award‖ from the
Bureau within the prior review threshold as stipulated;
i. Execute all contract agreements; and
ii. Announce and publicize the award in the format stipulated by
this Act and guidelines as may be issued by the Bureau from
time to time.

Restricted Tendering
Subject to the approval by the Bureau, a procuring entity may for reasons of
economy and efficiency engage in procurement by means of restricted tendering
on the following conditions:
a) Goods, works or services are available only from a limited number of
suppliers or contractors;
b) Time and cost required to examine and evaluate a large number of
tenders is disproportionate to the value of the goods, works or services to
be procured;
c) Procedure is used as an exception rather than norm; and
d) Procuring entity shall cause a notice of the selected tendering proceedings
to be published in the procurement journal.

Direct Procurement
Any entity may carry out any direct procurement where:
a) Goods, works or services are only available from a particular supplier or
contractor, or if a particular supplier or contractor has exclusive rights in
respect of the goods, works or services, and no reasonable alternative or
substitute exits;
b) There is an urgent need for the goods, works or services and engaging in
tender proceedings or any other method of procurement is impractical due
to unforeseeable circumstances giving rise to the urgency which is not the
result of dilatory conduct on the part of the procuring entity;
c) Owing to a catastrophic event, there is an urgent need for the goods,
works or services, making it impractical to use other methods of
procurement because of the time involved in using those methods;
d) An entity which has procured goods, equipment, technology or services
from a supplier or contractor, determines that:
i. Additional supplies need to be procured from that supplier or
contractor because of standardization;
ii. There is a need for compatibility with existing goods, equipment,
technology or services, taking into account the effectiveness of the
original procurement in meeting the needs of the procurement
entity;
iii. The limited size of the proposed procurement in relation to the
original procurement provides justification;
 iv. The reasonableness of the price and the unsuitability of alternatives
to the goods or services in question merit the decision.
e) The procuring entity seeks to enter into a contract with the supplier or
contractor for research, experiment, study or development, except where
the contract includes the production of goods in quantities to establish
commercial viability or recover research and development costs; and
f) The procuring entity applies this Act for procurement that concerns
national security, and determines that single-source procurement is the
most appropriate method of procurement.

Emergency procurement
An entity may, carry out an emergency procurement on the following conditions:
a) Where the country is either seriously threatened by or actually confronted
with a disaster, catastrophe, war, insurrection or Act of God;
b) Where the condition or quality of goods, equipment, building or publicly
owned capital goods may seriously deteriorate unless action is urgently
and necessarily taken to maintain them in their actual value or
usefulness;
c) Where a public project may be seriously delayed for worth of an item of a
minor value
d) In an emergency situation, a procuring entity may engage in direct
contracting of goods, works and services;
e) All procurements made under emergencies shall be handled with
expedition but a long principles of accountability, due consideration being
given to the gravity of each emergency; and
f) Immediately after the cessation of the situation warranting any
emergency procurement, the procuring entity shall file a detailed report
thereof with the Bureau which shall verify same and if appropriate issue a
Certificate of ‗No Objection‘.

Disposal of public property

During the disposal of public property the entity should follow the following
i. The open competitive bidding shall be the primary source of receiving
offers for the purchase of any public property offered for sale;
ii. The Bureau shall, with the approval of the Council:
a) Determine the applicable policies and practices in relation to the
disposal of all public property;
b) Issue guidelines detailing operational principles and organizational
modalities to be adopted by all procuring entities engaged in the
disposal of public property; and
c) Issue standardized document, monitor implementation, enforce
compliance and set reporting standards that shall be used by all
procuring entities involved in the disposal of public property.

Definition of Public Property

Public property is defined as resources in the form of tangible and non-tangible
assets (ranging from serviceable to the unserviceable)
i. Created through public expenditure;
ii. Acquired as a gift or through deeds;
iii. Acquired in respect of intellectual or proprietary rights;
iv. Acquired on financial instruments (including shares, stocks, bonds, etc.);
and
v. Acquired by goodwill and any other gifts of the Federal Government.
The means of the disposal of public assets shall include:
a) Sale and rental;
b) Lease and hire purchase;
c) Licenses and tenancies;
d) Franchise and auction;
e) Transfers from one government department to another with or without
financial adjustment; and
f) Offer to the public at an authorized variation.

Offences
The following shall also constitute offences under this Act
i. Entering or attempting to enter into a collusive agreement, whether
enforceable or not, with a supplier, contractor or consultant where the
prices quoted in their respective tenders, proposals or quotations are or
would be higher than would have been the case has there not been
collusion between the persons concerned;
ii. Conducting or attempting to conduct procurement fraud by means of
fraudulent and corrupt acts, unlawful influence, undue interest, favour,
agreement, bribery or corruption;
iii. Directly, indirectly or attempting to influence in any manner the
procurement process to obtain an unfair advantage in the award of a
procurement Act;
iv. Splitting of tenders to enable the evasion of monetary thresholds set;
v. Bid-rigging means an agreement between persons whereby;
a) Offers submitted have been pre-arranged between them; or
b) Their conduct has had the effect of directly or indirectly restricting
free and open competition, distorting the competitiveness of the
procurement process and leading to an escalation or increase in
costs or loss of value to the national treasury.
vi. Altering any procurement document with intent to influence the outcome
of a tender proceeding;
vii. Altering or using fake documents or encouraging their use; and
viii. Willful refusal to allow the Bureau or its officers to have access to any
procurement record.

COMPETITIVE TENDERS
The Ministerial Tenders Board must adopt the open competitive tendering
procedures. However, if it is considered necessary to use selective or limited
tender procedures, the short-listing or selection of contractors or suppliers
should be done by the Ministerial Tenders Board. In addition, the following
procedures and practices should be adopted:
(a) All contracts above 10million (Ten million Naira) should be advertised in at
least two national dailies and/or Government gazette. The advertisement will be
at least six weeks before the deadline for submitting bids for goods and works,
and at least one month for consultancy services. Notices of all other tenders
must be pasted at the notice board of procuring agencies.
(b) Opening of tenders must be done in the ‗open‘ at a designated date and time
and opening should immediately follow the closing of the bidding period, to
minimize the risk of bid tampering. The following people should be invited to the
opening tender:
(i) The bidders or their representatives.
(ii) Members of the civil society.
(iii) Members of the press, if they wish to attend.
(c) Bid evaluation criteria should be clearly defined in the bidding documents and
the award of all contracts should be based on the criteria so defined.
(d) There should be a committee made up of professionals for the evaluation of
the bids. The Secretary of the Tenders Board should be Secretary of the
Committee. Members of the Evaluation Committee, Tenders Boards, and
approval authorities should be obliged to declare any conflict of interest and
exclude themselves from bid evaluation and approval processes.
(e) The award of any major contract of 20,000,000 (Twenty million Naira) and
above should be published in two national dailies, stating:
(i) Description of the contract.
(ii) Name of the contractor.
(iii) Contract price.
(f) Contract awards should be properly handled so as to avoid or minimize
variations. Contract variations should not be allowed except when absolutely
necessary, subject to approval and/or the recommendation of the Ministerial
Tenders Board (MTB). The method for determining price variation during
contract execution should be incorporated into the contract. Such price
variations shall be for contracts extended for more than eighteen (18) months.

MOBILISATION FEE
Mobilization fee where necessary and appropriate shall not exceed 15% of the
contract sum. However, payment of such mobilization fee shall be effected upon
written application and an unconditional Bank Guarantee for equivalent amount
valid until the goods are supplied or until the mobilization fee has been repaid, in
the case of works contracts. Only Unconditional Bank Guarantees issued by
reputable Banks should be accepted.

AUDIT INSPECTION
The following must be forwarded to the Auditor-General for the Federation:
(a) Certified true copies of all contract agreements.
(b) The minutes of Tenders Board meetings, and
(c) Full records of all tendering processes which shall be made available for the
inspection of Auditor-General for the Federation and the
Accountant-General, at short or no notice. The records shall be kept for
verification for a period of seven (7) years, from the date of completion and
take-over of the project.

As a condition for final payment for contracts exceeding 5million (Five million
Naira), the Auditor-General for the Federation or his representative and a very
senior member of the Ministry/Agency should countersign the certificate
releasing final payment.

Contingencies Clause
This is one of the clauses in contract agreements which states that if the
contractor had taken reasonable care in executing the job and he is still faced
with unexpected situation, the contractee or the owner of the project shall bail
out the contractor by making more money available, or review upward the
contract sum. If otherwise, the contractor will bear the cost.

Retention Fee
It is a clause in a contract agreement which states that after the completion of
the project, Government shall with-hold about 5% of the contract sum, for six
(6) months. The amount withheld will be paid to the contractor thereafter if the
project is properly executed and constructional error is not noticed.
If the job is not properly executed, e.g if there is a crack on the wall and is due
to an error which arose from construction, then the amount withheld will be used
to correct the anomaly. If the amount withheld is not enough, Government will
ask the contractor to pay in the difference.
If the contractor fails to pay it in, he may be blacklisted.
PUBLIC PROCUREMENT ACT, 2007 The Act is established by the
Enactment of the National Assembly of the Republic of Nigeria.
COMPOSITION OF THE COUNCIL The Council shall consist of:
1. The Minister of Finance as Chairman
2. The Attorney-General and Minister of Justice of the Federation
3. The Secretary to the Government of the Federation
4. The Head of Service of the Federation
5. The Economic Adviser to the President
6. Six-Part-Time members to represent:
a) Nigeria Institute of Purchase and Supply Management
b) Nigeria Bar Association
c) Nigeria Association of Chambers of Commerce, Industry, Mines
and Agriculture
d) Nigeria Society of Engineers
e) Civil Society
f) The Media
7. The Director-General of the Bureau who shall be the Secretary of the
Council

FUNCTIONS OF THE COUNCIL

a. To consider, approve and amend the monetary issues relating to the
Act.
b. To consider and approve policies on public procurement
c. To approve the appointment of the Director of the Bureau
d. To receive, review, consider and approve the audited accounts of the
Bureau of Public Procurement
e. To approve changes in the procurement process to adapt to
improvements in modern technology
f. To perform such other functions as may be deemed necessary to
achieve the objectives of the Act.

BUREAU OF PUBLIC PROCUREMENT: This is established by the Public

Procurement Act 2007
OBJECTIVES OF THE BUREAU
a. The harmonisation of existing government policies and practices on
public procurement
b. The establishment of pricing standards and benchmarks
c. Ensuring the application of fair, competitive, transparent and standard
practices for the procurement and disposal of public assets and
services
d. The attainment of transparency, competitiveness and professionalism
in the public sector procurement system

FUNCTIONS OF THE BUREAU OF PUBLIC PROCUREMENT

a. To formulate the general policies and guidelines relating to public
sector procurement.
b. To supervise the implementation of established procurement policies.
c. To monitor the prices of tendered items and keep a National database
of standard process.
d. To publish the details of major contracts in the procurement journal.
e. To publish papers and electronic editions of the procurement journal.
 f. To maintain a National database of the particulars and classifications
and categorisation of Federal contractors and service providers.
g. To collate and maintain in a database for all Federal procurement plans
and information.
h. To undertake procurement research and survey.
i. To organise training and development programmes for procurement
professionals.
j. To prepare and update standard bidding and contract documents.

POWERS OF THE BUREAU The Bureau shall have the power:

i. To review and or inspect any procurement transaction to ensure
compliance with the provisions of the Act.
ii. To review and determine whether any procuring entity has violated any
provision of this Act.
iii. To stop and blacklist any supplier, contractor or service provider that
contravene any provision of this Act.
iv. To maintain a National database of federal contractors and service
providers.
v. To maintain a list of firms and persons that have been debarred from
participating in public procurement activity and publish them in the
procurement journals.
vi. To investigate any aspect of any procurement proceeding where a
breach, default, mismanagement and or collusion has been alleged,
reported or proved against a procuring entity or service provider.
vii. To recommend to the Council where there are persistent breaches of
this Act or regulations for suspension, replacement, discipline and
temporary transfer of any officer of any procuring entity or of the
Council.
viii. To act upon complaints in accordance with the procedures set out in this
Act.
ix. To nullify the whole or any part of any procurement proceeding or award
which is contravention of this Act.
x. To enter into contract or partnership with any company, firm or person
which in its opinion will facilitate the discharge of its functions.

FUNDAMENTAL PRINCIPLES OF PUBLIC PROCUREMENT

All public procurements must be conducted:
 subject to prior review of thresholds set by the Bureau.
 based only on procurement plans supported by prior budgetary
provisions/appropriations and a ―Certificate of `No Objection‘ to Contract
Award‖ from the BPP;
 by open competitive bidding;
 in a transparent, timely and equitable manner which will ensure
accountability and conformity with the Act;
 with the aim of achieving value-for-money and fitness for purpose;
 in a manner which promotes competition, economy and efficiency;
  in accordance with the procedures laid down in this Act and as may be
specified by the Bureau from time to time.

DUE PROCESS PROCEDURES

Due process is the mechanism for ensuring strict compliance with the openness,
competition and cost accuracy, rules and procedures that should guide contract
awards within the three tiers of Government in Nigeria.
It is a policy formulated to ensure that all the laid down rules and regulations
guiding the conduct of the award of any contract in any government
establishment are strictly adhered to without compromise, partial treatment or
manipulation. It is introduced to stem the tide of corrupt government officials in
connivance with contractors in the embezzlement of public funds in the name of
contract awards and arrest flagrant abuse of procedures, inflation of contract
costs and lack of transparency.

BENEFITS OF DUE PROCESS

1. To safeguard public funds and assets.
2. To improve the system of planning and diligent project analysis leading to
the accuracy of costing and prioritization of investments.
3. To improve fiscal management through more efficient and effective
expenditure.
4. To improve the technical efficiency through un-impaired and enhanced
information flow.
5. To enhance transparency and accountability in governance.
 Chapter Twenty
AUDITING OF GOVERNMENT ACCOUNT
Auditing is an independent appraisal process often governed by statute, for
examining, investigating and verifying the financial statements of an
organisation, by a person competently appointed. The Auditor seeks to establish
an opinion concerning the truth, accuracy, validity, reliability and fairness or
otherwise of the statements and the underlying records on which the statements
have been built and whether or not they comply with any statutory or other
requirements

TYPES OF AUDIT
1. External Audit: External Audit is carried out by a professional who has the
authority of the law to vouch the financial statements and records of the entity.
Under paragraph 85 of the 1999 Constitution, the Auditor-General for the
Federation vouches the financial statements and records of Public Offices. He has
indirect control over the accounts and audit of the Federal Parastatals.
Conversely, the State Auditor-General, under section 125 of the 1999
Constitution, exercises the same powers and influence as his Federal
counterpart. Nonetheless, by the laws creating the Parastatals, they have the
authority to appoint independent auditors. These are external auditors.

2. Internal Audit: An internal audit is an independent appraisal activity within an

organization for the review of accounting, financial and other operations as basis
for services to management. It is carried out by an individual designated as
internal auditor as a control process. In Government, audit certificates are
issued before contractors and suppliers are paid.

3. Annual/Statutory Audit: Annual audit is a regular responsibility covered by the

statute. It is a requirement of the law. It is carried out on a yearly basis by an
independent person to establish proper, adequate and accurate stewardship on
the part of management.

4. Ad-Hoc or Special Audit: Ad-hoc or special audit is a ―one-off‖ assignment

arising from a special request for investigation to be made. It could be in respect
of an arm or a unit of the organisation; for example, a case of fraud involving an
officer could be the ground for investigation.

5. Pre-payment Audit: Pre-payment audit is carried out before payment is effected. It is

common in Government Services. An example is the audit carried out before contractors
are paid. ‗Prepayment audit‘ is carried out by the internal auditor to evaluate the extent
to which management has achieved economy, efficiency and effectiveness and adhered
to laid down rules and regulations.

Objectives of Pre-payment Audit are:

(a) To guide against unreasonable or extravagant expenditure;
(b) To ensure that sufficient funds are available to enable payment to be
effected
(c) To ensure compliance with budgetary, civil service rules, financial
memorandum, legislation and other legal requirements on payment;
(d) To ensure that goods/services conform with the prescribed standards before
payments.

6. Post-Payment Audit
Post-payment audit is carried out after payment for the goods and services has
been effected. ‗Post payment audit‘ is executed by both Internal and External
Auditors. The exercise is to complement the prepayment audit and ensure that
disbursements take place in consideration of organizational interests and
policies.

7. Value-for-Money
This is the review of the financial transactions to confirm that an organisation
has received adequate benefit for the money expended.

The steps to be taken in carrying out Value-For-Money audit are:

(a) Do initial analysis of the financial statements.
(b) Review the management system.
(c) Plan and control.
(d) Carry-out compliance test. Check for approval by authorized office and limits
of authority. (e) Carry out substantive tests

Substantive test is subdivided into three, as follows:

(i) Economy Test. The objective of Economy Test is to ensure that resources
(inputs) are obtained at the cheapest prices. The tests to be carried out are:
(a) Oral interview, and
(b) Circularisation.

(ii) Efficiency Assessment. The objective of Efficiency Assessment is to ensure

that wastages are reduced to the barest minimum. The tests to be carried out
are:
(a) Physical asset verification.
(b) Check to ‗third party‘ evidence.
(c ) Review computation.
(d) Review extension.
(e) Circularisation.
(f) Conduct oral interview.
(g) Review internal audit report.

(iii) Carry out ‘Effectiveness Review’. The objectives of ‗Effectiveness Review‘ is

to confirm the popularity of the policy adopted by the organisation. The tests to
be carried out are:
(a) Circularisation, and
(b) Oral interview.

(iv) Write the report. To evaluate efficiency and effectiveness, it is necessary to

carry out physical verification of assets, check to evidences of third parties,
review computations for occupancy, consider internal audit reports, circularise
debtors and conduct oral interview. 249

8. Interim Audit: This is an audit carried out by the external auditor for the
earlier months of the year. It is designed to reduce the workload at the end of
the year. It has the advantage of early detection of frauds and mistakes, and
evaluation of the adequacy of the existing internal control.

9. Final Audit: This is the audit carried out after the end of the year to finalise
the audit since the interim audit was carried out.

10. Management Audit: This is a review of the performance of management

during a period. It is synonymous with the investigation or performance review
of the management, otherwise called ‗operational audit.

11 Operational or Systems Audit: The review concentrates on the operational

aspect of management performance. The review evaluates the efficiency and
effectiveness of management practices in rendering services to the members of
the public.

12 Vouching Audit: Vouching audit checks the relevance and adequacy of the
supporting documents of a transaction. Receipts are checked to third parties
while evidence and all other financial papers are traced to the ledgers.

13 Verification Audit: This is a review to confirm the existence and ownership of

the assets. It is undertaken by physical asset verification and review of evidence
of ownership.

FACTORS CONTRIBUTING TO AN EFFECTIVE AUDIT

The following factors make for an effective audit:
(a) The independence of the auditor:
(b) The adequacy and scope of the auditor‘s power: The Auditor must be given
adequate authority to discharge his responsibilities.
(c) The expertise and professionalism of the Auditor and his staff: The Auditor
should be adequately trained, versatile and skilful at his job.
(d) The resources at the Auditor‘s disposal: There should be enough funds at the
disposal of the Auditor to carry out his assignment.
(e) Freedom of reporting and the qualitative nature of reports: The reports which
the auditor transmits should be promptly looked into and timely and effective
decisions taken in order to comply with the Professional Audit Standards.
(f) Unrestricted access: Audits should be conducted with complete and
unrestricted access to employees, property and records.
(g) Stakeholder support: The legitimacy of the audit activity and its mission
should be understood and supported by a broad range of elected and appointed
government officials, as well as the media and the involved citizens.

Efficiency Unit
This is to ensure that government‘s resources are used in the most efficient
manner so that citizens get value for money and that more funds are available
for capital projects.

Mandate of the efficiency unit

The efficiency unit will execute its mandate in a number of ways:
i. Reviewing the government‘s spending pattern using data from the budget
implementation report and other sources;
ii. Work closely with the ministries, departments and agencies (MDAs) to
review work and procurement processes for specific expenditure lines;
iii. Agree changes or process improvements to reduce wastages and make
savings;
iv. Continuously publishing the achievements (savings) from the
implementation of such changes or process improvements;
v. Identifying and migrating best practices in the public sector spending
patterns and processes of other countries to Nigeria;
vi. Promoting a change in the culture of public spending by MDAs to one of
prudence and savings etc.

Benefits of Efficiency Unit

The creation of an efficiency unit as a public sector reform initiative has the
following unique benefits for Nigeria:
a) It is a tool that is internal to the government thereby saving costs,
providing learning opportunities for government and resulting in long term
benefits;
 b) It is participatory (the MDAs are involved) rather than top-down, which
makes acceptance and the institutionalization of a culture of efficiency
easier; and
c) It has the potential for introducing other reforms in the public sector for
public good.

International Organizations of Supreme Audit Institutions (INTOSAI) –Code of

Ethics and Auditing Standards
Code of Ethics
a) Integrity: Auditors have a duty to adhere to high standards of behavior
(e.g honesty and candidness) in the course of their work and in their
relationships with the staff of audited entities.
b) Independence, objectivity and impartiality: Personal or external
interests should not impair the independence of auditors. There is a
need for objectivity and impartiality in the work and the reports, which
should be accurate and objective. Conclusions in opinions and reports
should be based exclusively on evidence obtained and assembled in
accordance with the SAI‘s auditing standards.
c) Professional secrecy: Auditors should not disclose information obtained
in the auditing process to third parties except for the purposes of
meeting the SAI‘s statutory responsibilities.
d) Competence: Auditors must not undertake work which they are not
competent to handled.

OFFICE OF THE AUDITOR-GENERAL FOR THE FEDERATION

The External Auditor to the Federal Government is the Auditor-General for the
Federation. This is an institution or office or person established or authorized by
law to audit the accounts of all the Ministries and Extra-Ministerial Departments.
The Auditor-General submits his report directly to the National Assembly.
The Public Accounts Committee (PAC):
The Committee is a Body established by law to study and examine the reports
submitted by the Auditor-General, especially in the areas of fraud practices or
embezzlement of public funds. The Body is also to make appropriate
recommendations to the National Assembly

FUNCTIONS OF EXTERNAL AUDIT

The functions of external audit are to ascertain whether:
(a) Government is carrying out the activities authorised by the National or State
Assembly in conformity with the mandate of the people.
(b) The programmes and activities are conducted in an effective, efficient and
economic manner and in compliance with the requirement of ethical standards.
(c) Funds, property and personnel are adequately controlled and utilized.
(d) All monies collected are properly accounted for.
(e) The accounting system complies with prescribed principles, standards and
requirements.

Steps Taken In Auditing Financial Statements

These are:
(a) Review of the Financial Statements: The Financial Statements of the
Organisation will be analyzed into various departments and reviewed on monthly
basis.
(b) Review of the system:- The Ministry‘s or departmental system is reviewed
for internal control adequacy or otherwise.
(c) Planning and Control Based on the review of the system, the audit will be
planned and samples picked, for testing. Departments which have weak system
will supply large sample and vice versa. Samples may be picked, using scientific
or ‗best-of-judgement‘ approaches.
(d) Compliance Test‘ otherwise called ‗Walk-Through Test.‘ This approach
involves tracing a chosen transaction from initiation to conclusion. The objective
of the test is to test the compliance and effectiveness of the system. It is an
assessment of the reliability of the internal control system in operation.
(e) ‗Substantive Test‘– This involves ‗in depth test‘ to provide audit evidence as
to the completeness, accuracy and validity of the information contained in the
accounting records or the financial statements. Tests are conducted into such
issues as:
(i) Physical asset verification.
(ii) Proof of ownership.
(iii) Checking to third party evidence.
(iv) Review of computations.
(f) Writing of Report - Based on the outcome of the Compliance and substantive
tests conducted, audit reports are written and transmitted to the Audit Unit,
Department or Ministry, highlighting the areas of deficiencies which require
overhauling.

RELIANCE OF THE EXTERNAL AUDITOR ON THE INTERNAL AUDITOR‘S WORK

Before an external auditor could rely on the work of the internal auditor, the
former would have made the following assessments:
(a) The degree of independence of the internal auditor.
(b) The scope and objectives of the internal audit functions as defined by the
management.
(c) Due professional care, that is, whether or not the internal audit work is
properly planned, recorded and reviewed.
(d) The technical competence of the internal auditor. This raises the question as
to whether the internal auditor belongs to any reputable professional accounting
body or has relevant practical experience in internal audit work.
(e) The quality and quantity of the internal audit reports and to what extent they
are being acted upon by the management are of interest to the external auditor.
(f) The quality and standard of internal audit working papers are of significance,
showing the extent of work done.

Areas where the specialists can assist the external auditors

In some cases the external auditor may have to rely on the work of specialists to
form his audit opinion. Examples of such situations are:
i. Valuations of type of assets, for example, lands, buildings, machinery,
minerals, etc.;
ii. Measurement of work completed, in progress or to be completed on long
term contracts, architects, engineers, etc.;
iii. Legal interpretation of agreement or statutes;
iv. Physical stock taking of specialised stores e.g. drugs or chemicals; and
v. Determination of amounts using specialised techniques or methods, for
example, an actuarial valuation.

It should be noted that, when determining the need to use the work of
an expert, the auditor should consider:
i. The engagement team‘s knowledge and previous experience of the matter
being considered;
ii. The risk of material misstatement based on the nature, complexity and
materiality of the matter being considered;
iii. The quantity and quality of other audit evidence expected to be obtained;
iv. Evaluate the professional competence of the expert; and
v. Evaluate the objectivity of the experts which may be impaired if the expert
is employed by the auditee or related to the auditee.
ASSURANCE ENGAGEMENT
These are enquiries commissioned by client firms or government to find out the
cause or causes of an event, so that remedial actions may be taken. The internal
and external auditors can be requested to carry out an investigation into a
financial transaction. They will adopt standard audit review investigation steps
such as:
(a) Reviewing Financial Statements.
(b) Reviewing of the system.
(c) Evaluating the application of the relevant financial legislation.
(d) Conducting Compliance Test.
(e) Conducting Substantive Test.
(f) Writing of report.

Contents of Assurance Report

The following must be stated in assurance report:
(a) Confirmation and amount of loss.
(b) The regulation which was violated.
(c) Recommendations to effect correction and prevent a reoccurrence.
(d) Name and post of officer/s involved.
(e) Degree of negligence of individual officers.
(f) Recommendation and necessary sanction.

THE OBJECTIVES OF INTERNAL AUDITING

The objectives of Internal Auditing may be outlined thus:
(a) Determining the adequacy of the system of internal control which is in
existence.
(b) Investigating compliance with the existing financial memorandum, laws and
financial regulations.
(c) Checking the adequacy of monthly returns of activities.
(d) Verification of the physical existence of assets and liabilities.

The Scope of Internal Audit Functions

The duties and responsibilities of internal auditors are at the discretion of
management. However, from empirical studies, the following are the areas of
interest to an internal auditor, viz:
(a) Pre-audit.
(b) Vouching of payroll and third party claims.
(c) Auditing of store movements and records.
(d) Conducting internal investigations and evaluation for management.
(e) Constant review and appraisal of the existing internal control measures.

The Role of A Government Internal Auditor in The Presidential System

The Internal Auditor is expected to render ‗exception reports‘ on continuous
basis on the financial activities of Government. He writes his reports to the
Accounting Officer and copies the Auditor General. The presidential system of
Government empowers the Legislative House to interview the Auditor-General
on his position on actions already taken by the Executive arm which he had
endorsed as correct. The system of Government expects him to ensure budget
discipline through continued monitoring of receipts and payments.

He is expected to be objective, fair and articulate in reacting to the views of

opposing parties on financial matters. The Auditor-General for the Federation
can audit any State or Local Government Council on how the Federal ‗s special
allocations as Ecology Fund are being utilized.

Time Limit to
 Respond to
Audit Query Audit Query Sanctions

Inflation of Contracts 5 Days (i) Where it affects the Accounting Officer,

he shall be reported to Mr. President.
(ii) In the case of any other Officer, he shall be
surcharged appropriately and removed from
the duty schedule, dismissed and prosecuted.
(iii) Where it involves Tenders Board, all
members involved shall be severally and
collectively sanctioned.

Un authorised Contract 21 Days (i) Where it affects the Accounting Variation

Officer, he shall be reported to Mr. President.
(ii) In the case of any other Officer, he shall be
surcharged appropriately and removed from
the duty schedule, dismissed and prosecuted

Payment to Contractor (i) Contractor to complete the job within time

for Job not executed 30 Days time limit or refund the money paid to him.
(ii) Contractor to be black listed and report to
EFCC for prosecution

Payment to Contractor on 21 Days (i) Contractor to complete the job within time
false Certificate of Completion limit or refund the money paid to him.
(ii) Contractor to be black listed and report to
EFCC for prosecution.

Payment to Contractor for (i) Officer to refund the money paid to the
Job not executed due to N/A contractor.
fraudulent act of a public officer (ii) Officer to be removed from the duty
schedule and report to EFCC for prosecution.

Poor Quality of work 42 Days (i) Contractor to rectify the abnormalities of the
poor job within time limit or refund the money
paid to him.
(ii) Contractor to be black listed and report to
EFCC for prosecution
(iii) The officer that certified the job shall be
demoted.

Irregular or Wrong payment 21 Days (i) Officer to refund the money paid to the
contractor.
(ii) Officer to be removed from the duty
schedule.

Shortage or Losses of stores 14 Days (i) Officer to be surcharged for the loss.
by storekeeper (ii) Officer to be removed from the duty
schedule.

Shortage or Losses of 7 Days (i) Officer to be surcharged for the loss.

Cash by the cashier (ii) Officer to be removed from the duty
schedule.

Assets paid for but not 21 Days (i) Contractor to be black listed and report to
supplied 21 Days EFCC for prosecution.
 (ii) Officer to be removed from the duty schedule
and made to face disciplinary action.

Payment for Ghost workers NA Officer to be removed from the duty schedule,
charged for misconduct and reported to EFCC
for prosecution.

Overpayment of salaries 21 Days Officer to be disciplined and reported to

and allowances to staff Police for prosecution.

Failure to collect 21 Days Officer to be removed from the duty

Government Revenue schedule and surcharged.

Where an officer fails to 7 Days Officer to be surcharged for full amount

give satisfactory reply for and reported to EFCC or ICPC for prosecution
his failure to account for
government revenue

Non payment for use 30 Days Officer to be surcharged for full amount and
of Government property seriously warned.

Non-Rendition of Return 30 Days Officer to be surcharged for full the loss incurred
for non compliance and seriously warned.

Non-Rendition of Monthly 21 Days Allocation to the MDA shall be suspended

transcript indefinitely.

Non- Retirement of Advance 21 Days Officer to be surcharged and total amount

and Imprest recovered

Offences under the Public N/A (i) Imprisonment of not less than 5 calendar
Procurement Act, 2007 years without option of fine
(ii) Summary dismissal from government service
(iii)Debarment from all public procurements for a
period not less than 5 calendar years
(iv) A fine equivalent to 25% of the value of the
procurement in issue

Making payment with N/A (i) Budget allocation of the organisation to be

cash/ cheques by suspended.
organisation and officer (ii) Officer is regarded to have committed a gross
misconduct and shall be disciplined accordingly
 Chapter Twenty One
PROFESSIONAL PRONOUNCEMENTS ON GOVERNMENT ACCOUNTING BY THE
UNITED NATIONS
(a) A United Nations Survey was conducted and recommendations made for
improvements in the Government accounting systems of ‗third world‘ countries,
especially in budgeting practices, training, data classifications, methods and
accounting procedures.

(b) In the United States of America, the National Committee on Government

Accounting issued a manual titled ―Government Accounting, Auditing and
Financial Reporting (GAAFR).‖ The manual is generally referred to as ―The Blue
Book.‖ The Blue Book and other pronouncements of the committee set forth the
basic accounting and reporting principles covering the following areas, viz:
(i) Basis of Accounting.
(ii) Legality.
(iii) Funds and ‗Fund Accounting.
(iv) Budgetary, Planning and Control.
(v) Fixed Assets and Depreciation.
(vi) Terminologies and Accounting/Classifications.
(vii) Financial Reporting.

The Committee recommended the ‗accrual basis‘ of accounting for public

enterprises, capital projects and trust funds; the ‗modified accrual basis‘ for
special revenue and debt service funds and that depreciation is not chargeable
on fixed assets.

(c) The International Federation of Accountants (IFAC) issued International

Public Sector Accounting Standards, effective from year 2003.

(d) The Nigerian Public Sector Auditing Standards, effective from December,
1997, were issued by the Auditor-General for the Federation and Auditors-
General for the States.

(e) The American Institute of Certified Public Accountants (AICPA) recommended

that the financial statements of each governmental Unit should be prepared in
accordance with the generally accepted accounting principles while
supplementary schedules should accord with legal compliance.

(f) The International Organisation of Supreme Audit Institutions (INTOSAI),

which is the association of all Auditors-General in the world, meets annually and
draws up resolutions on accounting and audit practices and procedures to be
followed by member countries.

OBSERVATIONS MADE BY UN ON GOVERNMENT ACCOUNTING SYSTEM IN

THIRD WORLD COUNTRIES
The following are the observations made by the United Nations Organisation on
Government Accounting system in ‗third world‘ countries:
i. Relatively little has been given to Social Government Accounting and
Budgetary Control system.
ii. Accounting procedures in Government Departments reflect complicated
system of checks, rechecks and balances which tend to hamper the
efficacy and timeliness of the accounting information.
iii. Government Accounting is seen mainly as an accountability device for
public receipts and expenditure; effectiveness and economy of operations
tend to be neglected, book keeping or administrative legal compliance are
more common than modern accounting approaches.
 iv. Accounting tends to be identified with expenditure control. Expenditure is
subject to multiple checks.
v. The amount of paper work is vast but no efficiency, accountability and
financial controls are achieved.
vi. The accounting data upon which Government Budgets and plans are
based are frequently inaccurate and incomplete.
vii. Financial reports are delayed and generally in arrears.

CHARACTERISTICS OF GOVERNMENT ACCOUNTING

 There are distinct aspects of accounting information, classification and
procedures which apply only to transactions made by Government.
Examples are the budgeting system and applicable procedures, fiscal
policy, accounting methods and sources of revenue.
 In view of the requirement to obtain legislative approval for Government
revenue and expenditure, budgeting largely determines the structure of
Public Sector Accounting. The Government sometimes finds it necessary
to segregate its resources into specific or special purpose compartments,
a set-up of receipts and expenditure known as ‗Funds‘. The method of
accounting adopted in recording and measuring the Funds is referred to as
‗fund accounting.‘
 Another peculiarity of Government operations is that the accounting
system is maintained on ‗‘cash basis.‘‘ Only transactions involving the
movement of cash come into reckoning. Although the approach has its
inadequacies, the general practice is to adopt the ‗cash basis‘ of
accounting. All assets are written off as they are regarded consumed at
the point they are paid for. Accordingly, Government‘s balance sheet does
not contain information on fixed assets and neither is depreciation
charged in the revenue and expenditure accounts.

The various pronouncements made so far can be summarised as shown below

and compared with the position of Nigeria, in the following vein:
UNITED NATIONS NIGERIA’S ACCOUNTING REMARKS
PRESCRIPTIONS SYSTEM
(a) Accounting systems should be Government Accounting system in Government Accounting
designed to comply with the Nigeria adheres with the Nigerian System effectively
constitutional, statutory and other Constitution; Finance (Control and complies with the United
legal requirements of ‘third world Management) Act, Cap 144 LFN Nations Pronouncements.
countries. 1990 (as amended); the Audit Act
of 1956; Revenue Allocation Laws;
other Federal and State Laws and
Regulations; Local Government
bye-laws, etc.

(b) Accounting systems should be Accounts are kept on the basis of Remark is as in (a)
above related to the budget budgetary classifications at all
classifications. Levels of Government.
The budgetary and accounting
functions are complementary
Elements of financial management.
They should therefore be closely integrated.

(c) The accounts should be The budgetary provisions specify Remark is as in (a) above
maintained In a way that will the sources of revenue and the
clearly identify the objects and purposes for which funds are
purposes for which funds provided and expended. The budget
have been received and expended, documents also show the vote
and the executive authorities who controllers for both recurrent and
are responsible for custody and capital expenditure.
use of funds in programme
executions.

(d) Accounting systems have to be The Financial Regulations of the Federal Remark is as in
maintained in a way that and State Governments and the Financial (a) above
facilitate audit by external Memoranda of Local Government Councils
reviewing authorities, and specify the expenditure control measures,
readily furnishes the information payment procedures and the internal
needed for performance control system which are in operation.
appraisal and stewardship. The ‘three-tiers’ of Government in
Nigeria do comply, accordingly.

(e) Accounting systems ought to be The Financial Regulations stated in Programme

management is developed in a manner that will (d) above meet substantially the however
in its infancy under permit effective control of fund international requirements. the
Planning, Programming operation management and
Budgeting System which has internal audit appraisal.
been introduced.

(f) The accounts should be The cash basis of accounting

developed and prepared so adopted does not allow the Nigeria Accounting
System that they would effectively underlying pronouncement partially complies
with this. disclose the economic and to be incorporated in Nigeria. There is national
compliance. financial results of programme
operations, including the
measurement of revenues,
identification of costs and
determination of the operating
results (the surplus or deficit
positions) of the Government
and its Agencies.

(g) Accounting systems should be -do- Cash accounting basis

seems capable of serving the basic to constrain the
realization of financial information needs of this useful
objective. development, planning and
appraisal of performance in
physical and financial terms.

(h) The accounts should be -do- Planning, Programming and

maintained in a manner which Budgeting System and the
will provide financial data useful accrual accounting
for economic analysis and basis need to be firmly
re-classification of governmental implanted for this as well as
transactions. for the United Nations’
recipes
under (f) and (g) above
OBJECTIVES OF PROFESSIONAL PRONOUNCEMENTS
The objectives of Professional Pronouncements are:
 To develop and harmonize public sector financial reporting, accounting
and auditing practices.
 To put into practice the same accounting standards throughout the world
in order to make comparisons possible and meaningful.
 To make guidelines available for practitioners in order to maintain high
reporting standards.

Features of Government Accounting Systems as published by the United Nations

a) Not much attention has been accorded to Social Government Accounting
and Budgetary Control System.
b) Accounting procedures in Government Departments which reflect
complicated systems of checks and balances tend to hamper the efficacy
and timeliness of the accounting information and statistics produced.
c) There is the belief that Government Accounting only aim at accountability
for public fund receipts and disbursement while efficiency and
effectiveness of the operations are ignored.
d) Accounting compliance procedures are taken more seriously than modern
accounting approaches.
e) Accounting tends to be identified with expenditure control.
f) Efficiency, accountability and financial control are not put in place but
only accounting records.
g) The available data on which Government budgets are prepared are most
times incomplete, inaccurate and unreliable.

FEATURES OF A GOOD SYSTEM OF GOVERNMENT ACCOUNTING AS CONTAINED

IN A UNITED NATIONS MANUAL ON GOVERNMENT ACCOUNTING.
The system must:
a) comply with constitutional, statutory and other legal requirements of the
relevant country;
b) be related to budget classifications. Budgetary financial management must be
closely integrated;
c) be maintained in a manner that will clearly identify the objects and purposes
for which funds have been received and expended, and the executive
authorities who are responsible for custody and use of funds in programme /
budget implementation;
d) maintain records in a way that will facilitate audit by external review
authorities and readily furnish the information needed for effective audit;
e) be developed in a manner that will permit administrative control of funds;
f) be developed so that it effectively discloses the economic and financial results
of programme operations, including the sources of revenue, identification of
costs and determination of the operating results of government programmes
and organisation;
g) be maintained in a manner that will provide financial data useful for economic
analysis and identification of governmental transactions and also assist in the
development of the country‘s accounts.
h) Delay in financial reports which make them obsolete and irrelevant at the
point of implementation.
 Chapter Twenty Two
INVESTMENT APPRAISAL & Ratio Ananlysis
Investment Appraisal is a technique directed at finding out the least possible
costs of an investment and the maximum economic benefits which may accrue
from the commitment of resources into it.

METHODS OF INVESTMENT APPRAISAL

There are many techniques available for the appraisal exercises, which can be
classified into discounted cash flow (DCF), non-discounted cash flow (NDCF) and
investment decisions in Government - Cost Benefit Analysis, Cost Effectiveness
Analysis. These are further classified as follows:
(a) Accounting Rate of Return (ARR).
(b) Pay-Back Period (PBP).
(c) Discounted Cash Flow (DCF).
(i) Net Present Value
(ii) Internal Rate of Return
(d) Profitability Index (PI)
(e) Cost-Benefit Analysis
(f) Cost-Effectiveness Analysis
(g) Life Cycle Costing.
(h) Value Analysis/Value Engineering.

(a) Accounting Rate of Return

This is the return on initial outlay or return on average capital. It is computed,
using the formula:
ARR = Average Annual Accounting Profit
Average Investment

Where average investment is:

( INITIAL INVESTMENT + RESIDUAL VALUE) / 2

Profit is the ‗accounting profit.‘

In using the Accounting Rate of Return as an investment appraisal method, the
decision rule is to pick the option which gives the highest rate of return.

Advantages of ARR Method

(a) It considers the profits of a project throughout its useful life.
(b) It is simple to calculate and understand.
(c) It facilitates expenditure follow-up due to more readily available data on
accounting records.

Disadvantages of ARR
(a) It does not take into account the time value of money.
(b) It ignores the fact that profits from different projects may accrue at an
uneven rate.
(c) It fails to cater for risks and uncertainties.

(b) Pay-back Period Method

The method focuses on the time taken by an investment to recoup the amount
of money put into it. The shorter the pay-back period, the more preferable the
project is. A project will be undertaken only if the payback-period is shorter, or
at worst, equal to the maximum set standard period.

Advantages of Pay-Back Period Method

(a) It is a useful measure of liquidity, since the method ensures the selection of
projects that provide the hope of immediate cash recoupment.
(b) It may be used as a safeguard against risk, particularly if the latter increases
as pay-back period lengthens.
(c) It is simple to calculate and understand.
(d) The method is popular with public project evaluation where liquidity
predominates over profitability.
(e) It serves as a useful screen to evaluate all projects.
(f) The approach uses cash flows rather than accounting profits, to appraise.

Disadvantages of the Pay-Back Period:

These are highlighted as follows:
(a) It does not consider the time value of money.
(b) It ignores variations in the timing of cash inflows within the payback period.
(c) Cash inflows outside the payback period are ignored.
(d) It does not take into consideration risks and uncertainties.

(c) Discounted Cash Flow (DCF) Criteria There are two discounted cashflow
methods of project appraisal, namely:
i. Net Present Value : This method refers to the equivalents in present value
terms of the cash inflows and outflows from a project when discounted at a
particular or given cost of capital.

Advantages of Net Present Value (NPV)

(a) Timing of cash flows is considered.
(b) Cash flows on the entire lives of the projects are taken into consideration.
Disadvantages of Net Present Value (NPV)
(a) There is the obligation for management to determine the appropriate cost of
capital to use. (b) It is not suitable where capital rationing situation exists.
(c) There is the assumption that the cash inflows will come as predicted which
may not necessarily be so.

ii. Internal Rate of Return:

The approach is also known as ―discounted cash flow yield.‖ The ―internal rate of
return‖ is the discount rate, which when applied, gives zero net present value. It
can be found by either drawing a ―present value profile‖ or graph, or
mathematically through linear interpolation, using the formula stated thus:
R1+P(R2 - R1)
P+N
where: R1 is positive rate
R2 is negative rate
P is positive net present value (NPV)
N is negative net present value (NPV)

In using the internal rate of return model, the ‗decision rule‘ is to accept the
project appraised where the calculated rate is greater than the company‘s cost
of capital. The project with the highest percentage of internal rate of return is
picked where two or more mutually exclusive investments are being considered.

(d) PROFITABILITY INDEX TECHNIQUE

This is another investment appraisal technique which compares the present
value of cash inflows with the present value of cash outflows in ratio terms.
The formula is given as:
(i) PI = Present Value of Cash Inflows
Present Value of Cash Outlay
OR
(ii) PI = Net Present Value of Cash Inflows
Present Value of Cash Outlay
The decision rule in Profitability Index is to accept every project whose PI is
greater than 1
i.e. Accept Project if PI = 1 or > 1
Reject Project if PI = 0 or < 1

Advantages of Profitability Index

(a) It recognises time value of money
(b) It is a variant of the Net Present Value Method. It therefore requires the
same computation as in NPV method.
(c) It is a relative measure of a project‘s profitability since the present value of
cash inflows is divided by the present value of cash outflows.
(d) It is generally consistent with the wealth maximisation principle.

Disadvantages of Profitability Index

(a) It can only be used to choose projects under simple, one period, capital
constraint situation. (b) It does not work mutually exclusive projects or
dependent projects are being considered.
(c) The technique is not popular in public sector project appraisal.

(e) Cost-Benefit Analysis

This is defined as an analytical tool in decision-making, which enables a
systematic comparison to be made between the estimated cost of undertaking a
project and the estimated value of benefits, which may be obtained from its
execution.

Procedures for Conducting Cost-Benefit Analysis

a. Examine the problem with the proper definition of the objectives of the
analysis in focus.
b. Consider alternative courses of actions, which would achieve the defined
objectives in (a) above.
c. Enumerate the costs involved and the benefits, which would accrue from the
particular courses of action, to the establishment and the society.
d. Evaluate the costs and benefits.
e. Draw conclusions as to the economic and social effects of a particular choice.
f. Re-examine the problem and the chosen objectives to determine
accomplishment.

Cost-Benefit Analysis and Project Evaluation

The following methods are adopted in the evaluation of projects under Cost-
Benefit Analysis:
(a) Benefit/Costs Comparison: This method compares estimated benefits and
costs of project to be taken. The decision criterion is that if benefits are greater
than the costs of a project, it should be accepted for implementation, otherwise,
it should be rejected.
The major weaknesses of this method are:
(i) It ignores the effect of inflation on values used in the computation.
(ii) The figures and other details used are not relative.

(b) Benefit/Cost Ratio: This method assesses estimated benefits as a ratio of

estimated cost. The decision rule is that if the ratio is greater than one (1) the
project should be accepted, otherwise, it should be rejected.

Advantages of the Benefit/Cost Ratio

(i) It produces comparable results.
(ii) The benefits/costs used in the calculations are discounted.
 Disadvantages of the Method
The method ignores the time-value of money as in Benefit/Costs Comparison
approach.

Merits of Cost-Benefit Analysis Technique

i. It takes into consideration monopolistic power of Government over vital
public projects.
ii. It considers not only financial commitments on a project but also favourable
and unfavourable impacts of the project on the society. Non-consideration of
these impacts may jeopardize the lofty goals of the project despite the size of
finance committed.
iii. Cost-Benefit Analysis is a viable option for project appraisal in Government,
bearing in mind its service-rendering goal.
iv. The appraisal technique serves as a check on the excesses of political
decisions which most of the time ignore economic and social costs and
benefits of a project on the society.
v. It is easy to apply.

Demerits of Cost-Benefit Analysis Technique

(i) Dissimilar projects are not, most of the time, evaluated and considered
together, e.g. cost-benefit of constructing a road and school will not be
considered, but only similar items.

(ii) Final selection may be based on unjustifiable factors, e.g. political, social,
geographical and historical factors.

(iii) It requires comprehensive and intelligent data collection and analysis for
which the public sector is noted to be deficient.

(iv) Indirect User Benefits: Alternative methods of valuing benefits yield different
outcomes. Given the different approaches, there is difficulty in choosing an
appropriate monetary measure. One has to contend, therefore, with the problem
of whether or not to use the technique as a means of investment appraisal.

(v) Spillover Effects: There is the necessity to distinguish between technological

and pecuniary ‗spillovers‘. The decision maker faces the problem of how to
include these effects in the analysis. ―Spillover‖ is a situation where an action or
project has a lot of indirect benefits. For example, a raw material supplier may
install a modern and efficient machinery for production. Apart from the
availability of cheap raw materials, other benefits derivable may include
standardised, quality and timely supply always.

(vi) Double Counting: A difficult problem to address is ‗double counting‘. This is a

situation in which the cost may be accounted for twice, in view of the process
complication. For example, the cost may be taken into account as raw material
and later as finished product.

(f) Cost-Effectiveness Analysis - (CEA)

This is an approach to picking among alternative lines of action in public sector
organisations in regard to their effectiveness in attaining specified objectives.

In contrast to Cost-Benefit Analysis (CBA), the focus is on cost and not so much
on the benefit. Cost Effectiveness Analysis does not attempt to supply
information on the benefits of achieving goals. Rather, the emphasis is on the
least or minimal cost of achieving the specific objective of a public sector project.
 Procedure of Cost Effectiveness Analysis in the Appraisal of a Public Project
a. Objective definition is to determine what actual target is. What are the
projects?
b. Sourcing and assessment of alternatives: After the public project has been
determined, what are the cost alternatives that are available? The
information in this regard have to be collated.
c. Selection of measure to be adopted: It has to be determined what types of
approaches will enable management to achieve the set objectives within a
reasonable period of time.
d. Development of cost estimates: Cost estimates have to be collated,
addressing the issues of what to include and how to measure them.
e. Having ascertained the adequacy of cost effectiveness measures and relying
on the information on cost estimates, the public sector organisation evolves
the final decision, based on the principle of least cost.

Limitations of Cost-Effectiveness Analysis

(a) Procedures are subjective, since they are based on the personal judgment of
the decision-maker.
(b) What is an appropriate measure of effectiveness cannot be easily resolved.
(c) It may lead to wrong decisions resulting from imperfect information on which
costs are based and benefits derived.

(g) LIFE CYCLE COSTING

This is a costing approach which attempts to optimize the use of costs by
aggregating the entire original and operation costs of assets over their estimated
lives. It is used for evaluating the desirability of acquiring an asset, in preference
to others, based on cost minimisation. The concept adopts the discounting
technique so as to evaluate assets. . In life cycle costing, consideration is given
to the following factors:
(a) Original costs, of physical assets, including the costs of design, specification,
acquisition, and installation.
(b) Operating costs which include those of labour, materials and energy.
(c) Maintenance costs, relating to materials and labour.
(d) Lost profits and the cost of recovering lost profits.
(e) Disposal value. This is the residual value less disposal costs incurred.

The annual equivalent cost of a physical asset is computed, using the formula:
= Purchase Cost
Cumulative PV Factor

(h) VALUE ANALYSIS/VALUE ENGINEERING

This aims at trying to reduce costs and prevent any unnecessary costs before
the product or service is produced. It endeavours to eliminate any costs which
will not contribute to the value and performance of the product or service.
Value Analysis is the same process when it is aimed at cost reduction after the
product or service has been introduced.

Value engineering involves innovative and critical thinking. it uses a formal

procedure which examines the purpose of the product or service, its basic
functions and its secondary functions.
PROBLEMS OF INVESTMENT APPRAISAL METHODS
(a) Future events are difficult to forecast with complete accuracy.
(b) Investment decisions are sometimes determined by political factors.
(c) The choice of an appropriate investment appraisal method is subjective.
(d) The calculation of the cost of capital to be used is a matter of opinion. There
is nothing sacrosanct about any decision.
(e) The treatment and measurement of risk are not easy tasks.

Externalities
The term externalities refer to economic effects, which may be positive (gains)
or negative (losses) flowing from production or consumption of goods and/or
services by one economic unit into the utility function of another economic unit.
In other words, it is a situation whereby consumption benefit cannot be limited
and charged to a consumer or where economic activity results in social cost
which need not be paid for by the producer/consumer who causes them; that is,
the externality generator. The essence of the above condition is that
interdependence between two or more economic agents arises from the
presence of real variables in the receiving party‘s utility function.

Nature of externalities
(i) Externalities are unintended effects or involuntary transactions.
(ii) Externalities cannot be adequately priced or valued through the market
system

Causes of externalities
There are two principal causes of externalities. They are:
(i) Production activities
(ii) Consumption activities

(i) Production externalities. It exists where production activities result into

gains or losses to the people within a locality without any form of price or
compensation paid. For example, oil exploration will generate hazardous effects
(losses) and employment and business opportunities (gains) to the people within
the precinct of production activities. This shows that the profit that a firm makes
does not only depend on its activities but is influenced by the activities of other
economic units in the business environment.
(ii) Consumption externalities. This occurs when consumption benefit cannot
be limited and charged to a particular consumer. This arises when there is
interdependence in the consumption activities of individuals within an area
without any form of compensation or price paid to the externality generator. This
implies that the utility of individual consumption activities will impact on the
utility of another within the community.

Types of externalities
Externalities may be either of these types:
(i) Negative externalities; or (ii) Positive externalities
(i) Negative externalities. This refers to the losses suffered by an economic
entity because of the activities of another economic unit. For example, an
airplane flying or train moving will evoke a great deal of noise that will disturb
the peace of the environment.
(ii) Positive externalities. It is the gain or benefit realized from the activities
of another economic unit without the externality generator being compensated.
For instance, construction of an expressway will create new market to the
villages around the corridor. Positive externalities will lead to increase in
production and consumption of goods and services.

Ratio Analysis
Financial ratio analysis is the process of calculating financial ratios, which are
mathematical indicators calculated by comparing key financial information
appearing in financial statements of a public sector entity, and analysing those
to find out reasons behind the entity‘s current financial position and its recent
financial performance, and develop expectation about its future outlook. Ratio
analysis involves expressing one figure as a ratio percentage of another, to bring
out the weakness or strength in an organization‘s affairs. If one were to take a
look at the financial statements of a government department, ministry or
corporation, the various figures disclosed would not be sufficiently revealing in
terms of the strength or otherwise of the establishment, for well-informed
judgment to be made. Ratio analysis comes in handy here, as a useful guide.

Classification of ratios
In the public sector entities financial ratios can be broadly classified into liquidity
ratios, solvency ratios, profitability ratios and efficiency ratios (also called
activity ratios or asset utilisation ratios). In view of the peculiarity of public
sector activities, the following relevant ratios only, are considered:
(a) Liquidity ratios : Liquidity ratios assess an entity‘s liquidity, that is, its
ability to convert its assets to cash And pay off its obligations without any
significant difficulty (i.e. delay or loss of value). Liquidity ratios are particularly
useful for suppliers, employees, banks, etc. Important liquidity ratios are:
i. Quick asset ratio (also called acid-test-ratio) - quick ratio (also known as acid
test ratio) is a liquidity ratio, which measures the Naira of liquid current assets
available per Naira of current liabilities. Liquid current assets are current assets,
which can be quickly converted to cash without any significant decrease in their
value. Liquid current assets typically include cash, marketable securities and
receivables. Quick ratio is expressed as a number instead of a percentage.
The following is the most common formula used to calculate quick ratio:
Cash + Marketable Securities +Receivables
Current Liabilities
ii. Current ratio- Current ratio is one of the most fundamental liquidity ratios. It
measures the ability of a business to repay current liabilities with current assets.
Current assets are assets that are converted to cash within normal operating
cycle, or one year. Examples of current assets include cash and cash
equivalents, marketable securities, short-term investments, accounts receivable,
short-term portion of notes receivable, inventories and short-term prepayments.
Formula is: Current Assets
Current Liabilities
Current ratio matches current assets with current liabilities and tells us whether
the current assets are enough to settle current liabilities.

(b) Solvency ratios : Solvency ratios assess the long-term financial viability of
a public sector entity i.e. its ability to pay off its long-term obligations such as
bank loans, bonds payable, etc. Information about solvency is critical for banks,
employees, owners, bondholders, institutional investors, government, etc. Key
solvency ratios are:
(a) Debt ratio - Debt ratio (also known as debt to assets ratio) is a ratio, which
measures debt level of a business as a percentage of its total assets. It is
calculated by dividing total debt of a business by its total assets. Debt ratio finds
out the percentage of total assets that are financed by debt and helps in
assessing whether it is sustainable or not. If the percentage is too high, it might
indicate that it is too difficult for the business to pay off its debts and continue
operations.
Formula is: Debt ratio= Total debt
Total assets
While a very low debt ratio is good in the sense that the entity‘s assets are
sufficient to meet its obligations, it may indicate under utilization of a major
source of finance, which may result in restricted growth. A very high debt ratio
indicates high risk for both debt-holders and equity investors. Due to the high
risk, the entity may not be able to obtain finance at good terms or may not be
able to raise any more money at all.
(b) Debt to equity ratio-Debt-to-equity ratio is the ratio of total liabilities of a
business to its shareholders' equity. It is a leverage ratio and it measures the
degree to which the assets of the business are financed by the debts and the
shareholders' equity of a business.
Formula Debt-to-equity ratio is calculated using the following formula:
Debt-to-equity ratio= Total Liabilities
Net assets/equity
Both total liabilities and shareholders' equity figures in the above formula can be
obtained from the statement of financial position of an entity. A variation of the
above formula uses only the interest-bearing long-term liabilities in the
numerator. Lower values of debt-to-equity ratio are favourable indicating less
risk. Higher debt-to-equity ratio is unfavourable because it means that the entity
relies more on external lenders thus it is at higher risk, especially at higher
interest rates. A debt- to-equity ratio of 1:00 means that debts and half by Net
assets/equity finance half of the assets of a business. A value higher than1:00
means that more assets are financed by debt that those financed by money of
shareholders' and vice versa.

(c) Debt capital ratio- Debt-to-capital ratio is a solvency ratio that measures the
proportion of interest-bearing debt to the sum of interest-bearing debt and
shareholders' equity. Interest-bearing debt includes bonds payable, bank loans,
notes payable, etc. Non-interest bearing debt includes trade payable, accrued
expenses, etc. The debt-to-capital ratio is a refinement of the debt-to-assets
ratio. It measures how much of the capital employed (i.e.the resources on which
the company pays a cost) is debt. Higher debt included in the capital employed
means higher risk of insolvency.
Debt to capital ratio = Interest bearing debt
Interest bearing debt + equity

Other ratios
(i) Receivables‘ payment period
Although this index measures the average length of time it takes a Corporation‘s
debtors to pay, it is only an estimated average payment period.
The formula for calculating the payment period is:
Receivables for goods or services x 365 days
Sales (credit)
The earlier debtors are encouraged to pay, the better the cash position of the
board or corporation. It would be more informative to make this calculation
regularly to avoid distortions.
(ii) Payables‘ payment period
This is a measure of the average length of time it takes the parastatal under
focus to pay its creditors. It is calculated as follows.
Trade or expense creditors x 365 days
Credit purchases
(iii) Inventory turnover period
This indicates the average number of days that items of inventory are held for
sale or in the store. The inventory turnover period is calculated as:
Cost of goods sold
(Opening inventory plus closing inventory) / 2
Average inventory is the average of the opening and closing inventory figures.
The shorter the period, the healthier the situation is, in making the best use of
funds.

Advantages ratio financial analysis

(a) It simplifies the financial statements;
(b) It helps in comparing entities of different size with each other;
(c) It helps in trend analysis, which involves comparing a single company‘s
performance over a period; and
(d) It highlights important information in simple form quickly. A user can judge
an entity by just looking at few numbers instead of reading the whole financial
statements.

Disadvantages
Despite usefulness, financial ratio analysis has some disadvantages. Some key
disadvantages of financial ratio analyses are:
(i) Different entities operate in different geographical areas, each having
different environmental conditions such as regulation, market structure, etc.
Such factors are so significant that a comparison of two entities from different
geographical areas might be misleading;
(ii) Financial accounting information is affected by estimates and assumptions.
Accounting standards allow different accounting policies, which impairs
comparability and hence ratio analysis is less useful in such situations; and
(iii) Ratio analysis explains relationships between past information while users
are more concerned about current and future information.
 Chapter Twenty Three
THE ROLE OF PUBLIC SECTOR IN THE ECONOMY
Government in every modern economy pursues five macroeconomic objectives.
These are:
(a) Full-employment.
(b) Price stability.
(c) Economic growth.
(d) External balance. This refers to the promotion of a debt-free and a self-
reliant economy. This goal is achieved when a country records a balance of
payments (BOP) equilibrium.
(e) An equitable distribution of income and wealth.

GOVERNMENT ECONOMIC POLICIES

The various actions taken by the government to achieve macroeconomic
objectives are categorized broadly as follows:
(a) Monetary policy: This refers to the combination of measures designed to
control the supply of money and credit availability in an economy. Monetary
policy instruments in Nigeria include
i. open market operations (OMO)
ii. reserve requirements
iii. monetary policy rate (MPR) which is the discount rate
iv. credit ceiling
v. selective credit control
vii. special deposit and moral situation.

The policy is administered on behalf of the government by the Central Bank of

Nigeria (CBN) in partnership with the Federal Ministry of Finance. Monetary
policy can either by expansionary or contractionary. An expansionary monetary
policy is that which is intended to increase money supply and credit availability
in the economy. On the other hand, a contractionary or restrictive monetary
policy is that which is designed to reduce money supply and credit availability in
the economy.

(b) Fiscal policy: This refers to the use of taxation and government expenditure
to influence aggregate demand in the economy. Fiscal policy can be
expansionary, or contractionary. An expansionary fiscal policy increases
aggregate demand, while a restrictive or contractionary fiscal policy reduces
aggregate demand.

(c) Commercial policy: This is defined as the rules adopted by a country for the
conduct or regulation of its foreign trade and payments. It involves the use of
tariffs, quotes and exchange rate control to restrict or promote free trade.

(d) Prices and Income policy: This refers to a set of rules, guidelines, or law
devised by government to influence wage and price movements. The proponents
of this policy are those who hold the view that inflation is caused by trade union
activities such as work stoppages and strikes to force employers to pay higher
wages.

THE ECONOMIC ROLE OF THE PUBLIC SECTOR

Government performs a wide variety of functions in the economy. These can be
classified under five headings:
(a) Allocation function: Allocation refers to any activities of government which
affects the type, quantity and quality of goods and services being produced.
Allocation by government includes producing public education, subsidizing health
care services, subsidizing petroleum products and fertilizers, taxing cigarettes,
regulating factory and automobile emissions, constructing roads and setting
prices for electric power supplied by private firms to mention a few.

(b) Redistribution function: In a market economy, the distribution of income is

based on each person‘s contributions to production. Granting differences in
natural and acquired abilities, distribution of income determined exclusively by
the market will produce high inequality whereby some people are very wealthy,
while others are very poor. To redistribute income, government uses taxes and
transfer payments. To achieve a rich-to-poor redistribution, tax revenue is used
to finance transfer payments in the forms of free education, subsided public
health care services, and other pro-poor welfare programs.

(c) Economic stabilization: Economic stabilization policies are all policies

designed to promote price stability, full employment and economic growth. It
also involves government actions designed to ensure stability of foreign
exchange rate and interest rate in the money market. The term macroeconomic
stability is used to describe general stability of prices of goods and services,
exchange rate and interest rate, and it is vital prerequisite for economic growth
and development.

(d) Regulation of private business: This function is performed through a re-

growth of many specialized agencies of government. In Nigeria, for instance, the
Standard Organization of Nigeria (SON) and National Ford and Drug Commission
(NAFDAC) were established by the Federal Government to ensure that high-
quality and welfare-enhancing goods are produced as against goods that
endanger human lives.

(e) Administration of justice: The maintenance of the police and services

rendered by the courts has important economic consequences. The police is
maintained to protect human lives and properties, while the courts adjudicates
to sanction breaches of contracts. The level of economic activities and standards
of living will be low where people commit acts of illegality with impunity. It is
evident from the discussions in this section that government intervention in the
economy is to enable it perform its economic role which is based primarily on the
existence of market failure. Therefore, the market failure reality justifies the
need for government to;
(1) produce public goods,
(2) produce merit goods,
(3) redress the consequences of goods and services with negative externalities,
(4) reduce income inequality and
(5) promote economic stability.

Public versus private provision

The goods and services produced in every society can be classified into two
broad categories namely,
(i) Public goods; and
(ii) Private goods.
Public goods can also be subdivided into the following:
a. Pure public goods- They are goods that are perfectly non-rival in
consumption and non-excludable. Defense and street lightings are good
examples of pure public goods
b. Quasi-public goods- These are goods that possess some characteristics of
both private and public goods. They are partially non-rivalrous and partially
non-excludable. Examples include roads, tunnels and bridges. Markets for
these goods are considered to be inefficient. For example, private enterprise
could provide some bridges, roads and tunnels if a charging system could be
applied which solves the free rider problem.
 c. Merit goods- The concept was introduced in economics by Richard Musgrave
as a commodity which is judged to be of immense value to an individual or
society and one should have on the basis of need, rather than ability and
willingness to pay. Merit goods are those goods and services that the
government believes people will under-consume, and which ought to be
subsidized or provided free at the point of use so that consumption does not
depend primarily on the ability to pay for the goods or services. Education
and healthcare are good examples of merit goods

Characteristics of public goods

Below are the characteristics of public goods
i. Non-rival consumption: Generally public goods refer to those goods whose
consumption is not in rival relationship. This implies that consumption by one
individual will not cause a decline in the benefit that will accrue to other
consumers of the same goods. For example, government policy of providing
street lightings on roads, defence and adequate policing to make the society
crime-free will become beneficial to everyone. It does not matter whether or
not everybody is a tax payer. Therefore, consumption of public goods is not
competitive.
ii. Non-excludability: Another remarkable feature of public goods is the non-
applicability of exclusion principle. Since everyone consumes from the same
source of supply, once provided for one individual the same quantity and
quality becomes available to everyone. Divisibility of output into smaller units
to meet individual‘s demand is not desirable even if were feasible. Therefore,
consumption of public goods is not dependent upon payment thereby giving
room for ‗free riders‘. The non-excludability condition makes provision of
public goods through the market mechanism impossible.
iii. Zero marginal cost: Public goods are characterised by the existence of zero
or near zero marginal cost. This means that increase in demand may not
necessarily force government to increase supply at least in the short run.
Hence there is no extra cost incurred by the additional demand. For example,
increase in the number of vehicles plying a road may not necessitate
immediate expansion of the road. Similarly, additional vehicle passing over a
bridge is without any additional cost to the society.
iv. Equality of sum of marginal benefits with marginal cost :The marginal cost is
usually a measure of benefit (utility/satisfaction) derived by consumers from
consumption. In the case of public goods, it is the sum of the marginal
benefits derived by each individual that should equal marginal cost. This is so
since all consumers consume from the same source of supply.

Characteristics of private goods

i. Rivalrous consumption. This is a major feature of private goods. It means
that consumption of a particular private good makes it unavailable for
another person. Hence consumption of private goods is competitive. For
example, a pair of shoe or glasses worn by the class coordinator is not
available to his/her assistant.
ii. Excludability. It is a peculiar characteristic of private goods. There are specific
conditions that must be satisfied before consumers can enjoy the benefit of
private goods. Payment must be made, otherwise market will fail to function
efficiently in the production and supply of private goods. Where it is
impossible to limit the supply of goods to a particular consumer (exclusion), it
will be impossible to charge price and where price cannot be charged or
introduced, market fails. The principle of excludability is prevalent when
discussing private goods and nothing will be lost while much will be gained
when consumers are prevented from consumption unless they pay.
iii. Positive marginal cost. The marginal cost of private goods is positive.
Addition to the numbers of consumers for a particular good will necessitate
 increase in output which will not be possible without additional cost –
marginal cost. Increase in output will be necessary because of the urge to
make extra income by the producers of the good in question.
iv. Equality of marginal benefit with marginal cost: In the case of private goods,
efficiency requires equality of marginal benefit derived by each consumer
with marginal cost. The reason being that each individual consumer will pay
the same unit price but purchase different quantity.

Rationale for public sector in the economy Government involvement in

the economy can be explained by any or combinations of these factors.
i. Political and social ideologies: The need for government can be explained by
the existence of political and social ideologies which is different from the
principle of consumer‘s behaviour guided by utility satisfaction. More
importantly, market forces left alone cannot perform all economic functions.
Therefore, there is need to guide, regulate and supplement market forces
under certain circumstances.
ii. Allocation of resources: The claim that market mechanism leads to efficient
allocation of resources is based on the conditions of perfect competition
which presupposes the existence of free entry and exit, perfect knowledge of
the market, mobility of factors, lack of preferential treatment among other
factors. Government regulations and other measures are required to ensure
the presence of these conditions as market on its own will not guarantee their
existence.
iii. Healthy competition: It is the role of government to ensure that competition
exists in the production of goods and services. It is therefore expected to
improve quality and increase quantity of output. However, in the absence of
regulation, competition may become inefficient or at best reduced to
decreasing cost.
iv. Legal structure: An important factor for effective and efficient market system
is the legal structure that guarantees punishment for violators of rules and
regulations. It is the responsibility of government to ensure strict adherence
to rules and regulations otherwise abuse becomes an albatross to economic
growth and development.
v. Externalities: The case of externalities may be a potent factor to explain the
rationale for government intervention. Even if the legal structure is provided
and all barriers removed, certain goods and services cannot be provided
through the market system due to the presence of externalities that cause
distortion between private and public appraisal of projects. Externalities can
only be tackled through public policy.
vi. Economic objectives: The economic objectives of full employment, general
price stability, optimum growth rate, equitable distribution of income as well
as soundness of foreign account cannot be brought about automatically, even
in the most highly developed financial economy. Therefore, government
policies and other measures are to achieve these objectives.

PRIVATIZATION
Privatization is defined as the economic restructuring that involves transfer of
ownership interest and control from public to private individuals, institutions
and/or associations. In other words, it is the process whereby the size of an
ineffective and inefficient public sector is reduced by transferring some of its
functions to a relatively more efficient private sector.

COMMERCIALIZATION
This can be defined as the re-organization of enterprises, or partially owned by
government, thereby making such commercialized enterprises operate as profit-
making commercial ventures without subvention from government.
 THE OBJECTIVES OF PRIVATISATION AND COMMERCIALIZATION IN NIGERIA
(a) To enable the government to disengage from economic or business activities
in which it lack requisite competence or in which the private sector is better.

(b) To make the companies and corporations more efficient by injecting private
sector efficiency into their activities.

(c) To reduce government financial burden brought in the form of subsidies and
grants to these unprofitable ventures and deploy the financial resources so
saved to other areas that are critical to the growth and development of the
economy.

(d) To reduce government bureaucratic control which has militated against

the operational efficiency of the affected enterprises.

(e) To make commercialized companies financially self-sufficient and

self-sustaining.

(f) To improve the quality of goods and services produced by these companies
where poor management and acts of gross indiscipline explain poor outputs.

Public Private Partnership (3Ps)

A public-private partnership is a co-operative arrangement between two or more
public and private sector entities, typically of a long-term nature.
A public private partnership typically involves a private entity financing,,
constructing, or managing a project in return for a promised stream of payments
directly from government or indirectly from users over the projected life of the
project or some other specified period of time.

Types of Private Finance Initiative

i. Design-build (DB): The private-sector partner designs and builds the
infrastructure to meet the public-sector partner‘s specifications, often for
a fixed price. The private-sector partner assumes all risk.
ii. Operation and Maintenance (O&M): The private-sector partner, under
contract, operates and maintains a publicly-owned asset for a specific
period of time. The public partner retains ownership of the assets.
Concessioning of port terminals, Bus Rapid Transit (BRT) and Asaba
International Airport are examples under this category.
iii. Design Build Finance Operate and Transfer (DBFOT): The private-sector
partner designs, finances and constructs a new infrastructure component
and operates/maintains it under a long-term lease. The private-sector
partner transfers the infrastructure component to the public-sector
partner at the expiration of the lease, Lekki Epe expressway is a good
example of this type of private finance initiative.
iv. Build Own-Operate (BOO): The private-sector partner finances, builds,
owns and operates the public sector infrastructure component in
perpetuity. The public-sector partner‘s constraints are stated in the
original agreement and through on-going regulatory authority.
v. Build-Operate-Transfer (BOT): The private-sector partner is granted
authorization to finance, design, build and operate an infrastructure
component (and to charge user fees) for a specific period of time, after
which ownership is transferred back to the public-sector partner. Muritala
Muhammed Airport 2 (MM2), rehabilitation and upgrade of Muritala
Muhammed Airport road, development of Katampe District are some
examples of this type of public-private partnership.
 Advantages of private finance initiatives
a) Efficiency: There is the belief that the private sector is better at
managing investment projects and achieving overall cost efficiencies
than the public sector which is bedeviled with unnecessary
bureaucracies.
b) Extra investment: Extra funding can kick-start more projects thereby
bringing about economic and social benefits. The private finance
initiatives (PFI) provide private sector funds for projects that might
prove difficult for government to finance through higher borrowing and
taxes.
c) Delivery: The private sector is not paid until the asset has been
delivered, which encourages timely delivery. PFI construction contracts
are fixed price contracts with financial consequences for contractors, if
delivered late.
d) Dynamic efficiency: Private sector is better placed to bring innovation
and good design to projects, higher quality of delivery and lowering of
maintenance costs. The bidding process for PFI projects creates
competition at the point of tendering.

Disadvantages of Private Finance Initiatives

i. Debt cost: Private finance has always been more expensive than
government than government borrowing. The difference in finance costs
means that PFI projects are significantly more expensive to fund over the
life of a project.
ii. Inflexibility and poor value for money: Long service contracts may be
difficult/costly to change – especially when the management of a project
seems to have gone wrong.
iii. Risk: The ultimate risk with a project lies with the public sector
(government). Private finance agreements are complicated to organize
and there is no guarantee that the private sector will make a better cost
benefit analysis of a project than the public sector.
iv. Administration: High spending on advisors, lawyers and the costs of the
bidding process. The cost of bidding for a PFI project may be
unnecessarily too high for the public sector, thereby increasing the
estimated budgetary provision.

APPRAISAL OF THE PERFORMANCE OF THE NIGERIAN ECONOMY

Nigeria close 2016 with its worst GDP figure in 25 years as low oil prices, tight
monetary liquidity and militant attacks on oil infrastructure rocked the economy.
Although economic activity is showing some faint signs of improvement,
conditions remain challenging and weakness persists at the outset of the year.
These concerns were expressed by credit rating agency Fitch Ratings which
downgraded the country‘s outlook to Negative from Stable but maintained the
rating unchanged in February. Fitch expressed concern that the lack of FX
liquidity could asphyxiate a meaningful recovery and rising interest costs just as
the country is tapping into international bond markets to finance an aggressive
fiscal policy to spur growth.

The GDP in Nigeria shrank 1.3 percent year-on-year in the fourth quarter of
2016, following a 2.24 percent decline in the previous period. It was the fourth
consecutive quarter of contraction as lower oil prices keep hurting the oil sector.
Considering full 2016, the economy contracted 1.5 percent, following a 2.8
percent growth in 2015, the first annual contraction in 25 years. Some of the
relevant measures that have been suggested to promote sustainable economic
growth and widespread improvement in living standards include:
(a) Use of oil revenues more rationally to diversify economic activity
(b) Intensify domestic food production and raise labour productivity to achieve
food security. (c) Upgrade and expansion of economic infrastructures, especially
electricity supply, road and rail networks.
(d) Leverage Deposit Money Banks (DMBs) and Rural Microfinance Banks (RMBs)
in support of Micro Small and Medium Scale Enterprises (MSMSE) for
unemployment and growth generation (e) Removal of institutional constraints,
especially weak enforcement of contracts, and corruption to encourage private
investment.
(f) Reduce cost of governance and harmonise the tax regimes to encourage
private capital inflow.
(g) Liquidity management in the economy must be geared towards improving
the liquidity and efficiency of the financial market to ensure stability of prices,
foreign exchange and interest rates.
(h) Promote security of lives and properties.
(i) Lower population growth rate through a combination of effective family
planning programmes.
(j) Discourage borrowing of deadweight debts and for projects of doubtful
viability.
(k) Intensify efforts for human resource development and its utilization.

NIGERIA ECONOMIC RECOVERY AND GROWTH PLAN

Nigeria has finally launched the long-awaited Economic Recovery and Growth
Plan, a medium-term plan for 2017-2020, broadly targeting restoration of
growth, human development and globally competitive economy, in efforts to
combat current economic crisis and achieve sustained diversification and
inclusiveness.

The Ministry of Budget and National Planning released the ERGP document on
Tuesday, eventually providing a policy and reform framework, demanded locally
and internationally, to haul the economy out of recession and chalk out path to
national development.

Unavailability of the ERGP has been mentioned as impeding the country‘s efforts
to secure funds needed to address her economic challenges, including to fund
the budget especially critical infrastructural objectives.

In January, Reuters reported how inability to submit recovery and reform plan
stalled Nigeria‘s bid for loan, quoting unnamed sources in global and Nigerian
finance circle. The Reuters report mentioned the African Development Bank,
AfDB, President, Akinwunmi Adeshina, as saying the bank held back the last
tranche of $1 billion loan for Nigeria. ―We are waiting for the economic policy
recovery programme and the policy framework for that,‖ Mr. Adeshina was
quoted as saying, while explaining the reason for holding back last tranche of
loan for Nigeria.

The vision of the ERGP is one of sustained inclusive growth. There is an urgent
need as a nation to drive a structural economic transformation with an emphasis
on improving both public and private sector efficiency. This is aimed at
increasing national productivity and achieving sustainable diversification of
production, to significantly grow the economy and achieve maximum welfare for
the citizens, beginning with food and energy security. This Plan is a pointer to
the type of Nigeria that the people desire in the short to medium-term, and
encourages the use of science, technology and innovation to drive growth.
It also provides a blueprint for the type of foundation that needs to be laid for
future generations, and focuses on building the capabilities of the youth of
Nigeria to be able to take the country into the future.‖

BROAD OBJECTIVES
The ERGP has three main objectives, these are:
1. Restoration of growth which has been elusive: To restore growth, the ERGP
focuses on macroeconomic stability through fiscal stimulus, monetary stability
and improved external balance of trade; and economic diversification by giving
attention to agriculture, MSMEs, etc.
―The revival of these sectors, increased investment in other sectors, less reliance
on foreign exchange for intermediate goods and raw materials and greater
export orientation will improve macroeconomic conditions, restore growth in the
short term and help to create jobs and bring about structural change,‖ stated
the ERGP.

2. Investment in the people: To drive investment in the people, the government

said it would focus on social inclusion through targeted programmes that will
enhance access and ensure support for the vulnerable. It also said it would
reduce regional inequalities, especially in the Niger Delta and the North East.
Further, the government also expressed commitment to job creation and human
capital by investing in healthcare and education to fill the skills gap in the
economy.

3. Becoming a globally competitive economy: The ERGP aims to tackle the

obstacles hindering the competitiveness of Nigerian businesses, notably poor or
non-existent infrastructural facilities and the difficult business environment,
stated the ERGP. ―It will increase competitiveness by investing in infrastructure
and improving the business.‖

ECONOMIC CYCLE
Economic cycle also known as business cycle refers to the upward and
downward movements (fluctuations) as shown in the national gross domestic
product during a given period.

Phases of economic cycle

The following are the phases of economic cycle:
(i) Expansion
In the expansion phase, there is an increase in various economic factors,
such as employment, output, wages, profits, demand and supply of
products and sales. In addition, the prices of factors of production and output
increase simultaneously. In this phase, borrowers are generally in good
financial condition to repay their debts, therefore, lenders lend money at
higher interest rates. This leads to an increase in the flow of money. Due
to increase in investment opportunities, idle funds of organisations or
individuals are utilised for various investment purposes. Consequently, the
cash inflows and outflows of businesses equilibrate. This expansion continues till
the economic conditions become favourable;
(ii) Peak
This phase refers to the point at which the increase in growth rate of business
activities attains its maximum limit. In the peak phase, the economic factors,
such as output, profit, sales, income and employment, are higher but do
not increase further. There is a gradual decrease in the demand of various
products due to increase in the prices of input. The increase in the prices of input
leads to an increase in the prices of final products, while the income of
individuals remain constant. This causes consumers to restructure their
monthly budgets. Consequently, the demand for products such as jewelries,
homes, automobiles, refrigerators and other durables starts falling;
(iii) Recession
As discussed in the peak phase, there is a gradual decrease in the
demand of various products due to increase in the prices of input and budget
adjustment by consumers. When the decline in the demand for products
becomes rapid and steady, recession phase sets in. In this phase, all the
economic factors such as output, prices, savings and investment, start
declining. Generally, producers are unaware of decrease in the demand for
products and they continue to produce goods and services. In such a case,
the supply of products exceeds the demand.
(iv) Depression
Over time, producers realise the surplus of supply when the cost of
manufacturing of a product is more than revenue generated. This
condition is firstly experienced by few industries, but slowly spreads to all
industries. This situation is firstly considered as a small fluctuation in the
market, but as the problem persists for a longer period, producers start
noticing it. Consequently, producers cut down on further investment in factors
of production such as labour, machinery and furniture. This leads to the
reduction in the prices of factors, which results in the decline of demand of
inputs as well as output;
(v) Trough
During the trough phase, economic activities of a country decline below
the normal level. In this phase, the growth rate of an economy becomes
persistently negative. In addition, there is a rapid decline in national income
and expenditure, which it becomes difficult for debtors to pay off their
debts. As a result, the rate of interest decreases; therefore, banks reduce
lending. Consequently, banks face the situation of increase in their cash
balances. Apart from this, the level of economic output of the country
becomes low and unemployment becomes high. In addition, in trough phase,
investors do not invest in stock markets and many weak organisations leave the
industries or they liquidate. At this point, an economy reaches the lowest
level of shrinking; and
(vi) Recovery
Once the economy touches the lowest level, it happens to be the end of
negativism and beginning of positivism. In this phase, there is a
turnaround at the trough and the economy starts recovering from the negative
growth rate. Demand starts to pick up due to the lowest prices and
consequently, supply starts reacting too. The economy develops a positive
attitude towards investment and employment, hence, production starts
rising. Employment also begins to rise and due to the accumulated cash
balances with bankers, lending also shows positive signals. This will also
lead to new investment in production processes and replacement of
depreciated capital.
Recovery continues until the economy returns to steady growth levels.
This completes one full business cycle of boom and contraction. The extreme
points are the peak and the trough.
 Chapter Twenty Four
ECONOMIC AND FINANCIAL CRIMES COMMISSION (EFCC)
The EFCC was established by Act No. 5 of 2002, effective from 14 December, to
combat economic and financial crimes in Nigeria. The Commission is empowered
to prevent, investigate, prosecute and sanction economic and financial crimes
and is charged with the responsibility of enforcing the provisions of other laws
and regulations relating to economic and financial crimes such as The Money
Laundering Act 1995, The Advance Fee Fraud and Other Related Offences Act
1995, The Failed Banks (Financial Malpractices in Banks) Act 1994, The Banks
and Other Financial Institutions Act 1991, and Miscellaneous Offences Act.

COMPOSITION OF ECONOMIC AND FINANCIAL CRIMES COMMISSION (EFCC)

According to the Act of parliament No. 5 of December 2002, the Commission
shall consist of the following members:
(a) A chairman, who shall be the chief executive and Accounting Officer of the
Commission and shall be a serving or retired member of any government
security or law enforcement agency.
(b) A Director General who shall be the Head of Administration.
(c) The Governor of Central Bank or his representative
(d) A representative each of the following Federal Ministries not below the
rank of Director;
(i) Foreign Affairs Ministry
(ii) Ministry of Finance
(iii) Ministry of Justice
(e) The Chairman, National Drug Law Enforcement Agency.
(f) The Director General-The National Intelligence Agency
(g) The Director General, the department of State Security Service.
(h) The Director General-Securities and Exchange Commission
(i) The Commissioner for Insurance
(j) The Postmaster General, Nigeria Postal Service
(k) The Chairman, Nigeria Communication Commission
(l) The Comptroller General, Nigeria Customs Service
(m) The Comptroller General, Nigeria Immigration Service
(n) A representative of Nigeria Police Force not below the rank of
Assistant Inspector General.
(o) Four eminent Nigerians with vast experience in finance, banking or accounting.

FUNCTIONS OF EFCC
1. Enforcement and due administration of the provisions of the Act.
2. Investigation of reported cases of financial crimes such as Advance Fee Fraud
{419}, money laundering, counterfeiting, illegal charge transfer, contract
scam, forgery of financial instrument, issuance of dud cheques etc.
3. Adoption of measures to identify, trace, freeze confiscate or seize proceeds
derived from terrorist activities.
4. Adoption of measures to identify, trace, freeze and seize proceeds derived
from financial crime related offences.
5. Adoption of measures to eradicate and prevent the commission of economic
and financial crimes with a view to identifying individuals, corporate bodies or
groups involved.
6. Determination of the extent of financial loss and such other losses by
government, private individuals‘ and organisations.
7. Collaboration with government bodies within and outside Nigeria in carrying
out the functions of the Act.
8. Dealing with matters connected with extradition, deportation and mutual,
legal or other assistance between Nigeria and any other country involving
economic and financial crimes.
9. The collection, analysis and dissemination of all reports relating to suspicious
financial transactions to all relevant government bodies.
10.Carrying out and sustaining public enlightenment campaign against economic
and financial crimes within and outside Nigeria.

POWERS OF THE COMMISSION

Under paragraph 6 of the Act, the Commission has power to:-
1. Conduct investigation or cause investigation to be conducted as to whether
any person has committed an offence under the Act.
2. Cause investigation to be conducted into the properties of any person if it
appears to the Commission that the person lifestyle and extent of his properties
are not justified by his source of income 3. Power to enforce the provisions of
 The Bank and Other Financial Institution Act 1991 ( as amended)
 The Failed Banks (Recovery of Debts) Finance Malpractices in Banks Act 1994
(as amended)
 The Advance Fee Fraud and Other Related Offence Act 1994
 The Money Laundry ACT 1995
 The Miscellaneous offence Act

OFFENCES AND CONVICTIONS

A summary of the various offences committed and the penalties stipulated under
part IV, of the ACT is:
o Offences which relate to financial malpractices …..5 years imprisonment or a
fine of fifty thousand naira (N50,000) or both imprisonment and fine.
o Offences associated with terrorism………Imprisonment for life.
o Offences committed by public officers ….. Between 15 and 25 years
imprisonment.
o Retaining the proceeds of a criminal conduct…..Not less than 5 years
imprisonment or to a fine equivalent to 5 times the value of the proceeds of
the criminal conduct or to both fine and imprisonment.
o Offences in relation to economic and financial crimes…… Imprisonment for a
term not less than 15 years and not exceeding 25 years.

Paragraph 20 of the Act says ‗for the avoidance of doubt and without any further
assurance than this Act, all the properties of a person convicted of an offence
under this Act and shows to be derived or acquired from such illegal act and
already the subject of an interim order shall be forfeited to the Federal
Government.‘

THE CORRUPT PRACTICES AND OTHER RELATED OFFENCES ACT, 2000

The Corrupt Practices And other Related Offences Act, 2000, gave birth to the
Independent Corrupt Practices and other Related Offences Commission. The
Commission is a body corporate, endowed with perpetual succession. It has a
common seal and is juristic (that is, may sue and be sued in its corporate
name).

Composition of the Commission

The Commission shall consist of a Chairman and twelve (12) other members,
two of whom shall come from each of the six geo-political zones, thus:
(a) A retired Police Officer not below the rank of Commissioner of Police.
(b) A legal practitioner with at least 10 years post call experience.
(c) A retired Judge of a Supreme Court record.
(d) A retired Public Servant not below the rank of a Director.
(e) A woman.
(f) A youth not being less than 21 or more than 30 years of age at the time of
his or her appointment.
(g) A Chartered Accountant.
The Chairman shall be a person who has held or is qualified to hold office as a
Judge of a superior court of record in Nigeria.

Appointment of Members
The Chairman and members of the Commission who must be persons of proven
integrity shall be appointed by the President upon confirmation by the Senate
and shall not begin to discharge the duties of their offices until they have
declared their assets and liabilities as prescribed in the Constitution of the
Federal Republic of Nigeria. The Chairman shall hold office for a period of five (5)
years and may be re-appointed for another term of (5) years. Other members
hold office for (4) years and can be re-appointed for another four (4) years.

Removal of Members
The Chairman or any member can be removed from office by the President
acting on an address supported by two-thirds (2/3rd) majority of the Senate.

The Commission shall have a Secretary appointed by the President who under
the general direction of the Chairman shall be responsible for keeping the
records of the Commission and the general administration and control of the
staff of the Commission.

Immunities
An Officer of the Commission when investigating or prosecuting a case of
corruption, shall have all the powers and immunities of a Police Officer under the
Police Act and any other laws conferring power on the Police or empowering and
protecting law enforcement agents.

Duties of the Commission

a) Where reasonable ground exists for suspecting that any person has conspired
to commit or has attempted to commit or has committed an offence under
the Act or any other law prohibiting corruption, to receive and investigate any
report of the conspiracy to commit, attempt to commit or the commission of
such offence and, in appropriate cases the offenders.
b) To examine the practices, systems and procedures of public bodies and
where, in the opinion of the Commission, such practices, systems or
procedures aid or facilitate fraud or corruption, to direct and supervise a
review of them.
c) To instruct, advise and assist any officer, agency or parastatals on ways by
which fraud or corruption may be eliminated or minimized by such officer,
agency or parastatal.
d) To advise Heads of Public Bodies of changes in practices, systems or
procedures compatible with the effective discharge of the duties of the public
bodies as the Commission thinks fit to reduce the likelihood or incidence of
bribery, corruption and related offences.
e) To enlist and foster public support in combating corruption.

Offences and Penalties

(a) Offence of accepting gratification: Any person who corruptly asks for,
receives or obtains any property or benefit of any kind for himself or for
any other person or agrees or attempts to receive or obtain any property
or benefit of any kind for himself or for any other person, is liable to
imprisonment for seven (7) years.
(b) Offence of giving or accepting gratification through agent: On conviction,
shall be liable to imprisonment for seven (7) years.
(c) Acceptor or giver of gratification to be guilty, notwithstanding that, the
purpose was not carried out or matter not in relation to principal‘s affairs
or business: On conviction shall be liable to imprisonment for (seven) 7
years.
(d) Fraudulent acquisition of property: Any person found guilty, shall on
conviction, be liable to imprisonment for seven (7) years.
(e) Fraudulent receipt of property: Any person who receives anything which
has been obtained by means of act constituting a felony or mis-
demeanour inside or outside Nigeria, which if it had been done in Nigeria
would have constituted a felony or mis-demeanour and which is an
offence under the laws in force in the place where it was done, knowing
the same to have been so obtained, is guilty of a felony and the offender
shall, on conviction be liable to imprisonment for seven (7) years;
(f) Penalty for offences committed through postal system: If the offence by
means of which the thing was obtained is a felony, the offender shall on
conviction be liable to imprisonment for three (3) years, except the thing
so obtained was postal matter, or any chattel, money or valuable security
contained therein, in which case the offender shall on conviction be liable
to imprisonment for seven (7) years.
(g) Deliberate frustration of investigation being conducted by the
Commission: Any person who, with intent to defraud or conceal a crime or
frustrate the Commission in its investigation of any suspected crime of
corruption under the Act or any other law destroys, alters, etc any
document shall on conviction be liable to seven (7) years imprisonment.
(h) Making false statements or returns: Any person who knowingly furnishes
any false statement or return in respect of any money or property
received by him or entrusted to his care, or of any balance of money or
property in his possession or under his control, is guilty of an offence and
shall on conviction be liable to seven (7) years imprisonment.
(i) Gratification by and through agents: Any person who corruptly accepts,
obtains, gives or agrees to give or knowingly gives to any agent, any gift
or consideration as an inducement or reward for doing, fore bearing to do
any act or thing, shall on conviction be liable to five (5) years
imprisonment.
(j) Bribery of public officer: Any person who offers to any public officer, or
being a public officer solicits, counsels or accepts any gratification as an
inducement or a reward, in the course of official duties shall on conviction
be liable to five (5) years imprisonment with hard labour.
(k) Using office or position for gratification: Any public officer who uses his
office or position to gratify or confer any corrupt or unfair advantage upon
himself or any relation or associate shall be guilty of an offence and shall
on conviction be liable to imprisonment for five (5) years without option of
fine.
(l) Any public officer who in the course of official duties, inflates the price of
any good or service above prevailing market price or professional
standards shall be guilty of an offence under this Act and liable on
conviction for a term of seven (7) years and a fine of one million naira
(N1,000,000.00).

CODE OF CONDUCT FOR PUBLIC OFFICERS

The Fifth schedule, Part 1, of the 1999 Constitution states that ―a public officer
shall not put himself in a position where his personal interest conflicts with his
duties and responsibilities.‘‘

Restrictions on Specified Officers

A public officer shall not receive or be paid the emoluments of any public office
just as he receives or is paid the emoluments of any other public office, except
where he is not on full time basis, or does not engage in the running of any
private business. However, no public officer shall be prevented from engaging in
farming.

Prohibition of Foreign Accounts

The President, Vice-President, Governors, Deputy Governors, Ministers of the
Government of the Federation, State Commissioners, Members of the National
Assembly and of the Houses of Assembly of the States and such other public
officers or persons as the National Assembly may by law prescribe shall not
maintain or operate a bank account in any country outside Nigeria.
Retired Public Officers/Certain Retired Public Officers
No public officer shall, after retirement from public service and while taking
pension from public funds, accept more than one remunerative position as
Chairman, Director or Staff of a company controlled by the Government or any
public authority. A retired public servant shall not receive any other
remuneration from public funds additionally to his pension and the emolument of
such one remunerative position. The holders of the offices of President, Vice-
President, Chief Justice of Nigeria, Governor and Deputy Governor of a State are
prohibited from service or employment in foreign companies or foreign
enterprises.

Gifts or Benefits In-Kind

A public officer shall not ask for or accept any gift or benefit for himself or any
other person, in the discharge of his duties. However, he may accept personal
gifts or benefits from relatives or friends as recognized by custom only.

Bribery of Public Officers

A public officer should not receive any property, gift or benefit of any kind as a
bribe for granting a favour in the performance of his duties.

Abuse of Powers
A public officer shall not do or cause to be done, in abuse of his position, any
arbitrary thing which prejudices the rights of others.

Membership of Societies
A public officer shall not belong to a society, the membership of which runs
incompatible with the dignity of his office.

PARAGRAPH 11 OF THE FIFTH SCHEDULE, PART 1, states that every public

officer shall within three months after the coming into force of this Code of
Conduct or immediately after taking office and thereafter:
(a) at the end of every four years, and
(b) at the end of his term of office,
(i) Submit to the Code of Conduct Bureau a written declaration of all his
properties, assets and liabilities and those of his unmarried children under the
age of eighteen years.
(ii) Any statement in such declaration that is found to be false by any authority
or person authorized in that behalf to verify it shall be deemed to be a breach of
this Code.
(iii) Any property or assets acquired by a public officer after any declaration
required under this Constitution and which is not fairly attributable to income,
gift or loan approved by this Code shall be deemed to have been acquired in
breach of this Code unless the contrary is proved.
COMPOSITION OF THE CODE OF CONDUCT BUREAU
Code of Conduct Bureau shall consist of the following:
 A Chairman
 Nine other members each of whom at the time of appointment shall not be
less than fifty years of age and vacate his office on attaining the age of seventy
years.
The Bureau shall establish such offices in each State of the Federation as it may
require for the discharge of its functions under the constitution.

POWERS OF CODE OF CONDUCT BUREAU

The code of Conduct bureau was set up to:
a. Receive declarations by public officers made under paragraph 12 of Part I of
the 5th schedule of the 1999 constitution.
b. Examine the declarations in accordance with the requirement of the code of
conduct or any law.
c. Retain custody of such declaration and make them available for inspection by
any citizen of Nigeria on such items and conditions as the National Assembly
may prescribe.
d. Ensure compliance with and where appropriate enforce the provisions of the
code of conduct or any law relating thereto.
e. Receive complaints about non-compliance with or breach of the provisions of
the code of conduct or any law in relation thereto.
f. Investigate the complaint above and where appropriate refer such matters to
the Code of Conduct Tribunal.
g. To carry out any other function as may be conferred upon it by the National
Assembly.

CODE OF CONDUCT TRIBUNAL

Code of Conduct Tribunal is made up of a Chairman and two other persons.

PUNISHMENT BY THE CODE OF CONDUCT TRIBUNAL ON ANY PUBLIC

OFFICER GUILTY OF ANY OF THE PROVISIONS OF THE CODE OF
CONDUCT BUREAU
 Vacation of office seat in any legislative house
 Prosecution of the public officer in a court of law
 Disqualification from membership of a Legislative House and from holding
any public office for a period not exceeding ten years.
 Serve penalties imposed by any law where the conduct is a criminal
offence
 Seizure and forfeiture to the State any property acquired through the
abuse or corruption of office.

Public Accounts Committee (PAC)

Definition of Public Accounts Committee: The Committee is a body established
by law to study and exam in the reports submitted by the Auditor General,
especially in the areas of fraud or misappropriation of public funds. The body is
to also make appropriate recommendations to the National/ State Assembly.
The roles of PAC are as follows:
i. To examine the accounts showing the appropriation of the sum granted by
the National Assembly/State House of Assembly to meet the public
expenditure; together with the Auditor-General‘s report there on;
ii. The committee not only ensures that ministries spend money in
accordance with State House of Assembly approval, it also brings to the
notice of the Assembly instances of extravagance, loss, infructuous
expenditure and lack of financial integrity in public services;
 iii. The Committee shall, for the purposes of discharging that duty, have
power to send for any person, papers and records and to report from time
to time to the State House of Assembly and to sit notwithstanding the
adjournment of the Assembly;
iv. To examine any accounts or report of statutory Corporations and Boards
after they have been presented to the State House of Assembly and to
report thereon from time to time to the Assembly; etc
Weaknesses of PAC
a. The heavy turnover of PAC membership;
b. The general lack of interest among members of the legislative in
accountability issues;
c. The difficulty of distinguishing between issues of ―policy‖ and of
administration‖;
d. The unclear status of public servants before PAC and in the accountability
system more generally;
e. Many of its members do not seem to value, much less covet, the
assignment; nor do they necessarily have appropriate backgrounds or
experience to investigate issues of government administration. etc

NIGERIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE, (NEITI) ACT,

2007
Objectives of the NEITI:
a. To ensure due process and transparency in the payments made by all
extractive industry companies to the Federal Government and statutory
recipients.
b. To monitor and ensure accountability in the revenue receipts of the Federal
Government from extractive industry companies.
c. To eliminate all forms of corrupt practices in the determination, payments,
receipts and posting of revenue accruing to the Federal Government from
extractive industry companies;
d. To ensure transparency and accountability by government in the application
of resources from payment received from extractive industry companies, and
e. To ensure conformity with the principles of Extractive Industries
Transparency Initiative etc

Functions of NEITI:
i. develop a framework for transparency and accountability in the reporting and
disclosure by all extractive industry companies of revenue due to nor paid to
the Federal government;
ii. evaluate without prejudice to any relevant contractual obligations and
sovereign obligations the practices of all extractive industry companies and
government respectively regarding acquisition of a creages, budgeting,
contracting, materials procurement and production cost profile in order to
ensure due process, transparency and accountability;
iii. ensure transparency and accountability in the management of the investment
of the Federal Government in all extractive industry companies;
iv. obtain, as may be deemed necessary, from any extractive industry company,
an accurate record of the cost of production and volume of sale of oil, gas or
other minerals extracted by the company at my period, provided that such
information shall not be used in any manner prejudicial to the contractual
obligation or proprietary interests of the extractive industry companies;
v. request from any company in the extractive industry, or from any relevant
organ of the federal State or Local government, an accurate account of
money paid by and received from the company at any period, as revenue
 accruing to the Federal government from such company for that period;
provided that such information shall not be used in a manner prejudicial to
contractual obligations or proprietary interest of the extractive industry
company or sovereign obligations of Government;
vi. monitor and ensure that all payments due to the Federal Government from all
extractive industry companies, including taxes, royalties, dividends, bonuses,
penalties, levels and such like are duly made;
Appointment of External Auditors for the Extractive Industry Companies
According to Section 4. (1) of NEITI Act 2007, NEITI shall, in each financial year
appoint independent auditors to audit the total revenue which accrued to the
Federal Government for that year from extractive industry companies, in order
to determine the accuracy of payments and receipts. The independent auditors
appointed under subsection (1) of this section shall undertake a physical process
and financial audit on such terms and conditions as may be approved by the
National Stakeholders Working Group (NSWG). Upon the completion of an audit,
the independent auditors shall submit the reports together with comments on
the Extractive Industries Company to NEITI, which shall cause same to be
disseminated to the National Assembly and the Auditor General for the
Federation and also ensure their publication. NEITI shall submit a bi-annual
report of its activities to the President and National Assembly. The Auditor-
General for the Federation shall not later than 3 months after the submission of
the audit report to the National Assembly publish any comment made or action
taken by the Government on the audit reports.
National Stakeholders Working Group
(NSWG) The governing body of the NEITI shall be the National Stakeholders
Working Group (in this Act referred to as ―the NSWG‖) Functions of NSWG
(a) Be responsible for the formulation of policies, programmes and strategies for
the effective implementation of the objectives and the discharges of the
functions of the NEITI.
(b) Have powers to recommend the annual budget and work-plan of the NEITI
and ensure the periodic review of programmes performance by the NEITI
Composition of National Stakeholders Working Group (NSWG)
The NSWG shall be constituted by the President and shall consist of a Chairman
and no more than 14 other members one of whom shall be an Executive
Secretary. In making appointment into the NSWG, the President shall include:
i. representative of extractive industry companies,
ii. representative of Civil Society,
iii. representative of Labour Unions in the extractive Industries,
iv. experts in the extractive industry, and
v. one member from each of the six geopolitical zones.

Tenure, Allowances and Meetings of National Stakeholders Working Group

(NSWG)
a. The Chairman and other members of NSWG other than the Executive
Secretary shall serve on part-time basis.
b. The appointment of Executive Secretary shall be for 5 years and no more.
c. A person appointed as a member of the NSWG shall hold office for 4 years
and no more.
d. The members of the NSWG as well as any person appointed to any of its
special committees may be paid such allowances out of the funds of the
NEITI as the National Revenue Mobilization and Fiscal Commission may
approve.
e. The NSWG shall ordinarily meet quarterly for the dispatch of business at such
times and places as it may determine, but not less than four times in a year.
At every meeting of the NSWG, the Chairman shall preside and in his absence, a
member of the NSWG appointed by the members from among themselves shall
preside. Questions proposed at a meeting of NSWG shall be determined by a
simple majority of members present and voting and in the event of an equality
of votes, the person presiding shall have a casting vote.

The NSWG may at any time co-opt any person to act as an adviser at any of its
meetings but no person so co-opted shall be entitled to vote at any meeting.

The validity of the proceedings of the NSWG shall not be affected by the absence
of any member, vacancy among its membership or by any defect in the
appointment of any of the members.

The quorum of the NSWG at any meeting shall be 8 members.

Penalties for Offences Committed by Extractive Industry Companies
1. An extractive industry company which gives false information or report to the
Federal Government or its agency regarding its volume or production, sales
and income; or renders false statement of account or fails to render a
statement of account required under this Act to the Federal Government or
its agencies, resulting in the underpayment or non-payment of revenue
accruable to the Federal Government or statutory recipients commits an
offence and is liable on conviction to a fine not less than N30,000,000.
2. Where the Extractive industry has been convicted of an offence under (a)
above, the court shall, in addition to the penalty prescribed there under,
order the company to pay the actual amount of revenue due to the Federal
Government.
3. An extractive industry company which delays or refuses to give information
or report under this Act, or willfully or negligently fails to perform its
obligations under this Act, commits an offence and is liable on conviction to a
fine not less than N30,000,000.
4. President may on the recommendation of the NSWG suspend or revoke the
operational license of any extractive industry company which fails to perform
its obligations under this Act.
5. If any extractive industry company commits an offense against the Act, every
Director or other persons concerned in the management of the company
commits the offence and is liable on conviction to not less than 2 years
imprisonment or a fine not less than N5,000,000 unless that person proves
that (i) the offence was committed without his consent or connivance, and (ii)
the person exercised all such diligence to prevent the commission of the
offence as ought to have been exercised by that person, having regard to the
nature of his functions in that company and to all the circumstance.
6. A government official who renders false statement of account or fails to
render a statement of account required under this Act to the Federal
Government or its agencies, resulting in the underpayment or nonpayment of
revenue accruable to the Federal Government or statutory recipients,
commits an offence and is liable on conviction to not less than 2 years
imprisonment or a fine not less than N5,000,000, unless that person proves
that (i) the offence was committed without his consent or connivance, and (ii)
the person exercised all such diligence to prevent the commission of the
offence as ought to have been exercised by that person, having regard to the
nature of his functions in that company and to all the circumstance.

GENERAL RULE
a. Any officer found guilty of contravention of any of the provisions of the Code
of Conduct shall appeal to the Court of Appeal.
b. Prerogative of mercy shall not apply to any punishment imposed by the
Tribunal.
 Chapter Twenty Five
FISCAL FEDERALISM
Fiscal Federalism is the division of governmental functions, and the financial
relationship between different levels of government.
Fiscal federalism deals with the division of tax and expenditure functions among
the various levels of government in a federation. A federal system of
administration allows both centralised and decentralised collective choices to be
made by each tier of government.
As a subfield of public economics, fiscal federalism is concerned with
"understanding which functions and instruments are best centralized and which
are best placed in the sphere of decentralized levels of government" (Oates,
1999).

The Expenditure Assignment Function

Expenditure assignment deals with the allocation of spending powers and
responsibilities to different levels of government, especially with respect to the
provision and delivery of public goods and services. The general guidelines upon
which this expenditure assignment is based are:
(i) Efficient provision of public services - by using the jurisdiction that
controls the minimum geographical area that would bear the costs and benefits
of the provision of such services;

(ii) Equitable provision of public services – through equal treatment of all

citizens, irrespective of place of residence or employment (horizontal equity).

(iii) Preservation of a single internal common market – when subnational

government try to attract labour, capital and technology, they may erect local
incentives that become barriers to the free flow of goods and inputs across
governmental jurisdictions.

(iv) Economic stabilisation – it is difficult for a sub-national government to

implement successful stabilisation policy because of the openness of its economy
and the nature of stabilisation policy, like monetary and exchange rate policies,
that require coordination by a Central Bank. For similar reasons, decentralised
fiscal policy needs flexibility through the structuring of tax assignment and fiscal
policy coordination and through regular meetings of officials of central and sub-
national governments;

(v) Efficient provision of quasi-public goods – technically, services like

health, education, social welfare and social insurance are private goods, but they
are provided by the public sector on equity grounds. When they are provided by
the central government, this may be in order to satisfy minimum standards
across jurisdictions.

Centralisation and decentralisation of fiscal responsibilities

Arguments in favour of decentralisation of fiscal responsibilities
i. Local governments have better understanding of the concerns of local
residents being the closest to the people.
ii. Local decision making is responsive to the people for whom the services are
intended, thus encouraging fiscal responsibility and efficiency, especially if
financing of services is also decentralised.
iii. Unnecessary layers of jurisdiction are eliminated.
iv. Inter-jurisdictional competition and innovation are enhanced.

Arguments in favour of centralisation of fiscal responsibilities

a. Spatial externalities: Spatial externalities arise when the benefits and costs
of public services are realised by non-residents. In the case of benefit spill-
outs, the jurisdiction providing the service does not consider the proportion
of benefits of a public service accruing to non-residents and therefore under-
provides such a service. The reverse result is obtained in the case of cost
spill-outs, where the public service could not be financed by exporting taxes
to other jurisdictions. There are also public services whose benefits are
considered national in scope, such as defence and foreign affairs. These
services would be best provided by the federal government.
b. Economies of scale: Certain services require areas larger than a local
jurisdiction for cost-effective provision, for example, public transportation
and sewerage in metropolitan areas.
c. (Administrative and compliance costs: Centralised administration generally
leads to lower administrative costs associated with financing public services.

Problems of expenditure assignment

i. Lack of formal assignment: The absence of a formal assignment of
responsibilities among the multi-levels of government is a common problem
with expenditure assignment. A formal assignment of responsibilities
contributes to the stability of the system of inter-governmental finances.
From a fiscal management perspective, a formal expenditure assignment also
introduces an important element of certainty for budget planning at all levels
of government.
ii. Inefficient assignments: Another common problem in the assignment of
expenditure responsibilities is the inefficiency of the assignments. First is the
Issue of capital expenditure responsibilities. The problem has been the
assignment of all capital expenditure responsibilities at the central level,
independently of the level of government responsible for the provision of the
services associated with the capital infrastructure. This assignment is guided
either by the capacity to finance large projects or by the belief that only
central government officials are qualified to make capital investment
decisions. However, the full assignment of capital expenditure responsibilities
is inappropriate.
iii. Ambiguity in certain assignments: Despite the ambiguity in assignments,
there are few open conflicts or disputes that have taken place between the
central and sub-national governments in terms of assignment of expenditure
responsibilities. For example, there are arguments on whose responsibility it
is to maintain internal security in Nigeria when the police is under the control
of the central government while the governors have little or no control over
the police.
iv. Co-sharing of responsibilities: The co-sharing of responsibilities within a
particular public service is likely to cause confusion leading to in efficiencies.
In the case of education, it would appear to be for the most part a local (or
state) activity, many key decisions in educational policies are carried out at
the central level in many countries. For example, the Ministry of Education
may be responsible for the construction of school buildings, curriculum
design, teacher training, and design and production of textbooks.

Solutions to expenditure assignment problems

i. Establishment of a formal assignment of expenditure responsibilities:
Expenditure responsibilities should be specified in the law. Doing so in the
 Constitution may create difficulty when changes become inevitable due to
technological and environmental conditions.
ii. Reassignment of selected expenditure responsibilities: The central
government should assume full financial responsibility for social welfare
expenditure when these are assigned at the sub-national level. Delivery of
these services can still be performed through local governments on a
reimbursement basis, a grant programme, or any of other several means.
The central government should also assume 100 percent responsibility for
expenditure in national defence.
iii. Reassignment of capital investment responsibilities: Responsibilities for
capital infrastructure should be placed at the level of government responsible
for the delivery of the specific services including the operations and
maintenance of those facilities. This will encourage a more efficient use of
resources. Only those capital infrastructure facilities actually desired by sub-
national governments will be built and sub-national governments will have an
interest in maintaining and repairing the capital infrastructure.
iv. Facilitating capital investment at the sub-national level: All types of
subnational borrowing should be closely regulated by the central authorities.
Besides enforcing the debt limits established by the law, there should be a
certification process of the conditions for any bond issues. The central
government, as a general policy should not act as guarantor of regional and
local government debt issues.
v. Sub-national development funding: There is considerable merit to the
establishment of a sub-national development fund to promote lending to
subnational governments for long-term capital investment. This may be the
only effective way to allow small local governments to fulfil their capital
investment responsibilities. Other sources of financing include local bond
issues. Both should be encouraged.

Principles of tax assignment

The division of revenue sources among federal and sub-national governments
constitutes tax assignment. Once expenditure and regulatory assignments
have been agreed upon, tax assignment and the design of transfers become
critical elements in matching expenditure needs with revenue means at
different levels of government.

Anwar Shah opined that four general principles require consideration in assigning
taxing powers to various governments. The principles are discussed briefly below
(i) Economic efficiency: This criterion dictates that taxes on mobile factors and
tradable goods that have a bearing on the efficiency of the internal common
market should be assigned to the national government. Sub-national assignment
of taxes on mobile factors may facilitate the use of socially wasteful beggar-thy
neighbour policies to attract resources to own areas by regional and local
governments. In a globalised world, even the national assignment of taxes on
mobile capital may not be very effective in the presence of foreign tax havens
and the difficulty of tracing and attributing incomes from virtual transactions to
various physical spaces.
(ii) National equity: This demands that progressive redistributive taxes should
be assigned to the national government. It limits the possibility of regional and
local governments‘ following perverse redistribution policies using both taxes and
transfers to attract high-income people and to repel low-income ones. Doing so,
however, leaves open the possibility of supplementary, flat-rate, local charges
on residence-based national income taxes.
(iii) Administrative feasibility: This (lowering compliance and administration
costs) is of the opinion that taxes should be assigned to the jurisdiction with the
best ability to monitor relevant assessments. This criterion minimises
administrative costs as well as the potential for tax evasion. For example,
property, land, and betterment taxes are good candidates for local assignment
because local governments are in a good position to assess the market values of
such assets.
(iv) Fiscal need, or revenue adequacy: criterion suggests that, to ensure
accountability, revenue means (the ability to raise revenues from own sources)
should be matched as closely as possible to expenditure needs.The literature
also argues that long-lived assets should primarily be financed by raising debt so
as to ensure equitable burden-sharing across generations. Furthermore, such
large and lumpy investments typically cannot be financed by current revenues
and reserves alone.

Revenue Allocation
The most important issue of fiscal federalism is the revenue allocation formula,
the sharing of national revenue among the various tiers of government (vertical
revenue sharing) as well as the distribution of revenue among units of
government of the same level (that is, horizontal revenue allocation). In
determining how these resources are to be shared among the tiers of
government, the popular practice is that these revenues be shared according to
predetermined principles.
The various principles specified in the Constitution under section 162 (2) to be
used by the Commission are:
(i) Derivation
(ii) Population
(iii) Land Mass
(iv) Terrain
(v) Internal revenue
(vi) Equality of states

Principles of revenue allocation

(i) Derivation: This principle was originally applied to the proceeds of export
taxes on agricultural produce. The principle asserts that the state from which the
bulk of the revenue is obtained should receive extra share over and above what
other states receive.
(ii) Even development: The objective of government is that the Federation
itself should grow and develop at an optimum rate and that each of the
constituent states should grow and develop at the optimum (not necessarily
equal) rate. The principle requires that growth and development should be
spread so that serious inequalities or imbalances are reduced in the Federation.
These may be achieved by sacrificing efficiency in the form of a reduced overall
growth.
(iii) Need: The rate of growth and development a state is able to achieve
depends on the revenue the state is able to generate. It requires financial as
well as other resources not only to maintain its existing facilities but also to
develop additional capacities. Given a set of these other resources, a state
requires funds to enable it realize its potential. When the need of a state is
compared with the need of others, it may be necessary to transfer financial
resources from one state to another in the interest of efficiency.
(iv) National Interest: This principle is used residually by the highest level of
government to intervene and transfer funds to lower levels or units in the lower
levels to serve various considerations. It lies therefore, in the sphere of
discretionary grants to be administered by the highest tier, that is, government
of the Federation.
(v) Independent Revenue: The principle is of the view that each level of
government should be able to raise and keep some revenue for its use. The bulk
of the revenue of the state revenue comes from what is raised and collected by
the Federal government. The main sources left to the state governments are
those on personal income taxes, capital gains tax and stamp duties, which
should be exploited.
(vi) Continuity of Government Services: The principle suggests that each
level of government has a certain minimum responsibility and that the level of
services provided should not be allowed to fall below a certain standard. Where a
state is unable to function effectively due to lack of funds, such a state should be
assisted with federally collected revenue.
(vii) Equality of States: All men are created equal, but are endowed
differently. Similarly, states are created equally but they arrive, at creation and
through passages of time with different endowments of economic, financial and
political power. The principle asserts that revenue sharing among the states
should be done on equal basis.
(viii) Equality of Access to Development Opportunities: This was introduced
to correct unequal endowments of the states. The principle asserts that
preferential treatment should be given to those states which by some measures
of development lag behind others or fall below a certain norm.
(ix) Absorptive Capacity: It represents the capacity of the state to make
proper use of funds. It is on exceptional and efficiency grounds, that is, funds
should go to those states that are best able to utilise them.
(x) Population: This Principle asserts that since government is about people,
that development is also about people and that the essence of government
should be the welfare of the people. Therefore, states with larger populations
should receive extra share above others with smaller populations.
(xi) Tax Effort: The principle, which applies in most Federation, is designed to
encourage states to exploit their tax capacities. The realization of a state‘s
potential in respect of tax revenues will widen its development possibilities.
(xii) Fiscal Efficiency: This principle asserts that states should minimise the
cost of fiscal administration or obtain maximum revenue from a given cost.
Fiscal efficiency reflects not only on the ability to raise taxes and collect them,
but it reflects also the structure of the tax base itself as well as the overall
administrative machinery of government.

Principles for Intergovernmental Transfers

Intergovernmental transfers or grants from higher to lower level government are
a critical part of fiscal arrangement in multilevel governments. It is usually
classified into two broad categories as:
(i) Matching or conditional grants: This require that the recipient uses the grant
for a specific purpose as well as provide a specific proportion of the total
programme cost to supplement the amount granted.
(ii) Non-matching grants: which may be either conditional or unconditional, do
not require the recipient to provide a matching or supplementary amount. Such
grants are usually spent where it may be necessary to subsidize programmes
considered to be of high priority by a higher level of government but lower
priority by a lower government.

Guidelines for grant design

The design of fiscal transfers is critical to ensuring the efficiency and equity of
local service provision and the fiscal health of sub-national governments. A few
simple considerations can be helpful in designing these transfers: Guidelines for
grant design
(i) Clarity in grant objectives: Grant objectives should be specified clearly and
precisely.
(ii) Autonomy: Sub-national governments should have complete independence
and flexibility in setting priorities. They should not be constrained by the
categorical structure of programs and uncertainty associated with decision
making by national officials. Tax-base sharing – allowing sub-national
governments to introduce their own tax rates on national bases, formula-based
revenue sharing, or block grants– is consistent with this objective.
(iii) Revenue adequacy: Sub-national governments should have adequate
revenues to discharge designated responsibilities.
(iv) Responsiveness: The grant program should be flexible enough to
accommodate unforeseen changes in the fiscal condition of the recipients.
(v) Equity (fairness): Allocated funds should vary directly with fiscal-need
factors and inversely with the tax capacity of each jurisdiction.
(vi) Predictability: The grant mechanism should ensure predictability of sub-
national governments‘ shares by publishing five-year projections of funding
availability. The grant formula should specify ceilings and floors for yearly
fluctuations. Any major changes in the formula should be accompanied by
harmless or grandfathering provisions.
(vii) Transparency: Both the formula and the allocations should be
disseminated widely in order to achieve as broad a consensus as possible on the
objectives and operation of the program.
(viii) Efficiency: The grant design should be neutral with respect to sub-national
governments‘ choices of resource allocation to different sectors or types of
activity.
(ix) Incentive: The design should provide incentives for sound fiscal
management and should discourage inefficient practices. Specific transfers
should not be made to finance sub-national government deficits.
(x) Accountability for results: The grantor must be accountable for the design
and operation of the program. The recipient must be accountable to the grantor
and its citizens for financial integrity and results (that is, improvements in
service delivery performance). Citizens‘ voice and exit options in grant design
can help advance bottom-up accountability objectives.

INTERGOVENMENT FISCAL RELATIONS IN NIGERIA

The nature and character of intergovernmental relations are discussed in this
sub-section. To make for organised discussions, it is structured into three (3) as
follows:
1. Profile of Fiscal Federalism in Nigeria
There has been a limited degree of fiscal decentralisation in Nigeria since 1954
when the country adopted federalism. With federalism, regional and state
governments were given functional responsibilities with separate and
independent budgets. However, the revenues from regional or state remained
grossly inadequate to meet their expenditure responsibilities.

Therefore, states had to fall back on their share of federally collected revenues,
but the federal government retained fiscal supremacy. The bulk of the revenue
made available to the regional and states governments was on the basis of
derivation between 1954 and 1974. The tendency towards equalisation
principle began, however, in 1975 when the government said that the existing
revenue allocation formula accentuated disparities in the level of development
among the states. Overtime, more resources were made available to the states,
but the bulk of the federally collected revenue continued to be retained by the
federal government.

Revenues accruing to the three levels of government consist of tax and non-tax
financial flows which are derived from internal and external sources.

Until 1976, the position of local governments in the Nigerian federal set-up was
not clear, as they were merely decentralised units of the regional and state
governments. The 1999 Constitution gave them recognition as the third tier of
government with specific functions and sources of revenue. Consequently, they
started to enjoy statutorily allocated revenues in 1981.

2. Overview of Revenue Sharing in Nigeria

These phases of revenue allocation have been marked by various fiscal or
revenue allocation Commissions/Committees/Reviews, Decrees and Acts, and
executive orders.

The current revenue formula is based on the modified grant from the Federal
Ministry of Finance, which came to effect in March, 2004

Federal Government: 52.68%

State Government: 26.72%
Local Government: 20.6%

From the 1999 Constitution, the 13% Derivation provision is accounted for
before the revenue is allocated into the federation account.

3. Problems of Intergovernmental Fiscal Relations in Nigeria.

There are critical issues and problems with decentralisation of government and
intergovernmental fiscal relations in Nigeria. These interrelated issues/ problems
are discussed under a number of sub-headings as follows:
(a) Over-dependence on Oil Revenue
The exploration of oil in Nigeria and its high yielding revenue has continue to
undermine the development of the hitherto buoyant agricultural sector and other
viable sectors such as industry, mining and human capital development.
(b) Conflicts over Revenue Sharing Formula
Revenue sharing among the component units of Nigerian federation has, from
the inception, been replete with agitations, controversies and outright rejections
due to the nature of the politics and criteria used for the sharing. A number of
interrelated reasons have accounted for this. The major ones are:
(i) The allocation of revenue to the various levels of government after 1946
reflected a character of strong bargaining powers of the regions. That is, what
went to a particular regional or state government depended on how well they
could influence the bargaining process;
(ii) With the advent of military regimes, the pattern of revenue sharing formula
appeared biased in favour of the region or state in control of state power in
Nigeria.
(iii) lack of consensus on the criteria of distribution;
(iv) the absence of reliable socio-economic data;
(v) the rapid rate of constitutional change and the extent to which revenue
distribution is tied to perceptions of regional and ethnic dominance.
(c) Centralising Tendency of Fiscal Relations
There are also the centralising of the Federal Government. The radical change to
a mono – economy (i.e oil-driven economy) further propelled centralism of the
federal government over the states in Nigeria. The Federal Government in
Nigeria, in most cases, unilaterally spends or decides the modes and methods of
spending. A case in point is the excess crude account which some states are
challenging as unconstitutional. The outcome of this concentration of spending
and revenue-generation powers in the centre is decrease in internally generated
revenue by the lower governments in a way that compels dependence on higher
governments.
(d) Agitation for Resource Control
The historical facts of the use of the principle of derivation have been a source of
inter-regional/ states conflict, rivalry and antagonism. This has led to
kidnapping, vandalism of oil pipes and installations, desperations and high scale
violence.
 Chapter Twenty Six
PARASTATALS AND PUBLIC ENTERPRISE ACCOUNTING
Public Enterprises are organizations set-up and controlled wholly or partly by the
government to provide essential services to the public in form of social benefits
or for the redistribution of resources to the people.
Parastatals and public companies are agencies established by Government for
specific purposes. Examples are Corporations, Boards and Public Companies.

The characteristics of Parastatals or Corporations are outlined, thus:

(a) Corporations are special organizations set up by Government with the aim of
carrying out certain projects or performing beneficial services to the Nation.
Examples are the River Basin Authority which was set up to harness the
agricultural benefits of the River Basins, the National Electric Power Authority
(NEPA) now Power Holding Company of Nigeria (PHCN) for the generation and
supply of electricity to the citizens at subsidized rates, and the Federal
Environmental Protection Agency (FEPA) aimed at safeguarding Nigeria‘s
environment. Most of the Corporations are not-for-profit organizations. However,
some of them are to recover their operating costs and make some margin or
surplus.

(b) Each Corporation or Parastatal has its own Enabling Act. This is the law
setting it up, and will show in detail the following:
(i) The name of the Corporation, its functions and objectives.
(ii) The Principal Officers of the Board, their functions and mode of appointment.
(iii) The Supervising Ministry.
(iv) The place where the head office and branches of the parastatal will be sited.
(v) The organogram of the organisation.
(vi) The source of fund to the parastatal and the type of accounts they are
expected to keep.
Parastatals or Corporations are usually not governed by the provisions of the
Companies and Allied Matters Act, Cap. C20, LFN 2004. Hence, a Corporation‘s
name will not end with the word ‗Limited‘ or ‗Public Limited Company.‘

(c) State and Federal Governments are free to set up their own Corporations
after due processes. Such Parastatals, Boards or Corporations are quite different
from the Ministries. Ministries and Extra-Ministerial Departments have the same
accounting system, unlike the Boards and Corporations. Government regulations
which apply to the Ministries may not be applicable to Government Agencies.
The term ‗Parastatal‘ also refers to a Government Company, Board, Corporation
or a Tertiary Institution such as the Lagos State Polytechnic, University of
Nigeria, Nsukka or Ahmadu Bello University.

(d) All Corporations have supervising Ministries. Regulations passed by a

Corporation are called ‗bye-laws‘. The supervising Ministry and Government
approve the following for a Corporation, before they become operative:
i. Increases in the prices of goods and services delivered. For example, the
Federal Ministry of Aviation would approve any price increase by the
Nigeria Airways before it is implemented.
ii. All the bye-laws.
iii. The Corporation‘s Annual Budget.
iv. Any major foreign agreement.
The supervising Ministry recommends the appointments of the Managing
Director or General Manager, Executive Director and Key Officers of the
Corporations to the President or National Assembly, for approval.
MAIN OBJECTIVES OF SET TING UP CORPORATIONS/PARASTATAL/ PUBLIC
ENTERPRISES
The following are the main objectives of setting up Parastatals:
a. To bring the means of production under public ownership.
b. To avoid high prices of goods normally charged by the private sector.
c. To avoid duplication of facilities.
d. To ensure close Government control over certain ‗key‘ sectors of the
economy.
e. To ensure the survival of the Industries.
f. To avoid imitation of goods.
g. To enhance the standard of living of the people.

ACCOUNTING IN THE PUBLIC ENTERPRISES

The nature and structure of accounting in the public enterprises depend largely
on the scope and objectives of setting them up.
The accounting structure will thus vary from one enterprise to another. Despite
the differences in their structure and objectives, any accounting system set up
for a public enterprise should be able to:
a. provide detailed financial information adequate for policy formulation;
b. facilitate extraction of relevant financial statements which comply not only
with the requirements of the enabling law but also the needs of the
information users;
c. accommodate changes that become necessary; and
d. facilitate the work of the auditors appointed to examine the books of the
enterprises.

Financial Statements
The financial statements of an enterprise are expected to comply with the
normal accounting standards in operation, requirements of the laws regulating
the activities of the enterprises, etc. For profit-making public enterprises, the
financial statements will include:
(a) Statement of financial position;
(b) Statement of financial performance;
(c) Statement of changes in net assets/equity;
(d) Cash flow statement; and
(e) Accounting policies and
(f) Notes to the financial statements and other disclosures

CLASSES OF GOVERNMENT ENTERPRISES

Public enterprises are establishments owned either partially or wholly controlled
by Government. They come into existence through the promulgation of
appropriate Federal or State laws. Government enterprises may take the
following forms:
(a) Public Utilities: These are parastatals providing essential services to the
citizens either at ‗nil‘ cost or at subsidized rates. This is to bring about proper
balance between social and economic objectives.

(b) Regulatory Agencies: These are Government Agencies or partially

autonomous establishments executing general policies of the Government within
specified areas. Examples are National Communication Commission (NCC) and
Nigeria Copyright Commission.
They may be fully or partially commercial in nature although they still look
forward to Government‘s financial assistance in meeting their obligations.

(c) Commercial Enterprises: They are bodies established by Government in line

with the appropriate laws of the country, to create competitive environment and
make profit from their operations. Government-owned companies are usually in
different sectors of the economy, such as mining, banking, insurance,
manufacturing, trading and transportation. Such companies are autonomous in
structure and operations. They are incorporated and must comply with the
existing laws. The laws governing their operations include the Companies and
Allied Matters Act, Cap C20, LFN 2004, Insurance Act of 2000 (as amended), the
Banks and Other Financial Institutions Act 1990 (as amended) and Bankruptcy
Act of 1979 (as updated).

(d) Government business enterprises (GBEs) mean an entity that has all the
following characteristics:
(i) It is an entity with the power to contract in its own name;
(ii) Has been assigned the financial and operational authority to carry on a
business;
(iii) Sells goods and services, in the normal course of its business, to other
entities at a profit or full cost recovery;
(iv) It is not reliant on continuing government funding to be a going concern
(other than purchases of outputs at arm‘s length); and
(v) It is controlled by a public sector entity. Government business enterprises

(GBEs) include both trading enterprises, such as utilities, and financial

enterprises, such as financial institutions. GBEs are, in substance, no different
from entities conducting similar activities in the private sector. GBEs generally
operate to make a profit, although some may have limited community service
obligations under which they are required to provide some individuals and
organisations in the community with goods and services at either no charge or a
significantly reduced charge.

Audit of government enterprises

The laws setting up most of the federal corporations state that:
(a) An internal audit department should be established. The department should
audit the corporation and copies of reports forwarded to the Auditor General for
the Federation, for information only;
(b) The annual accounts of the corporations must be audited by an external
auditor;
(c) According to section 85 (125) sub-section 3 (b) the Auditor General has the
power to comment on the annual accounts and external auditor‘s reports
thereon and report to the legislature. Furthermore, Section 85 (125) sub-section
4 gives the Auditor General the power to conduct periodic checks of all
government statutory corporations, commissions, authorities, agencies,
including all persons and bodies establish by an Act of the National (State)
Assembly.

Hospital accounting
Hospitals undertake functions such as caring for the sick, conducting research,
and medical training. A major purpose of hospital accounting is to assist hospital
administrators in the efficient and effective management of resources.
Government hospital accounting has the following features:
(a) Fund accounting system is operated;
(b) The financial activities of hospitals are covered by budgeting and budgetary
control procedures;
(c) Subsidiary and principal books of accounts are kept to facilitate the
extraction of information. Such books include ledger accounts, journal and DVEA
book;
(d) An autonomous government hospital is required to prepare financial
statements, to determine proper stewardship in fund disbursements and general
resource management, as follows:
(i) Statement of financial performance: These are prepared to show the surplus
or deficit of the organisation during a specified period of time, usually one year.
They are extracted showing the comparative figures for the preceding year.
(ii) Statement of financial position: This is prepared to ascertain the financial
strength of the hospital, as at the end of that period. The balance sheet is
extracted with the comparative figures for the preceding year.
(iii) Cash flow statement: A cash flow statement is prepared to establish the
hospital‘s sources of cash inflows and directions of outflows. The cash flow
statement is very revealing of the liquidity preparedness in meeting short term
obligations. Preceding year‘s figures are disclosed as well, for comparative
analysis.
(iv) Notes to the accounts: These are modifiers or amplifiers, accompanying the
financial statements. They disclose information such as the hospital‘s accounting
policy and method of depreciation, which the final accounts do not supply.
(v) Memorandum statement of account of capital fund: The statement shows the
financial information of all the tangible assets and capital projects in progress as
at a particular period. The standard accounting practice is to transfer any portion
of the project completed in any financial year to the tangible assets account.
‗Capital Work in Progress‘ is determined based on valuer‘s certificates. The
statement of capital fund contains only the financial information in respect of
capital projects. Funds are transferred to augment the balance available in the
capital fund.
(vi) Memorandum statement of account of recurrent funds: The statement
highlights the financial information of all the recurrent items. These include
unutilised grants for research, stocks, and debtors.

Sources of revenue Hospitals generate revenue from various sources, which

include:
(a) Capital subvention: This is in the nature of contributions made by
government, at intervals, for the execution of capital projects of the hospital.
(b) Recurrent subvention: This is the amount contributed by the government at
intervals for meeting recurrent expenditure. Examples are the personnel cost of
staff, overhead costs covering repairs of the facilities of the hospital and
purchase of drugs.
(c) Charges: These represent fees realised from the services rendered by the
hospital. The charges include fees realized from the school of nursing, X-Ray and
laboratory facilities.
(d) Miscellaneous revenue: These include revenue generated from sundry
sources, examples of which are income from investments, reimbursements,
disposal of assets, rent on property and do nations from philanthropic
organisations and individuals.

Development and property corporations Some parastatals are established for the
following aims and objectives:
(a) Construction and sales of buildings;
(b) Upgrading land for sale;
(c) Property ownership;
(d) Managing facilities on government estate; and
(e) Maintenance of industrial estates.

An example of such a corporation is the Lagos State Property Development

Corporation.

Main sources of income of corporations These include:

(a) Sale and rent of houses;
(b) Sale of land;
(c) Miscellaneous income (dividends, interests on fixed deposit accounts);
(d) Surplus from property management;
(e) Professional service income, e.g. survey fees for private land;
(f) Government grants; and
(g) Gifts and donations.

The expenditure incurred by corporations includes:

(a) Payment of salaries;
(b) Cost of construction, e.g. drainage, building;
(c) Cost of land clearing;
(d) Interest on loan; and
(e) Compensations made to those who are dispossessed of their landed
property.

Development and property accounting Corporations, which engage in the

development of property, prepare the following final accounts:
(a) General revenue account. It is in this account that the expenses relating to
general development and estate management as well as transfers to the various
reserves are consolidated.
(b) Property and permanent works capital accounts. The accounts are meant for
transactions relating to capital projects like land and buildings under
construction and for ultimate sale to the public.
 Chapter Twenty Seven
PUBLIC DEBT
Public debt is simply the debt which a country owes to its citizens and to residents,
institutions and governments of foreign countries. It is the total outstanding debt,
obligations or accumulated borrowing of the national government.

Categorization of Public Debt

There are different categorization of Public Debt. They include:
(a) Marketable and Non-marketable Debt
i. Marketable debts are those which can be bought and sold in the financial market. In
Nigeria, This include Treasury Bills (short term debts traded in the money market) and
Federal Government Development Stocks (long term debts traded on the Stock Exchange).

ii. Non-marketable debts are those which have been issued in favour of specified debt
holders and cannot be sold to others. They cannot be traded in the money market.

(b) Funded and Unfunded Debt

i. Funded Debt is a long term debt for a definite period. The interest rate to be paid, with
terms and conditions of repayment are clearly spelt out in the debt certificate. Provision is
made to facilitate repayment of the debt by the creation of a debt fund also known as
sinking fund in which some money is deposited yearly by the government, so as not to
unnecessarily erode the financial base of the nation.

ii. Unfunded Debt, on the other hand, is for a short period of less than a year. No separate
fund is created by the government to effect its repayment rather, the debt is repaid out of
government current receipts, often by floating new bonds in the money market. In this way,
an unfunded debt is also referred to as a floating debt.

(c) Reproductive and Deadweight Debts

i. A debt is productive or reproductive when its amount is used to finance a project which in
the long run generates revenue to the government which is sufficient to service the debt.

ii. deadweight or unproductive debt is debt that does not increase the productive capacity
of the economy because it is not backed by any existing asset. For example, debt contracted
to finance war or to be used as safety nets for flood disaster victims is a deadweight debt.

(d) Internal Debt and External Debt

i. Internal or Domestic Debt is that which the country owes to its citizens. In other words, it
is a claim against the government by its citizens as individuals, institutions etc. within the
country.

ii. External or Foreign Debt, on the other hand, refers to debt owed to foreign individuals,
governments (bilateral loans), international organizations like International Monetary Fund
(IMF), World Bank Groups such as International Development Association (IDA),
International Financial Cooperation (IFC)S, International Bank for Reconstruction and
Development (IBRD) as well as African Development Bank (ADB).

(e) Trade arrears. A trade debt arises when a country trades with other
countries and is unable to pay, either partly or wholly, for the goods and services
supplied. For example, in the early 1980s Nigeria‘s inability to settle her import
bills resulted in the accumulation of trade arrears amounting to US$9.8 billion
between 1983 and 1988.
(f) Balance of payments support loans. The overall economic transactions
between a country and the rest of the world, classified into current, financial and
capital accounts, constitute the balance of payments position which may be
favourable when surpluses are recorded or unfavourable if otherwise. However,
a persistent unfavourable balance of payments often known as balance of
payments disequilibrium, may inform government‘s decision to seek for balance
of payments support loans.
(g) Project-tied loans: Sometimes, there are investment opportunities which
have good potentials and prospects of accelerating economic growth and
development and such may lead government into contracting project-tied loans.
As implied, this type of debt which is for the execution of a particular project is
supposed to be self-liquidating in the sense that the projects are expected to
generate adequate financial surplus from which the borrowed money would be
repaid.
(h) Loans for socio-economic needs: The provisions of the socio-economic
needs of the people such as water supply, flood control, health and education
facilities as well as other social amenities may necessitate borrowing by
government to finance them. Such projects are not expected to generate
financial returns but rather economic and social benefits that would enhance the
living conditions of the people.

GENERAL CAUSES OF PUBLIC DEBT

The following are some of the reasons that have been advanced to justify the need for a
country to borrow:
(a) Huge and persistent budget deficit: The government borrows when its expenditure is
greater than its revenue (budget deficit), especially after its taxing capacity has been
stressed to the limit.

(b) Rapidly increasing population: In most developing countries, population is growing

faster than the national output. The need arises for government borrowing to expand public
enterprises and public utilities to cater for the welfare of the people.

(c) Implementation of development programmes: To promote economic development

usually require provision of new and upgrading of existing social and economic
infrastructural facilities like roads, railways, electricity, schools and hospitals. The tax
revenue of government may not be sufficient to execute such projects, hence the resort to
government borrowing.

(d) Economic instability: A stable economy naturally provides an enabling environment for
economic growth and development. Public debt of the internal type may be contracted to
control inflation, while both internal and external borrowing may be used to stimulate
economic activities during economic depression.

(e) Natural disasters: Government has the responsibility to provide relief to the victims of
earthquake, flood and fire disasters, famines, sectarian violence and other natural
calamities. Government borrowing may be justified because such occurrences are never
expected or budgeted for.

(f) Fluctuations in government revenue: Most countries operate mono cultural economies
depending on only one (or very few) export product for foreign exchange income. A sudden
poor performance of such product in the international market would reduce income
considerably and affect budget implementation adversely.

(g) War-time borrowing: Financial resources needed to prosecute wars are usually beyond
the capacity of the government. Hence, the need to borrow arises to avoid devastating
consequences of defeat.

(h) Debt servicing: New debt with favourable terms and conditions may be incurred to
service old debts with a view to reducing the burden of debt on the economy.

Advantages of borrowing
The benefits of public debt include the following:
a) Rapid economic growth and welfare improvement would be achieved if
borrowed funds are utilised to finance economically and socially viable
projects.
b) The confidence of local and foreign investors in the economy would be
boosted, if public debt is used to control inflation. New and additional
investment would lead to creation of new jobs and greater output of welfare-
enhancing goods and services.
c) If borrowed funds are spent on public works, standards of living will improve,
especially via creation of new jobs and the transformation of the
environment.
d) Public debt reduces income inequalities if it is spent on social, security and
projects that are of more benefit to the lower income groups.
e) Those who lend money to government by purchasing government securities,
instead of keeping idle savings, will become richer as they acquire additional
assets to boost their wealth portfolio.

Disadvantages of borrowing
The adverse consequences or disadvantages of public debt include the
following:
a) Excessive government borrowing within the economy tends to crowd out
private investments. That is, government competes with private companies in
the financial market and deprive them loanable funds they need to grow their
activities.
b) Tax burden on future generation: Public debt imposes unfair tax obligation on
future generation especially when borrowed funds are deployed to fund
consumption rather than investment programmes or when such funds are
diverted to non-self- liquidating projects or projects that are poorly designed,
thereby making execution impossible.
c) Funding excessive interest rate on public debt in hard currency deprives the
nation of foreign exchange needed to procure critical inputs, especially in a
country like Nigeria that is highly dependent on import with respect to raw
materials required in the industrial sector. This leads to declining industrial
capacity utilisation and loss of industrial jobs.
d) Borrowing comes with conditionalities that may become too stringent for the
debtor nation(s), like trade liberalisation, withdrawal of subsidies on essential
products, expenditure reduction, non-increase of salary of public servants
and other stiff conditions that might have great consequence on living
standards of the people.
e) It is an ineffective way of controlling inflation. As a matter of fact, debt
servicing may create inflationary effects at a time of full-employment.
Specifically, the financing of domestic debt usually causes aggregate demand
to increase when creditors bring the income generated through their
investment in government securities into circulation.
f) Debt-servicing problem is aggravated when short and medium-term loans are
committed to long-term projects with amortisation becoming due before
projects are completed.
g) Borrowing tends to widen the level of income inequalities since it is the rich
only that can invest in government securities or lend to government and
hence benefit from high interest payment.

Domestic borrowing instruments

There are various instruments that can be used by both federal and sub-
national governments for the purpose of raising money within the domestic
economy. Some of these instruments may be of short term, medium term and
long-term depending on the objective of the government at the time of
borrowing. They include:
(i) Treasury bills: These are highly liquid financial obligations of the federal
government issued on its behalf by the Central Bank. They are issued in
multiples of N1,000 for 91 days maturity. With a minimum investment N10,000
treasury bills are issued and traded on discount basis. The income is the
difference between the purchase price and the maturity value.
(ii) Treasury certificates: They are interest earnings obligations of the Federal
Government issued by the Central Bank for maturities ranging from one to two
years.Treasurycertificaterateisusuallyhigherthanthatoftreasurybillsbecause of its
longer tenure. As with the treasury bills, the major investors in treasury
certificates are the Central Bank, commercial banks, discount houses and to a
lesser extent merchant banks.
(iii) FGN bonds: These are debt securities (liabilities) issued by the Debt
Management Office (DMO) for and on behalf of the Federal Government of
Nigeria (FGN). The FGN has an obligation to pay the bondholder the principal
and agreed interest as and when due. The FGN bonds are considered as the
safest of all investments in the domestic debt market because it is backed by the
‗full faith and credit‘ of the Federal Government, and as such it is classified as a
risk-free debt instrument.
(iv) FGN savings bond (FGNSB) is issued by the Debt Management Office
(DMO), on behalf of the Federal Government of Nigeria (FGN). The bonds are
issued for the following objectives: » To deepen the national savings culture;

» To provide opportunity to all citizens irrespective of income level to contribute

to national development; and

» To enable all citizens participate in and benefit from the favourable returns
available in the capital market.

It is issued monthly in tenors of 2 and 3 years, with quarterly payment of

interest to investors/bondholders. FGNSB is offered to the investing public
through offer for subscription at an interest rate announced by the DMO.

v) Government development stocks: Development stocks are either medium

or long-term securities usually issued to finance development projects or for
lending to lower levels of government. The yield on government development
stocks will be higher, the longer the maturity. The principal investors in
development stocks are insurance companies, which are required to invest in
them by the virtue of insurance act, commercial and merchant banks, Central
Bank, and other savings institutions.

(vi) FGN sovereign sukuk : This is an Islamic investment certificate that

represents ownership interest of the holder in an asset or pool of assets. It
entitles the holder to receive income from the use of the assets.
The Federal Government of Nigeria issues Sukuk bond for the purpose of:

(i) Funding the construction/rehabilitation of key critical infrastructure projects

like roads;

(ii) Diversifying the sources of government funding;

(iii) Offering ethical investors an opportunity to invest in government issued

securities;

(iv) Achieving higher level of financial inclusion; and

(v) Serving as a reference pricing of Sukuk for other issuers especially private
sector issuers.

(vii) General obligation bonds: These types of bonds are backed by the full
faith and credit of the issuer, in addition to the power of the issuer to introduce
tax and take any other steps necessary to repay the bond holders. They are
frequently used to pay for the construction of roads, schools, prisons and other
public infrastructures.

(viii) Revenue bonds: They are municipal bonds issued on the premise that
both principal and interest will be repaid from the revenue generated from the
facilities to be constructed with the proceeds of the issue. In other words, an
authority that has constructed physical assets would charge customers for the
use of the assets and then dedicate the revenue to servicing of the associated
debt.

(ix) Special assessment bonds: They are types of bonds for which the
payment of interest and principal will be made from a special tax assessed upon
the beneficiaries of the facility to be constructed. These types are popular for
development of public utilities and service programmes.

State or local government borrowing through the capital market

The sub-national governments can access the capital market to raise fund to
finance investment opportunities that have potentials to accelerate growth and
development in their jurisdictions. However, such sub-national (state or local)
government must satisfy the requirements stipulated by regulatory authorities of
the capital market. Below are some of the requirements that must be satisfied
before issuance of bond by a state or local government.

Documentation for state or local government bond issuance

The documentation is highlighted as follows:
(a) Profile of the state, showing its population, major industries, their locations
and other major projects embarked upon. The information has to be submitted
with an application to the Securities and Exchange Commission as well as the
Nigerian Stock Exchange.
(b) A profile of the assets and liabilities of the State in the last five years in
addition to a 5-year projection.
(c) Sources of revenue for the past 5 years, indicating the percentage
contribution of each to the total revenue.
(d) The law of the State authorising it or its agency to borrow from the capital
market.
(e) A feasibility report of the project to be financed.
(f) A draft of the Trust Deed in respect of the proposed issue.
(g) The consent of the Federal Ministry of Finance to the State‘s request to
borrow from the capital market.
(h) Letter of authority from the State Government to the Central Bank of Nigeria
or the Accountant-General of the Federation, to seek direct recovery of loans
and interest from the affected Government‘s statutory allocations, in case of
default.
(i) Letter of consent from the Central Bank/Accountant General to deduct
(quarterly) adequate funds from the State‘s allocations for the redemption of the
loan in case of default.

Problems facing state governments in financing projects through capital market

The problems include:
(a) Poor accounting system on the part of a state government;
(b) Lack of qualified personnel to effectively evaluate, appraise and monitor
projects;
(c) Poor performance of existing state government projects which act as
disincentive to potential investors;
(d) Inability of government to package and market viable projects to the
investing public;
(e) Lack of awareness of the potential investment by the investing public; and
(f) Preference for short-term investments by the public.

Special requirements for revenue bonds

The special requirements are:
(a) Identification of government‘s authority to borrow and the types of activities
to which the enabling legislation applies;
(b) General grant of power to acquire, construct, improve, extend or provide
special improvement and to issue revenue bonds and pledge same for the
payment of these bonds;
(c) Requirement that the issuing body should establish sufficient charges or
rates to operate and maintain the projects and meet principal and interest
payments as scheduled;
(d) Guarantee that there revenue bonds have all the qualities of a negotiable
instrument under the appropriate law of the state;
(e) Provisional design to secure the successful operation of the project; and
(f) Remedies to be initiated where there is default.

Sources of external debt Nigeria has contracted a number of debt obligations

from various sources, some of which are discussed briefly below
(i) Paris Club of Creditors - The Club came into existence in 1956 as a result
of outstanding balances in the books of Argentina and some European countries.
Since then, it has become a common forum where the debtor nations and
creditor countries meet to discuss debt repayment problems. The club actually
represents only government guaranteed creditors. Membership of the club
includes United States of America, United Kingdom, Federal Republic of
Germany, France and Canada who guaranteed the export activities of their
nationals through their Official Export Credit Guarantee Agencies. When the
recipient nation‘s government is unable to pay the foreign exchange equivalent
of the domestic currency cover paid by the importer, it then becomes
government owed debt to creditor nations. The first Paris Club of Creditors
meeting was held in 1956. Such meetings are scheduled to discuss repayment
problems and reach debt relief agreements for debt nations.
(ii) London club of creditors - These are mainly uninsured and unguaranteed
debts extended by commercial banks to nationals of debtor countries. Members
of the club are commercial banks mainly of industrialised nations. The first
meeting of the London Club was convened in 1976. Such meetings are held to
discuss repayment problems and conclude restructuring agreements.
(iii) Multilateral creditors- These are international institutions funded by
member nations. They include the World Bank and its affiliates such as
International Monetary Fund (IMF), African Development Bank (AfDB), European
Investment Bank (EIB), International Development Assistance (IDA),
International Fund for Agricultural Development (IFAD), that provide credit for
development purposes, balance of payment support, as well as private ventures.
(iv) Promissory note creditors: These are uninsured trade credits, arising
mainly from trade arrears accumulated between1982 and 1983.The debts were
refinanced by the issuance of promissory notes to the creditors.
v) Bilateral creditors- A bilateral credit is provided by a government to another
government. Such credits are intended for development purposes in the
recipient countries. Examples are Official Development Assistance (ODA),
sometimes provided on bilateral basis with a minimum grant element of 25
percent and export credits guaranteed by export credit agencies of exporting
countries.
(vi) Private sector creditors- These are usually short-term credits extended
by commercial banks, institutional investors and individual foreign suppliers in
form of suppliers or buyers credits.

Indicators of external debt burden

External debt does not constitute a burden when contracted loans are optimally
deployed and there turn on investment is sufficient to meet maturing obligations
as and when due, while servicing of the domestic economy is not undermined. In
other word, where marginal return on investment is greater than or equal to the
cost of borrowing or where the loan is self-liquidating, a debt service burden
would not arise. The magnitude and severity of debt burden cannot be
determined on the basis of debt volume only. Rather, the debt volume should be
viewed in combination with certain debt ratios for better appreciation of the debt
problem. This implies that the severity of debt crisis can be determined only by
comparing to national output, the resources committed to debt service. The
higher these ratios, the greater the debt burden on the country. There are four
major ratios or indicators commonly used to determine the extent of
indebtedness of any country.
These ratios are explained briefly below:
(i) External debt service to export ratio: This relates total external debt
service to export of goods and services. It reflects the level of export earnings
committed to servicing external debts. Since external debts are denominated in
foreign currency, then servicing and repayment must be in foreign currency
which can only be procured through export earnings.
(ii) External debt stock to export ratio: The ratio relates to the availability of
foreign exchange earnings in the economy. It is an important indicator since
foreign exchange is needed to pay off foreign debts. It reflects the extent to
which total exports of goods and services can be used to liquidate external debt
outstanding. The movement in this ratio is an indicator of the nation‘s debt
service capacity.
(iii) External debt stock to nominal gross domestic product ratio: This
ratio measures the extent to which total domestic output can be deployed to
wipe out total outstanding external debt obligations. The higher this ratio the
greater the degree of external debt burden.
(iv) External debt service to nominal gross domestic product ratio: This
ratio relates to the proportion of total domestic output set aside for servicing
external debt. The ratio will be rising where total domestic output is falling.

The higher these ratios the greater is the debt burden. However, it is important
to emphasise that debt service ratios should be interpreted with caution because
the ratio will be relatively low if the country continues to default in debt service
payment.

Justification for debt burden transfer

If we proceed on the assumption that public services are financed on benefit
basis, then each individual (generation) should pay for its own share in the
benefit received. If we apply this principle to public capital outlays the benefit of
which will extend into the future, it follows therefore that debt burden transfer is
justified as a matter of intergeneration equity.
Methods of burden transfer
There are various ways through which burden transfer can be implemented.
(i) Transfer through reduced capital formation: The decision of government
to withdraw money from the economy will cause a reduction in the level of
disposable income, which invariably may affect consumption, or capital
formation. In the first case, the welfare of the present generation as measured
by consumption is reduced while the income of the future generation will be
unaffected. In the second case, the consumption welfare of the present
generation is untouched whereas the future generation will inherit a small capital
stock and thus enjoy a lower income. In this sense the future generation is
burdened.
(ii) Transfer through generation overlap: Capital formation is the only way
through which burden transfer between generations can occur. Assume the
existence of two generations with generation one living from years 1 to 50 and
generation two lives from 25 to 75. If generation one is requested to pay N1.0
million needed to finance a public project with a useful life of 50 years,
generation one will do so at the cost of reducing its own consumption by this
amount. Only in years 25 to 50will it be possible to collect taxes of N0.5 million
from generation two in order to refund generation one. In this way, generation
one while initially assuming the entire burden can transfer part onto generation
two.
(iii) Transfer with external debt: In this case, there is no need for generation
one to reduce its expenditure. Both consumption and capital formation in the
private sector can remain intact as there sources needed for the public outlay are
obtained abroad. Loan finances now impose a burden on generation two not only
with reduced capital formation but with responsibility to servicing the foreign
debts. Taxes must be paid to finance interest paid to foreigners rather than to
domestic holders of the debt. This foreign debt burden replaces the loss of
capital formation which generation two would have suffered had there been
domestic loan finance and a resulting reduction in capital formation.

Borrowing policy
Sometimes, countries contracting loan obligations are able to choose between
different sources of credits and could therefore make a decision based on the
most favourable conditions. The criteria for decision making would include the
following:
(i) The comparative rates of interest: In using comparative interest rates to
decide between loan offers, the nominal rate of interest is rarely used. Instead,
comparison of loans from different countries or market sources is based on the
real rate of interest which takes into consideration the rate of inflation in the
creditor countries. Furthermore, the way the interest on the loan is charged as
well as the manner of its calculation is important as these would determine the
amount to be charged. Some creditor sources might charge interest at a fixed
rate, that is a flat rate percentage of the full loan or at a variable rate which
fluctuates over the life of the loan and in accordance with financial market
conditions.
(ii) The possibility of the loan being project-tied : Where loans are applied
for the execution of specific projects, a further consideration of interest rate
charges may focus on there turns or benefits from the project to be financed by
the loans. In such instances, the project is subjected to appropriate comparative
minimum unit-cost tests using national or international yardsticks. If the project
is supposed to be profit-yielding, it must be ensured that there is a positive
internal rate of return which is at least equal to the cost of borrowing, while
projects in the area of social services or infrastructures are considered on the
basis of their cost-benefit ratios.
(iii) Degree of concessionality :Another criterion for loan selection where
several sources of external loans are being considered is the degree of
concessionality of such a loan, that is, the extent of ―softness‖ or otherwise of
the loan. The degree of concessionality is measured by the percentage of grant
element present in the loan. Loans have various degrees of concessionality
depending on their source and nature. Where a loan has a grant element of 100
percent, it is regarded as being totally concessional.
(iv) Repaymentability: One of the underlying principles on which loan terms
and conditions are considered before selection is the repaymentability of the
borrowing country. This is of mutual benefit to the donor as well as the recipient
of the loan. Before taking a loan, it must be ensured that the projects and
programmes for which the loan is being sourced will eventually provide sufficient
income from which the debt can be serviced as and when due. A further
consideration of the repayment ability is the socio-political condition of the
country. Where the government in power does not command popular credibility,
it may be difficult for such to access foreign loans.

Public debt management and strategies

Debt management refers to policy measures designed primarily to curtail debt
ratios and ensure effective control on the volume of debt. According to
traditional philosophy, debt management should focus on raising of necessary
debt at the cheapest cost and paying it back as early as possible. On the other
hand, debt management can be defined as the conscious and carefully planned
schedule of acquisition, deployment and retirement of loans acquired either for
developmental purposes or to support the balance of payments. It incorporates
estimate of foreign exchange earnings, sources of finance, the projected returns
from the investment as well as the repayment schedule. It also includes an
assessment of the country‘s capacity to service existing debt and a judgement of
the desirability of contracting further loans.
Debt management strategies
The debt management strategies of the Federal Government of Nigeria can be
decomposed into two broad categories. They are long term debt management
strategies and short-term debt management strategies. The long-term strategies
entail various economic restructuring and diversification programmes like
commercialisation, deregulation, liberalisation, privatisation and globalisation.
On the other hand, the short term strategies cover measures involving debt and
debt reduction strategies such as restructuring of the outstanding debt, embargo
on new loans, limiting the debt service payments and so on. Some of the short-
term strategies are discussed briefly below:

Refinancing
This is the procurement of new loans by a debtor to pay off an existing debt. The
new loan may be procured from the same creditor or new set of creditors as the
case may be. Another variant of debt refinancing occurs when the original
creditor government or an export agency decides to pay off a debt there by
becoming the new creditor. Under the debt refinancing arrangement an amount
totaling $4.5 billion was refinanced as at the end of 1990 by the FGN.
Rescheduling
This is the rearrangement of payment terms of debt with respect to new
maturities, grace period and readjustment of the interest rate. The essence is to
facilitate convenience indebt repayment. Series of rescheduling arrangements
were negotiated with the Paris Club of creditors to which more than half of
Nigeria‘s external debt was owed. About $2.1billion was rescheduled in 1986,
$996million in 1989 and $3.2 billion as at 1991. Principles of debt rescheduling
process There are three main principles that guide the Paris Club rescheduling
process. These principles are discussed briefly below:
(a) Imminent default :This principle applies to the debtor country and requires
the debt or nation to prove that it will not be able to meet its external debt
service obligations unless it is granted a relief. This proof can be shown through
accumulation of debt service arrears. The IMF balance of payments projections
of the country also serve the purpose, as these projections always provide an
indication of the country‘s economic position. This requirement is very important
as a debtor country will be denied access to the rescheduling process without the
Club being satisfied that this condition has been fulfilled.
(b) Burden sharing: The principle of burden sharing applies to the creditor
countries. It requires the creditors to be prepared to share fairly and equitably
the burde no f the rescheduling in the proportion of their individual exposure to
the debtor countries. In effect, the creditor must agree to provide the debtor
country with relief that is commensurate with their exposure. The counterpart,
from the point of view of debtors, is the principle of comparability of treatment
which extols the need for debtors to treat creditors equitably in meeting the debt
service obligations.
(c) Conditionality:This principle which is generally regarded as the ―golden
rule‖ of the Paris Club of Creditors also applies to the debtor countries. It
requires the debtor nation to put in place an IMF structural adjustment
programmes before approaching the Club for rescheduling process. Sometimes
such programmes determine the type of agreement which the official creditors
would be prepared to reach with the debtor country. 34.13.3 Restructuring: It
occurs when an existing debt stock is converted into various categories of debt.
The composition of Nigeria‘s external debt has been restructured to provide
relief. In March 1991, an arrangement in principle was reached with the London
club of creditors for the restructuring of debt which totaled $5.8 billion. Three
options offered under the scheme are:-debt buy-back, collaterised bonds and
new money bonds. One basic advantage of debt restructuring is the eligibility of
the debt for conversion

Debt conversion
This is the exchange of monetary instruments e.g. promissory notes or par
bonds for tangible assets or other financial instruments. It is a mechanism for
reducing a country‘s external debt by changing the character of its debt. Debt
conversion may or may not bring in additional money but it is aimed at
enhancing debt management and facilitating a country‘s access to international
financial market arena. Under the debt conversion programme, the Central Bank
of a debtor nation would agree to repay a foreign currency denominated debt
guaranteed by the public in local currency on the condition that the local
currency proceeds would be used for specific domestic activities. There are
different forms of debt conversion programme which are discussed briefly below:
(a) Types of debt conversion
(i) Debt for equity conversion: This is the exchange of a country‘s foreign
denominated debt for local currency which can be used either for the
establishment of new enterprise or for the purchase of equity share in an
existing private sector concern.
(ii) Debt for debt conversion: This involves the exchange of foreign currency
debt for domestic currency denominated debt e.g. Government Development
Stock (GDS) that can be sold or traded in the domestic secondary market.
(iii) Debt for cash conversion: It entails the exchange of foreign currency
denominated debt for local currency which can be used for local working capital,
loan repayments and local tax payments.
(iv) Debt for export conversion: Under this arrangement, exports are paid for
in a combination of cash that is, foreign currency and debts conversion
proceeds.
(v) Debt for nature: This arises when the domestic currency proceeds of debt
conversion are applied for development of conservation, promoting wildlife
tourism and other natural resources. Another variant is a situation where by the
foreign currency denominated debtis exchanged for a particular natural resource
for a given period.
(vi) Debt for development: In this case, the proceeds of debt conversion are
employed for development activities of non-governmental private voluntary
organisations such as foundations, trusts and multi-national aid organisations
(vii) Relending: Under this category, the proceeds of debt conversion are given
out as fresh loan(s) to non-governmental private economic entities, mostly
multinational corporations. This practice is usually employed when ever the
Central Bank does not have adequate foreign exchanges to pay the beneficiaries
of debt conversion.

Objectives of debt conversion programme

As stated in the guidelines on debt conversion programme for Nigeria, the
scheme is established to:
(i) Reduce Nigeria‘s external debt service thereby reducing the stock of
outstanding foreign currency denominated debt in order to alleviate debt service
burden;
(ii) Improve and make economic environment attractive to foreign investors;
(iii) Serve as additional incentive for repatriation of flight capital;
(iv) Stimulate employment-generating investments in industries with significant
dependence on local input;
(v) Encourage the creation and development of export-oriented industries
thereby diversifying the export base of the Nigerian economy; and
(vi) Increase access to appropriate technology, external market and other
benefits associated with foreign investment.

(b) Problems of debt conversion programme

The problems relate to a number of adverse macroeconomic effects associated
with designing a workable conversion programme. Some of these are discussed
briefly below:
(i) Inflation: From the discussion on the types of debt, there is an obvious fact
that debt conversion transactions involve the release of domestic currency. As a
consequence, there is the possibility of an unplanned increase in money supply
thereby leading to inflationary pressure.
(ii) Round tripping: Debt conversion offers opportunity for round tripping which
involves the conversion of redemption proceeds into foreign currency either in
the official foreign exchange market or parallel market for exportation
immediately or at a later date. This problem has serious implications not only for
foreign exchange rate but also for balance of payment position.
(iii) Degree of additionality: This represents the capacity of debt equity swaps
to attract foreign equity investment and flight capital into the country which
otherwise would not have come in. Thus, the advantages associated with debt
conversion depend on the degree of additionality in the absence of which the
exercise results only in minimal benefit to the economy.
(iv) Fear of foreign domination: Debt conversion programmes tend to
increase fear about the possibility of a radical change in the structure of business
ownership in favour of foreigners. Such fears tend to generate political
sensitivity about the programme.
(v) Effective transactions exchange rate: The transactions effective
exchange rate is determined by a combination of factors such as discounted
purchase price of the debt, tax or conversion charges among other. The
transaction‘s effective exchange rate must be sufficiently attractive to the
investors in order to make debt conversion worthwhile. On the other hand, an
excessively attractive transaction‘s exchange rate would constitute a loss to the
economy, as it will amount to subsidising inefficiency.

(c) Minimising the problems of debt conversion

The above stated problems can be minimised or eliminated through design of
workable conversion programme. Some of the ways include:
(i) Setting of limits on the amount and type of debt to be converted;
(ii) Blocking of the redemption proceeds in an account with the Central Bank
from which releases would be made overtime according to the cash
requirements of the investment projects;
(iii) Minimal use of debt for cash conversion and maximum use for productive
investment or uses which do not create new money but makes use of existing
liquidity such as the issue of special long-dated domestic currency denominated
debt instruments which can be traded in the domestic secondary market; and
(iv) Domestic credit policy could be used to dampen the inflationary impact of
increase in money supply. Demand for credit by already established business
would be reduced to the extent that they benefit from redemption proceeds.
Loans pooling and consolidation Loans pooling refers to an arrangement whereby
loans of similar characteristics are acquired from different sources for a specific
purpose which may include but not limited to project financing or sale in the
secondary market after securitisation.

Debt consolidation
This is similar to debt refinancing in the sense that it involves procurement of
new loan in order to pay off an existing obligation. Debt consolidation refers to
an arrangement whereby new loan is obtained to pay out a number of smaller
loans, debts, or bills on which payments are currently being made. Since this is
bringing multiple debts together and combining them into one loan, this is
referred to as ―consolidating‖ them. That is why it is called a debt consolidation
loan.
Debt repudiation
This involves disowning the debt completely. This approach had been advocated
by many economists. Fidel Castro, in his own contribution, did not see any sense
in developing countries paying back the debt in view of past colonisation and
neocolonisation experiences. African countries had more than paid for the debts,
accordingto Fidel Castro of Cuba. However, there is the possibility of the
imposition of sanctions by the International Monetary Fund and World Bank, if
Nigeria should illegally repudiate its indebtedness.
Debt forgiveness relief
This arises where a creditor Nation decides to forgive or write off the liabilities of
a debtor nation. The option has been taken by Paris Club in favour of some
debtors. In 2006, Paris Club of creditors granted Nigeria a debt relief of about
$18bn. This translated to about N2.43 trillion at an average exchange rate of
N130 to $1.
Economic restructuring programme
The idea is a long-term solution. It is believed that the poor performance of the
economy led to the debt crisis, hence the adoption of structural adjustment
programme in 1986.
The objectives which informed the initiative were as follows:
(i) To restructure and diversify the productive base of the economy, in order to
reduce dependence on the oil sector and imports.
(ii) To reduce the debt burden and attract the net inflow of foreign capital.
(iii) The adoption of a realistic exchange rate policy.
(iv) Privatisation and commercialisation of public enterprises so as to ensure
their efficiency and effectiveness.
(v) Reduction of complex administrative control.
 Chapter Twenty Eight
Public expenditure
This is an important segment of budgetary activities. It refers to the expenses
incurred by government in the course of its activities. It can as well be defined
as the financial counterpart of limited resources used directly by government or
places at the disposal of certain section of the society for the purpose of
achieving specific objectives such as:
o correcting distortions or market failures;
o regulating private activity that might be harmful to the society;
o providing public goods and services (i.e. economic and social infrastructure);
and
o engage in other productive activities.

Reasons for increase in public expenditure

i. Traditional function. The traditional responsibilities of government such
as defence, maintenance of law and order, as well as general
administration are becoming extensive and cumbersome.
ii. Additional responsibility: Besides the traditional functions of the state,
there is growing awareness of additional responsibilities. Embarking on
welfare measures which include measures to enrich the cultural life of the
society and those designed to provide social securities to the people such
as pensions, old peoples‘ homes, etc.
iii. Population: Increasing population may also be an important determinant
of public expenditure growth. As the population is rising, there will be
change in the demand structure of the society which will evoke some
changes in the provision of public goods and services. The volume of
various public goods and services has to rise in conformity with the
growth of population.
iv. Urbanisation: It has been argued that urbanisation and the resulting
congestion has increased the need for more infrastructure and public
goods and services. For example, a number of incidental services like
those connected with traffic, roads, sanitation, pollution and so on have to
be provided.
v. Inflation: The tendency for prices to go up has equally contributed to the
growth of public expenditure. The increase in prices of input and other
goods purchased by public sector has resulted in an increase in public
expenditure.
vi. Debt servicing: Increasing public expenditure can also be explained in
terms of increasing cost of debt servicing. Incremental provisions made
yearly in the national budget for debt servicing confirms the effect of debt
service on expenditure growth.

Functional classifications of public expenditure

(a) Productive or developmental expenditure are those incurred to create
and maintain social overheads. They include expenses on irrigation, road
construction, rail building, energy and power, communication, education
and healthcare facilities and so on. This category of expenditure increases
productive capacity of the economy and bring income to the government.
Hence, they are classified as productive or investment expenditure. All
expenditure that promotes economic growth and development are termed
as developmental expenditure.
(b) Non-productive or non-developmental expenditure comprises
expenditure on defence, civil administration (that is, police, judiciary and
prisons), interest on borrowing, financial commitment to multilateral
agencies, etc. In other words, unproductive (non– development)
 expenditure do not create any productive asset which brings income to
government.
It is equally possible to reclassify expenditure into these four major functional
areas as follows:
(i) General services : This category covers both civil and defence expenditure
meant to provide basic administrative structure and includes general
administration, tax collection, police, currency and mint, external affairs,
defence, un-planned provision against natural calamities, etc. these are
indispensable activities performed by the state, the benefits of which cannot be
allocated to specific groups, businesses or individuals.
(ii) Social and community services: They cover basic social amenities supplied
directly to the community, households or individuals, and include education,
health care, social security and welfare, housing, community development,
recreational and cultural activities. This class of expenditure is required to
improve and maintain the living conditions of the people.
(iii) Economic services : This category covers all expenditure which directly or
indirectly promote economic activity within the country and incorporate
expenditure on agriculture, industry, transport and communications and other
economic services. They are necessary to create stock of capital that will
generate future flow of income for growth and development of the economy.
(iv) Transfer services : It covers those items which cannot be classified under
the above three heads like interest payments, pensions, food subsidies,
statutory grants-in-aid to states, special loans, aid to foreign countries and the
like. It is known as transfer because the benefit accrues to a third party

Effects of public expenditure

The effects of public expenditure on the economy can be examined by reference
to its impacts on a number of macroeconomic and socio-political activities as
discussed below:
(i) Public expenditure and economic stabilization: Public expenditure as an
anti-cyclical tool can be designed in such a manner as to create effective
demand thereby stimulating investment activities. Stimulation of investment will
lead to increase in employment, output and reduction in price, other things
being equal. It must be emphasised however, that the total demand should be
regulated so that the demand flows would match the supply flows otherwise the
stimulating effect would result into inflationary pressure.
(ii) Public expenditure and production : Public expenditure can help the
economy to attain a higher level of production. Through stimulation of
investment activities, it can help to create conditions favourable for market
forces to push up production. It can be used to create human skills through
education and training and maintenance of social overheads. Expenditure on
education and health promotes human capital development and also promotes
physical stock of capital for growth.
(iii) Public expenditure and economic growth :The goals of planning are
growth and social welfare which can be realised only through government
expenditure. Consequently, the government allocates funds to various sectors
like agriculture, industry, transport, communications, education, energy, health,
exports, etc with a view to achieve impressive growth. Government expenditure
has been very helpful in maintaining balanced economic growth in the country.
(iv) Public expenditure and distribution: An important aspect of the market
mechanism is the inequalities of income and wealth, which arise on account of
natural endowment and get widened through the institutions of private property
and inheritance. Welfare consideration favours an equitable distribution of
income and wealth since the purpose of economic policy is to attain the
maximum level of social benefits possible. A shift towards equality may be
achieved through various forms of public expenditure especially those that are
meant to help the poorer sector of the society.
Principles of public expenditure
(i) Principle of economy: The resources of the economy are limited relative to
need. Public expenditure is the financial counterpart of the limited resources,
which the government uses up directly, or places at the disposal of certain
sections of the society for the purpose of achieving specific objectives. According
to this principle, the use of public expenditure must not be more than what is
just necessary. Utmost care must be taken to avoid waste of public funds.
(ii) Principle of sanction: According to this principle, no public funds must be
used without proper authorization and that funds must be applied only for the
purpose for which they have been sanctioned. In a democratic setting, it is the
responsibility of the legislature to approve expenditure on demand by the
executive authorities.
(iii) Principle of benefit: This is a most fundamental principle of public
spending. According to this principle, money is to be spent to promote maximum
social advantage (MSA) to the economy. Any public expenditure is to be viewed
against the benefit that would accrue from it. Public expenditure is to be
incurred, if only it will be beneficial to the society.
(iv) Principle of surplus: This is completely opposed to the practice of deficit
budgeting. According to this principle, government should be more prudent in
the utilisation of resources and aim at meeting its current expenditure needs out
of its current revenue. It should not overspend and run into debt.
(v) Principle of elasticity: The principle of elasticity requires that public
expenditure should not in any way be rigidly fixed at all times. Rather, it should
be fairly elastic. The public authorities should be in a position to adjust the
expenditure as the situation demands.
(vi) Principle of neutrality: The public expenditure should be organised in such
a way that there would be no adverse effect on production or distribution of
wealth in the country. Public expenditure should aim at stimulating production
and reducing inequalities of income and wealth distribution.

Justification for public enterprises

Public undertakings are enterprises created and owned either wholly or partly by
the public sector as instruments of social control. The main attributes of public
sector enterprises are: state ownership; state control and management; public
accountability; non-profit motive; state privileges; and regulations.

The need for public undertakings can be justified by a number of factors:

(i) Market failure :The operation of market mechanism presupposes that the
economic activities are guided by rational expectation that is, profitability.
However, there are differences in endowment which in most cases determines
productivity and returns. Therefore, public undertakings are required in areas of
the economy which the government deems necessary or very crucial, but which
investors may not be willing to touch because of the huge capital and risks
involved in such ventures. Furthermore, investment in such areas of the
economy may take a longer time to materialise. It is for these reasons that
public enterprises are established to operate in such essential industries of the
economy
(ii) Merit goods :The goods or services considered to be of utmost necessity
such as education, health care services, water supply and the likes cannot be left
in the hands of private investors. They would be under-supplied because
consumers would not be able to pay the market prices of these goods.
Generally, the supply of such services should be adequate and should be
available at low or near zero prices in order to encourage more consumption. In
the case of education, for example, the government may insist that every child
up to a certain age must benefit from free education. In some cases, free
medical services are provided for certain categories of people such as pregnant
women as well as people over 75 years. But when the provision and supply is
dominated by private investors, the prices may be beyond the reach of the
people. Hence, the need for these services to be provided by government
through the establishment of public enterprises thereby making prices become
bearable for the populace.
(iii) Strategic or security consideration Sometimes, governments set up
Public Enterprises because of the very nature of the projects. Currency and mint,
for example cannot be expected to be left in the hands of private investors.
Similarly, some defence industries, certain research and development
organisations would be better handled by public enterprises.
(iv) Promote growth of the economy :Usually, the objective or goal of the
government is that the country should grow and develop at an optimum rate.
This happens if the various components of the country have steady access to
capital stock which may not be readily available through market mechanism.
Therefore, public undertakings directly add to the capital assets of the economy
in the form of roads, bridges, factories and the likes. Without public
undertakings, certain areas of the country‘s economy may be starved of the
capital they require to function even though such areas of the economy are very
important. Hence, another reason why public enterprises are established is to
inject capital into areas of the economy which ordinarily private investors may
shy away from.
(v) Monopoly :Another reason for the establishment of public undertakings is
where the effective control of the economy is sought to be in the hands of the
state rather than individuals. This is the argument of not permitting the
emergence of monopoly in the hands of private investors. The authorities might
plan to have a strategic control over the workings of the whole economy through
controlling of key sectors. This is generally referred to as controlling the
commanding heights of the economy from which, indirectly, the movement of
the economy can be guided.
(vi) Natural resources : One of the potent reasons for public undertakings is
the case of some natural resources like forests, mines, and so on. The
commercial interest of private investors may be in conflict with those of the
state. A private investor, for example, authorised to mine a particular resource
may likely want to make more money by extracting more than expected. This
may result in a large scale and quick denuding of the land thereby causing soil
erosion and upsetting the ecological balance. A public enterprise or undertaking
given the same task would operate based on a defined systematic policy of
extraction thereby avoiding damage to the soil structure.
 Chapter Twenty Nine
IPSAS 1 (IAS 1): Presentation of Financial Statements
Objective
To set out the manner in which general-purpose financial statements shall be
prepared under the accrual basis of accounting, including guidance for their
structure and the minimum requirements for content.
Summary
 Fundamental principles underlying the preparation of financial statements,
including going-concern assumption, consistency of presentation and
classification, accrual basis of accounting, and aggregation and materiality.

 A complete set of financial statements comprises:

o Statement of financial position
o Statement of financial performance
o Statement of changes in net assets/equity
o Cash flow statement
o When the entity makes it approved budget publicly available, a
comparison of budget and accrual amounts
o Notes, comprising a summary of significant accounting policies and
other explanatory notes

 An entity whose financial statements comply with IPSAS shall make an

explicit and unreserved statement of such compliance in the notes.
Financial statements shall not be described as complying with IPSAS unless
they comply with all the requirements of IPSAS.

 Going concern
An entity‘s IPSAS financial statements will be prepared on a going concern
basis unless management has significant concerns about the entity's ability to
continue as a going concern. These uncertainties must be disclosed. If the
financial statements are not prepared on a going concern basis that fact shall
be disclosed together with some other of disclosures [IPSAS 1.38].

 Assets and liabilities, and revenue and expenses, may not be offset unless
offsetting is permitted or required by another IPSAS.

 Materiality and aggregation

Each material class of similar items must be presented separately in the
financial statements. Dissimilar items may be aggregated only if they are
immaterial on an individual basis [IPSAS 1.45].

 Comparative prior-period information shall be presented for all amounts

shown in the financial statements and notes. Comparative information shall
be included when it is relevant to an understanding of the current period‘s
financial statements. In the case presentation or classification is amended,
comparative amounts shall be reclassified, and the nature, amount of, and
reason for any reclassification shall be disclosed.

 The statement of changes in net assets/equity shows all changes in net

assets/equity.
  Financial statements generally to be prepared annually. If the date of the
year-end changes, and financial statements are presented for a period
other than one year, disclosure thereof is required.

 Current/noncurrent distinction for assets and liabilities is normally

required. In general, subsequent events are not considered in classifying
items as current or noncurrent. An entity shall disclose for each asset and
liability item that combines amounts expected to be recovered or settled
both before and after 12 months from the reporting date, the amount to be
recovered or settled after more than 12 months.

 IPSAS 1 specifies minimum line items to be presented on the face of the

statement of financial position, statement of financial performance, and
statement of changes in net assets/equity, and includes guidance for
identifying additional line items, headings, and subtotals.

 Analysis of expenses in the statement of financial performance may be

given by nature or by function. If presented by function, classification of
expenses by nature shall be provided additionally.

 IPSAS 1 specifies minimum disclosure requirements for the notes. These

shall include information about:
 Accounting policies followed
 The judgments that management has made in the process of
applying the entity‘s accounting policies that have the most
significant effect on the amounts recognized in the financial
statements
 The key assumptions concerning the future, and other key sources of
estimation uncertainty, that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities
within the next financial year
 The domicile and legal form of the entity
 A description of the nature of the entity‘s operations
 A reference to the relevant legislation
 The name of the controlling entity and the ultimate controlling entity
of the economic entity

IPSAS 2 (IAS 7): Cash Flow Statements

Objective
To require the presentation of information about historical changes in a public
sector entity‘s cash and cash equivalents by means of a cash flow statement that
classifies cash flows during the period according to operating, investing, and
financing activities.
Summary
 A cash flow statement must analyse changes in cash and cash equivalents
during a period, classified by operating, investing, and financing activities.
 Cash equivalents include investments that are short term (less than three
months from the date of acquisition), readily convertible to known
amounts of cash, and subject to an insignificant risk of changes in value.
Generally, they exclude equity investments.
 Cash flows for operating activities are reported using either the direct
(recommended) or the indirect method.
 Public sector entities reporting cash flows from operating activities using
the direct method are encouraged to provide a reconciliation of the
 surplus/deficit from ordinary activities with the net cash flow from
operating activities.
 Cash flows from interest and dividends received and paid shall each be
disclosed separately and classified as operating, investing, or financing
activities.
 Cash flows arising from taxes on net surplus are classified as operating
unless they can be specifically identified with financing or investing
activities.
 The exchange rate used for translation of cash flows arising from
transactions denominated in a foreign currency shall be the rate in effect
at the date of the cash flows.
 Aggregate cash flows related to acquisitions and disposals of controlled
entities and other operating units shall be presented separately and
classified as investing activities, with specified additional disclosures.
 Investing and financing transactions that do not require the use of cash
shall be excluded from the cash flow statement, but they shall be
separately disclosed.

IPSAS 3: Accounting Policies, Changes in Accounting Estimates

and Errors
Objective
To prescribe the criteria for selecting and changing accounting policies, together
with the accounting treatment and disclosure of changes in accounting policies,
changes in accounting estimates, and corrections of errors.

1. Accounting policies are the specific principles, bases, conventions, rules

and practices applied by an entity in preparing and presenting financial
statements [IPSAS 3.7].

2. A change in accounting estimate is an adjustment of the carrying amount

of an asset or a liability, or the amount of the periodic consumption of an asset,
that results from the assessment of the present status of, and expected future
benefits and obligations associated with that asset or liability [IPSAS 3.7].

3. Prior period errors are omissions from, and misstatements in, an entity's
financial statements for one or more prior periods arising from a failure to use,
or misuse of, reliable information that was available and could reasonably be
expected to have been obtained and taken into account in preparing those
statements. Such errors result from mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of facts, and fraud
[IPSAS 3.7].
4. Materiality is defined as assessing whether an omission or misstatement
could influence decisions of users.

4. Retrospective application is applying a new accounting policy to

transactions, other events, and conditions as if that policy had always been
applied [IPSAS 3.7].

Selecting and Applying Accounting Policies

When a Standard specifically applies to a transaction, other event or condition,
the accounting policy or policies applied to that item must be determined by
applying the Standard [IPSAS 3.9] taking into consideration relevant
Implementation Guidance [IPSAS 3.11].
In the absence of a Standard that specifically applies to a transaction, other
event or condition, management is required to use its judgment in developing
and applying an accounting policy that results in information that is relevant and
reliable [IPSAS 3.12].

In making that judgment, management must refer to, and consider the
applicability of, the following sources in descending order:
• the requirements and guidance in other IPSASs dealing with similar and
related issues
• the definitions, recognition criteria and measurement criteria for assets,
liabilities, revenue and expenses in other IPSAS standards
• most recent:
(a) pronouncements of other standard-setting bodies and
(b) accepted public or private sector practices, to the extent that these do not
conflict with the sources indicated in IPSAS 3.14 [IPSAS 3.15].
Examples of such pronouncements include [IPSAS 3.16]:
• Pronouncements of the IASB
• IFRSs
• IFRIC and SIC interpretations

Consistency of accounting policies

An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless a Standard or specifically
requires or permits categorisation of items for which different policies may be
appropriate. If a Standard requires or permits such categorisation, an
appropriate accounting policy shall be selected and applied consistently to each
category [IPSAS 3.16].

Changes in accounting policies

An entity must apply a change in an accounting policy only if the change:
• is required by a standard; or
• results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or conditions on the
entity's financial position, financial performance, or cash flows [IPSAS 3.17]

Applying an accounting policy to a transaction or event that did not occur

previously or was immaterial is not considered as a change in an accounting
policy [IPSAS 3.21].

If a change in accounting policy is required by an IPSAS standard, the change is

accounted for as required by the specific transition provisions in that standard, if
the no specific transition provisions are included, then the change in accounting
policy is applied retrospectively [IPSAS 3.24]

When the change is applied retrospectively, the opening balance of each

affected component of equity for the earliest prior period presented and the
other comparative amounts disclosed for each prior period presented, are
adjusted, as if the new accounting policy had always been applied. [IPSAS 3.7
and IPSAS 3.27]
• In case it is impracticable to determine either the period-specific effects of the
change for one or more prior periods presented, the entity shall apply the new
accounting policy to the carrying amounts of assets and liabilities as at the
beginning of the earliest period for which retrospective application is practicable.
[IPSAS 3.29].
• In case it is impracticable to determine the cumulative effect, at the beginning
of the current period, of applying a new accounting policy to all prior periods, the
entity shall adjust the comparative information to apply the new accounting
policy prospectively from the earliest date practicable [IPSAS 3.30].

Disclosures - changes in accounting policies

Disclosures relating to changes in accounting policy from the initial application
of a standard [IPSAS 3.33]
• the title of the standard that caused the change
• nature of the change in policy
• a description of the transitional provisions and there possible effect on future
periods
• for the current period and each prior period presented, the amount of the
adjustment to each line item affected
• amount of the adjustment relating to prior periods not presented
• if retrospective application is impracticable, explain and describe how the
change in policy was applied
• these disclosures should not be repeated in subsequent periods.

Disclosures relating to voluntary changes in accounting policy include [IPSAS

3.34]:
• nature of the change in policy
• the reasons why applying the new accounting policy provides reliable and more
relevant information
• for the current period and each prior period presented, the amount of the
adjustment to each line item affected
• amount of the adjustment relating to prior periods not presented
• if retrospective application is impracticable, explain and describe how the
change in policy was applied
• these disclosures should not be repeated in subsequent periods

If an entity has not applied a new standard that has been issued but is not yet
effective, the entity must disclose this fact and any known or reasonably
estimable information relevant to assessing the possible impact that the new
IPSAS will have in the year of initial application

Changes in accounting estimates

Recognise the change prospectively in surplus or deficit in [IPSAS 3.41]:
• Period of change, if it only affects that period; or
• Period of change and future periods
However, to the extent that a change in an accounting estimate gives rise to
changes in assets and liabilities, or relates to an item of net assets/equity, it is
recognised by adjusting the carrying amount of the related asset, liability, or
net/assets/equity item in the period of the change. [IPSAS 3.42]

Disclosures relating - changes in accounting estimates

Disclosures relating to changes in accounting policy :
• Nature and amount of change that has an effect in the current period (or
expected to have in future) [IPSAS 3.44]
• Fact that the effect of future periods is not disclosed because of impracticality
[IPSAS 3.45]
• Subsequent periods need not repeat these disclosures

Errors
Generally an entity is required to correct all material prior period errors
retrospectively in the first set of financial statements authorized for issue after
their discovery by [IPSAS 3.47]:
• restating the comparative amounts for the prior period(s) presented in which
the error occurred; or
 • if the error occurred before the earliest prior period presented, restating the
opening balances for the earliest prior period presented If it is impracticable to
determine the period.

Furthermore, if it is impracticable to determine the cumulative effect, at the

beginning of the current period, of an error on all prior periods, the entity is
required to restate the comparative information to correct the error
prospectively from the earliest date practicable [IPSAS 3.50].

Disclosures – prior period errors

Disclosures related to prior period errors concern [IPSAS 3.54]

• nature of the prior period error

• for each prior period presented, if practicable, disclose the correction to each
line item affected
• amount of the correction at the beginning of earliest period presented
• if retrospective application is impracticable, explain and describe how the error
was corrected
• subsequent periods need not to repeat these disclosures.

IPSAS 4: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Objective
To prescribe the accounting treatment for an entity‘s foreign currency
transactions and foreign operations.

Key definitions [IPSAS 4.10]

i. Functional currency: the currency of the primary economic environment in
which the entity operates.
ii. Presentation currency: the currency in which the entity‘s financial
statements are presented.
iii. Foreign currency: currency other than the entity‘s functional currency
iv. Exchange difference: the difference resulting from translating a given
number of units of one currency into another currency at different exchange
rates.
v. Foreign operation: a controlled entity, associate, joint venture or a branch
whose activities are based or conducted in a country or currency other than
that of the reporting entity.

Summary
 First, determine the reporting entity‘s functional currency — the
currency of the primary economic environment in which the entity
operates.
 Next, translate all foreign currency items into the functional
currency:
 At the date of transaction, record using the spot exchange rate for
initial recognition and measurement.
 At subsequent reporting dates:
 Use closing rate for monetary items
 Use transaction-date exchange rates for nonmonetary items carried
at historical cost
 Use valuation-date exchange rates for nonmonetary items that are
carried at fair value
 Exchange differences arising on settlement of monetary items and
on translation of monetary items at a rate different from when
 initially recognized are included in surplus or deficit, with one
exception: exchange differences arising from monetary items that
form part of the reporting entity‘s net investment in a foreign
operation are recognized in the consolidated financial statements
that include the foreign operation in a separate component of net
assets/equity; these differences will be recognized in the surplus or
deficit on disposal of the net investment.
 The results and financial position of an entity‘s foreign operations
whose functional currency is not the currency of a hyperinflationary
economy are translated into a different presentation currency using
the following procedures:
 Assets and liabilities for each statement of financial position
presented (including comparatives) are translated at the closing
rate at the date of that statement of financial position.
 Revenue and expenses of each statement of financial performance
(including comparatives) are translated at exchange rates at the
dates of the transactions.
 All resulting exchange differences are recognized as a separate
component of net assets/equity.
 Special rules apply for translating into a presentation currency the
financial performance and financial position of an entity whose
functional currency is hyperinflationary.

IPSAS 5 BORROWING COSTS

IPSAS 5 Borrowing Costs prescribes the accounting treatment for borrowing
costs. Generally IPSAS 5 requires the immediate expensing of borrowing costs.
Capitalization of borrowing costs is allowed if they are directly related to the
acquisition, construction or production of a qualifying asset.

Capitalization should start when [IPSAS 5.31]:

o outlays are being incurred
o borrowing costs are being incurred
o activities that are necessary to prepare the asset for its intended use or sale
are in progress

Suspension of borrowing cost

Capitalization is suspended during periods in which active development is
interrupted [IPSAS 5.34].
There may be periods when the development of an asset is temporarily
suspended. During such inactive periods the capitalisation of borrowing costs
should be discontinued and instead finance costs incurred during this period
should be immediately recognised in profit or loss.

It is possible that a temporary delay is part of the production or construction

process, and during such periods borrowing costs should continue to be
capitalised. Examples include where the maturity of an asset is an essential part
of the production process or where there is expected non-activity due to
geological features (such as periods of very high tides).

Cessation of capitalization is required when substantially all of the activities

necessary to prepare the asset for its intended use or sale are complete [IPSAS
5.36]. If there are only minor modifications outstanding, this indicates that
substantially all of the activities are complete. [IPSAS 5.37].
In case a construction of an asset is completed in stages, and the part can be
used while construction of the other parts continues, capitalization of attributable
borrowing costs should cease when substantially all of the activities necessary to
prepare that part for its intended use or sale are complete. [IPSAS 5.38].

Summary

 Borrowing costs include interest, amortisation of discounts or premiums on

borrowings, and amortisation of ancillary costs incurred in the arrangement
of borrowings.
 Two accounting treatments are allowed:

 Expense model: Charge all borrowing costs to expenses in the period

when they are incurred;
 Capitalisation model: Capitalise borrowing costs which are directly
attributable to the acquisition or construction of a qualifying asset, but
only when it is probable that these costs will result in future economic
benefits or service potential to the entity, and the costs can be
measured reliably. All other borrowing costs that do not satisfy the
conditions for capitalisation are to be expensed when incurred.

Where an entity adopts the capitalisation model, that model shall be

applied consistently to all borrowing costs that are directly attributable
to the acquisition,

construction, or production of all qualifying assets of the entity.

Investment income from temporary investment shall be deducted from
the actual borrowing costs.

 A qualifying asset is an asset which requires a substantial period of time to

make it ready for its intended use or sale. Examples include office buildings,
hospitals, infrastructure assets such as roads, bridges, and power-generation
facilities, and some inventories.
 If funds are borrowed generally and used for the purpose of obtaining the
qualifying asset, apply a capitalisation rate (weighted-average of borrowing
costs applicable to the general outstanding borrowings during the period) to
outlays incurred during the period, to determine the amount of borrowing
costs eligible for capitalisation.

Disclosures
Following disclosures are required:
• the accounting policy adopted (under benchmark [IPSAS 5.16] and alternative
treatment [IPSAS 5.40])
• amount of borrowing cost capitalized during the period [IPSAS 5.40]
• capitalization rate used [IPSAS 5.40]

IPSAS 6: (IAS 27) CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

IPSAS 6 Consolidated and Separate Financial Statements prescribes when an
entity must consolidate another entity and includes guidance to assess control.
IPSAS 6 furthermore includes guidance for the preparation of separate financial
statements and disclosures.
IPSAS 6 shall be applied:
• for the preparation and presentation of the consolidated financial statements
for an economic entity [IPSAS 6.1]
• in accounting for controlled entities, jointly controlled entities, associates and
when an entity elects, or is required by local regulations, to present separate
(non-consolidated) financial statements [IPSAS 6.3].

Key definitions [IPSAS 6.7]

a. Consolidated financial statements: the financial statements of an
economic entity presented as those of a single entity.
b. Controlled entity: an entity, including an unincorporated entity such as a
partnership, which is under the control of another entity (known as the
controlling entity).
c. Controlling entity: an entity that has one or more controlled entities.
d. Separate financial statements: presented by a controlling entity, an
investor in an associate, or a venturer in a jointly controlled entity, in which the
investments are accounted for on the basis of the direct net assets/equity
interest rather than on the basis of the reported results and net assets of the
investees.
e. Control: The power to govern the financial and operating policies of another
entity so as to benefit from its activities [IPSAS 2.8].
f. Economic entity: group of entities comprising a controlling entity and one or
more controlled entities [IPSAS 1.7]

Control is presumed to exists in case of following power indicators [IPSAS 6.39]:

• the entity has, directly or indirectly through controlled entities, ownership of a
majority voting interest in the other entity.
• the entity has the power, either granted by or exercised within existing
legislation, to appoint or remove a majority of the members of the board of
directors or equivalent governing body, and control of the other entity is by that
board or by that body.
• the entity has the power to cast, or regulate the casting of, a majority of the
votes that are likely to be cast at a general meeting of the other entity.
• the entity has the power to cast the majority of votes at meetings of the board
of directors or equivalent governing body, and control of the other entity is by
that board or by that body.
Unless there is clear evidence that another entity holds control.

Control is presumed to exists in case of following benefit indicators [IPSAS

6.39]:
• the entity has the power to dissolve the other entity and obtain a significant
level of the residual economic benefits or bear significant obligations. For
example the benefit condition may be met if an entity had responsibility for the
residual liabilities of another entity.
• the entity has the power to extract distributions of assets from the other
entity, and/or may be liable for certain obligations of the other entity.
Unless there is clear evidence that another entity holds control.

Disclosures
Disclosures required in consolidated financial statements [IPSAS 6.62]
• list of the significant controlled entities
• if a controlled entity is not consolidated because it is exclusively held with a
view to dispose, this fact should be disclosed;
• summarized financial information of controlled entities, either individually or in
groups, that are not consolidated, including:
a. total assets
b. total liabilities
c. revenues
d. surplus or deficit;
• name of any controlled entity in which the controlling entity holds an
ownership interest and/or voting rights of 50% or less, together with an
explanation of how control exists;
• the reasons why the ownership interest of more than 50% of the voting or
potential voting power of an investee does not constitute control;
• the reporting date of the financial statements included in the consolidated
financial statements in case the date is different from that of the controlling
entity, and the reason for using a different reporting date or period
• the nature and extent of any significant restrictions (e.g., resulting from
borrowing arrangements or regulatory requirements) on the ability of controlled
entities to transfer funds to the controlling entity in the form of cash dividends

Disclosures required in separate financial statements that are prepared for a

controlling entity that elects not to prepare consolidated financial statements:
[IPSAS 6.63]
• the fact that the financial statements are separate financial statements; that
the exemption from consolidation has been used; the name of the entity whose
consolidated financial statements that comply with IPSASs have been produced
for public use and the jurisdiction in which it operates; and the address where
those consolidated financial statements can be obtained,
• a list of significant controlled entities, jointly controlled entities, and associates,
including the name, jurisdiction in which it operates, proportion of voting power
held (if different from proportion of ownership interest held), and the method
that was used to account for these entities.

Disclosures required in the separate financial statements of a controlling entity,

investor in a jointly controlled entity, or investor in an associate: [IPSAS 6.64]
• the fact that the statements are separate financial statements and the reasons
why those statements are prepared if not required by law, legislation or
authority
• a list of significant controlled entities, jointly controlled entities, and associates,
including the name, the jurisdiction proportion of ownership interest and, if
different, proportion of voting power held, and the method that was used to
account for these entities.

IPSAS 7 (IAS 28): Investments in Associates

Overview
IPSAS 7 Investments in Associates prescribes the accounting treatment for
investments in Associates. Associates will be accounted for using the equity
method and concern entities where the investor has significant influence.

Key definitions [IPSAS 7.7]

a. An associate: an entity, including an unincorporated entity such as a
partnership, over which the investor has significant influence, and that is neither
a controlled entity nor an interest in a joint venture.
b. Equity method: a method of accounting whereby the investment is initially
recognized at cost, and adjusted thereafter for the post-acquisition change in the
investor‘s share of net assets/equity of the investee. The surplus or deficit of the
investor includes the investor‘s share of the surplus or deficit of the investee.
c. Significant influence: is the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control over
those policies.
Identification of associates
Significant influence is a matter of judgment based on the definition of
significant influence and the nature particular of the relationship between the
investor and the investee [IPSAS 7.11].

Significant influence is presumed when holding 20% or more of the voting power
(directly or through subsidiaries) unless the contrary can be clearly
demonstrated. If the holding is less than 20%, the investor will be presumed not
to have significant influence unless such influence can be clearly demonstrated
[IPSAS 7.13]

Significant influence is in most case evidenced by [IPSAS 7.12]:

• Representation on the board of directors or equivalent governing body of the
investee
• Participation in policy-making processes, including participation in decisions
about dividends or similar distributions
• Material transactions between the investor and the investee
• Interchange of managerial personnel
• Provision of essential technical information

Potential voting rights should be considered in determining whether significant

influence exists [IPSAS 7.14].

Accounting for associates

In consolidated financial statements the equity method of accounting should be
used for investments in associates, except in the following three circumstances
[IPSAS 7.19]:
• the entity is acquired and held exclusively with a view to sell within 12 months
from acquisition and management is actively seeking a buyer. The investment in
the associate should be classified as held for trading and accounted for under
IPSAS 29 [IPSAS 7.20].
• a controlling entity that is exempted from preparing consolidated financial
statements by paragraph 16 of IPSAS 6 may prepare separate financial
statements as its primary financial statements. In those separate statements,
the investment in the associate may be accounted for by the cost method or as a
financial instrument under IPSAS 29. [IPSAS 7.41]
• the equity method should not be applied if all of the four following conditions
are met :

1) the investor is
• itself a wholly-owned controlled entity and users of such financial statements
are unlikely to exist or their information needs are met by its controlling entity‘s
consolidated financial statements;
• a partially-owned controlled entity of another entity and its other owners,
including those not otherwise entitled to vote, have been informed about, and do
not object to, the controlling entity not presenting consolidated financial
statements
2) The investor’s debt or equity instruments are not traded in a public
market (a domestic or foreign stock exchange or an over-the-counter market,
including local and regional markets)
3) the investor did not file, nor is it in the process of filing, its financial
statements with a securities commission or other regulatory organization for the
purpose of issuing any class of instruments in a public market
4) the ultimate or any intermediate controlling entity of the investor produces
consolidated financial statements available for public use that comply with
IPSASs.
Application of the equity method
a. Main principle: Under the equity method of accounting, an equity
investment is initially recorded at cost and is subsequently adjusted to reflect
the investor's share of the net profit or loss of the associate [IPSAS 7.17].

b. Reporting date of associate's financial statements: for the application of

the equity method, the investor should use the most recent financial statements
of the associate, when the dates reporting dates are different the associate
should prepare financial statements on the reporting date of the investor as
unless it is impracticable to do so [IPSAS 7.30] In case it is impracticable, the
most recent available financial statements of the associate should be used and
adjustments should be made for significant transactions or events that have
occurred between the reporting period ends. In any case the difference between
the reporting dates cannot exceed three months [IPSAS 7.31]

c. Uniform accounting policies: accounting policies consistent with these of

the investor should be used for the associate‘s financial statements [IPSAS
7.31]. If different policies are used, adjustments should be made to reflect the
investor's accounting policies for the purpose of applying the equity method
[IPSAS 7.32].

d. Distributions and other adjustments to carrying amount: Distributions

received from the investee reduce the carrying amount of the investment.
Adjustments to the carrying amount may be necessary for changes in the
investee's net assets/equity that have not been included in surplus or deficit (for
example, revaluations and foreign exchange translations) [IPSAS 7.17].

e. Potential voting rights: Potential voting rights are only considered in

determining whether significant influence exists, the investor's share of surplus
or deficit of the investee and of changes in the investee's net assets/equity is
determined on the basis of present ownership interests. It should not reflect the
possible exercise or conversion of potential voting rights [IPSAS 7.18].

f. Elimination of transactions with associates: surpluses and deficits

resulting from upstream and downstream transactions (transactions between
investor and associate) should be eliminated to the extent of the investor's
interest in the associate [IPSAS 7.28].

g. Implicit goodwill and fair value adjustments: Goodwill relating to an

associate is included in the fair value of an associate. On acquisition of the
investment in an associate, any difference (whether positive or negative)
between the cost of acquisition and the investor's share of the fair values of the
net identifiable assets of the associate is accounted for like goodwill in
accordance with relevant national or international standards (e.g. IFRS 3
Business Combinations). Appropriate adjustments to the investor's share of
surpluses and deficits after acquisition are made to account for additional
depreciation of the depreciable assets based on their fair values at the
acquisition date [IPSAS 7.29].

Impairment Losses
1. Deficits in excess of investment: In case an investor's share of deficits of
an associate equals or exceeds its interest in the associate, the investor
discontinues recognizing its share of further losses. The interest in an associate
is the carrying amount of the investment in the associate under the equity
method together with any long-term interests that, in substance, form part of
the investor's net investment in the associate [IPSAS 7.35]. After the investor's
interest is reduced to zero, a provision or a liability for additional deficits/losses
should be recognized but only to the extent that the investor has incurred legal
or constructive obligations or made payments on behalf of the associate. If
surpluses are reported subsequently, the investor resumes recognizing its share
of those surpluses only after its share of the surpluses equals the share of
deficits not recognized [IPSAS 7.36].

2. Further impairment test: After application of the above described method,

the impairment indicators of IPSAS 29 Financial Instruments: Recognition and
Measurement, apply to investments in associates [IPSAS 7.37]. If in indication
for impairment exists, the methods described in IPSAS 21 Impairment of Non-
Cash-Generating Assets and IPSAS 26 Impairment of Cash-Generating
Assets should be applied to calculate and allocate the incurred impairment
[IPSAS 7.39]. The recoverable amount of an investment in an associate is
assessed for each associate individually, except when the associate does not
generate cash flows independently [IPSAS 7.40].

Discontinuation of the equity method

Use of the equity method should cease from the date that significant influence
ceases. The carrying amount of the investment at that date should be regarded
as a new cost basis [IPSAS 7.24-25].

Presentation of associates accounted for using equity method

Associates accounted for using the equity method should be classified in the
financial statements as non-current [IPSAS 7.44].

Separate financial statements of the investor

In the separate financial statements of the investor the associate should be
accounted for [IPSAS 7.41]:
• using the equity method
• at cost
• as a financial instrument in accordance with IPSAS 29

Disclosures
Disclosures required [IPSAS 7.43]:
• fair value of investments in associates for which there are published price
quotations
• summarized financial information of associates, including the aggregated
amounts of assets, liabilities, revenues, and surplus or deficits
• an explanation when investments of less than 20% are considered as having
significant influence
• an explanation when investments of more than 20% are not considered as
having significant influence (versus the presumption of significant influence)
• the use and the reason of a different reporting date of the financial statements
of an associate
• nature and extent of any significant restrictions on the ability of associates to
transfer funds to the investor in the form of cash dividends, similar distributions
or repayment of loans or advances
• unrecognized share of losses of an associate, both for the period and
cumulatively, if an investor has discontinued recognition of its share of losses of
an associate
• the fact that an associate is not accounted for using the equity method
• summarized financial information of associates, either individually or in groups,
that are not accounted for using the equity method, including the amounts of
total assets, total liabilities, revenues, and surpluses or deficits
The following disclosures are also required:
• the investor‘s share of the surplus or deficit and the carrying amount of
associates accounted for using the equity method [IPSAS 7.44]
• the investor‘s share of discontinuing operations of associates accounted for
using the equity method [IPSAS 7.44]
• The investor's share of changes recognized directly in the associate's net
assets/equity should also be recognized in net assets/equity by the investor,
with disclosure in the statement of changes in net assets/equity as required by
IPSAS 1 Presentation of Financial Statements [IPSAS 7.45]
• the investor's share of the contingent liabilities of an associate incurred jointly
with other investors [IPSAS 7.46]
• contingent liabilities that arise because the investor is severally liable for all or
part of the liabilities of the associate [IPSAS 7.47]

Venture capital organizations, mutual funds, unit trusts and other similar entities
are required to provide disclosures about nature and extent of any significant
restrictions on transfer of funds by associates [IPSAS 7.1].

IPSAS 9 (IAS 18): Revenue

Objective
To prescribe the accounting treatment for revenue arising from exchange
transactions and events.

Summary
 IPSAS 9 applies to revenue arising from the following exchange
transactions and events:
o The rendering of services
o The sale of goods
o The use of others of entity assets yielding interest, royalties, and
dividends
 Revenue shall be measured at the fair value of the consideration received
or receivable.
 Recognition:
o From sale of goods: When significant risks and rewards have been
transferred to purchaser, loss of effective control by seller, amount
of revenue can be reliably measured, it is likely that the economic
benefits or service potential associated with the transaction will flow
to the entity, and the costs incurred or to be incurred in respect of
the transaction can be measured reliably.
o From rendering of services: Reference to the stage of completion of
the transaction at the reporting date, provided the outcome of the
transaction can be estimated reliably. If the outcome of the
transaction cannot be estimated reliably, revenue must be
recognized only to the extent of the expenses recognized that are
recoverable.
 For interest, royalties, and dividends: Recognized when it is probable that
economic benefits or service potential will flow to the entity, and the
amount of the revenue can be measured reliably.
o Interest — on a time proportion basis that takes into account the
effective yield on the asset.
o Royalties — as they are earned in accordance with the substance of
the relevant agreement.
o Dividends or their equivalents — when the shareholder‘s or the
entity‘s right to receive payment is established
IPSAS 10 (IAS 29): Financial Reporting in Hyperinflationary Economies
Overview
IPSAS 10 prescribes the accounting treatment of financial statements of entities
in hyperinflationary economies to ensure that these financial statements are
useful. The financial statements (including comparatives) should be restated to
reflect the change in the purchasing power on the basis of a general price index.

Guidance on determining if an Economy is Hyperinflationary

IPSAS 10 does not establish an absolute rate or definition of hyperinflation.
Instead IPSAS 10 includes characteristics of an economy that may be indicators
of hyperinflation, but allows judgment to asses when restatement of financial
statements becomes is required [IPSAS 10.5].
 the general population prefers to keep its wealth in non-monetary assets or
in a relatively stable foreign currency. Amounts of local currency held are
immediately invested to maintain purchasing power
 the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be
quoted in that currency
 sales and purchases on credit take place at prices that compensate for the
expected loss of purchasing power during the credit period, even if the
period is short
 interest rates, wages, and prices are linked to a price index
 the cumulative inflation rate over three years is around 100% or more.

Restatement of financial statements

The key principle in IPSAS 10 is that for financial statements of an entity, with a
functional currency of a hyperinflationary economy, should be stated in terms of
the measuring unit current at the reporting date [IPSAS 10.11]. Budget figures
included in the financial statements [IPSAS 10.10] and comparative amounts for
prior period(s) should be restated into the same current measuring unit at the
reporting date [IPSAS 10.11].
The surplus or deficit on the net monetary position should be recognized in the
statement of financial performance and disclosed separately [IPSAS 10.12].

Restatement of Financial Position (“Balance Sheet”)

Restatements are made by applying a general price index [IPSAS 10.14].
Monetary items that are already stated at the measuring unit at the reporting
date are not restated [IPSAS 10.15]. Non-monetary items, not already carried at
fair value or net realizable value, are restated [IPSAS 10.17] based on the
change in the general price index between the date those items were acquired
and the reporting date [IPSAS 10.18].

When a non-monetary item has been revalued at another date than the
acquisition date, the price evolution between the revaluation date and the
reporting date is taken into account based on the general price index [IPSAS
10.21].

Relevant impairment test should be performed according to IPSAS 21 and 26 to

determine if the restated amount should be reduced to the recoverable amount
of the non-monetary asset [IPSAS 10.22].

Restatement of Financial Performance (“Income Statement”)

Restatements are made by application of the change of a general price index to
all revenues and expenses since the date they were actually recorded [IPSAS
10.27].

Gain or Loss on the Net Monetary Position

The gain or loss on the net monetary position should be included in the
Statement of Financial Performance [IPSAS 10.29] and disclosed separately in
this statement [IPSAS 10.12]. This gain or loss is an indicator of the purchase
power gain or loss as a consequence of the inflation and may be derived by
different methods [10.28].

Consolidation
Controlling entities, reporting in the currency of a hyperinflationary economy
themselves, consolidating entities in hyperinflationary economies should restate
the financial statements of that entity into the unit current at the reporting
date before consolidation [IPSAS 10.32].

Economies Ceasing to be Hyperinflationary

When an economy ceases to be hyperinflationary an entity should stop restating
its financial statements according to IPSAS 10. The amounts included in the
financial statements of the previous reporting period restated at the unit current
at that reporting date shall be used as the basis for the carrying amount in its
subsequent financial statements [IPSAS 10.35].
Disclosures
• The fact that financial statements and prior period comparatives have been
restated for changes in the general purchasing power of the functional currency
[IPSAS 10.36 (a)]
• Identity and level of the price index at the reporting date and changes in the
index during the current and previous reporting periods [IPSAS 10.36(b)]

Note that the surplus or deficit on the net monetary position should be disclosed
on the face of the Statement of Financial Performance [IPSAS 10.12]. from
exchanges of goods or services [IPSAS 9.39(c)]

IPSAS 11: Construction Contracts.

Overview
IPSAS 11 prescribes the accounting treatment for Construction Contracts. This
standard provides requirements on the allocation of revenue and costs to
accounting periods in which construction work is performed. Contract revenues
and costs are recognized by reference to the stage of completion of contract
activity where the outcome of the construction contract can be estimated
reliably, otherwise revenue is recognised only to the extent of recoverable
contract costs incurred.

Definitions
a. Construction contract: a contract or a similar binding arrangement,
specifically for the construction of an asset or a combination of assets that are
closely interrelated or interdependent in terms of their design, technology, and
function or their ultimate purpose or use [IPSAS 11.4].
b. Contractor: an entity that performs construction work as specified in a
construction contract
c. Cost plus or cost-based contract: construction contract in which the
contractor is reimbursed for allowable or otherwise defined costs and, in the case
of a commercially based contract, an additional percentage of these costs or a
fixed fee, if any [IPSAS 11.4]
d. Fixed price contract: a construction contract in which the contractor agrees
to a fixed contract price, or a fixed rate per unit of output, which may be subject
to cost escalation clauses [IPSAS 11.4]
When a construction contract covers two or more assets, the construction of
each asset should be treated separately if [IPSAS 11.13]:
1. separate proposals were submitted for each asset
2. portions of the contract relating to each asset were negotiated separately
3. costs and revenues of each asset can be identified

A group of contracts should be accounted for as a single contract when [IPSAS

11.14]:
4. they were negotiated together
5. the work is interrelated
6. the contracts are performed concurrently or in a continuous sequence

In case a contract gives the customer an option to order additional assets,

construction of each additional asset should be accounted for as a separate
contract if [IPSAS 11.15]:
7. the additional asset differs significantly from the original asset(s) or
8. the price of the additional asset is separately negotiated.

Determination of contract revenue and contract costs

Contract revenue includes [IPSAS 11.16]:
• the amount agreed in the contract initially
• contract work variations, claims and incentive payments

Contract work variations, claims and incentive payments are only included to the
extent that (i) they are expected to generate revenue and (b) that they can be
measured reliably [IPSAS 11.16].

Contract costs concern costs [IPSAS 11.23]:

• Directly relating to the specific contract

• Costs that are attributable to the general activity of the contractor's to the
extent that they can be systematically and rationally allocated to the contract

• other costs that can be specifically charged to the customer under the terms of
the contract.

Accounting treatment prescribed by IPSAS 11

1) The outcome of the contract can be estimated reliably: Application of
the percentage of completion method: In case the outcome of a construction
contract can be estimated reliably, revenue and costs related to the contract
should be recognized in proportion to the stage of completion of contract at the
reporting date [IPSAS 11.30].
An entity can estimate the outcome of a contract reliably, when it is able to
make a reliable estimate of total contract revenue, the stage of completion, and
the costs to complete the contract [IPSAS 11.31-32].

The stage of completion of a contract can be determined in different ways,

including the following methods [IPSAS 11.38]:
(i) the proportion that contract costs incurred for work performed to date bear to
the estimated total contract costs
(ii) surveys of work performed
(iii) completion of a physical proportion of the contract work.

2) The outcome of the contract cannot be estimated reliably

In case the outcome cannot be estimated reliably, contract revenue should only
be recognized to the extent that contract costs incurred are expected to be
recoverable and contract costs should be expensed as incurred [IPSAS 11.40].
Expected deficits on construction contracts should be recognized immediately as
an expense as soon as such deficit is probable, but only when it is intended at
inception that the contract costs are to be fully recovered [IPSAS 11.44]. In case
of a non-commercial contract where the contract costs will not be fully recovered
from the parties to the contract, when the deficit will be compensated by a
government appropriation, general purpose grant or allocation of government
funds to the contractor, the requirement of the recognition of the deficit does not
apply [IPSAS 11.46].

Presentation
The entity has to present amounts relating to contract work [IPSAS 5.53]:
As an asset: the gross amount due from customers for contract work
As a liability: the gross amount due to customers for contract work

Disclosures
Following disclosures are required:
• amount of contract revenue recognized [IPSAS 11.50(a)]
• method used to determine contract revenue [IPSAS 11.50(b)]
• method used to determine stage of completion of the contract [IPSAS
11.50(c)]

For contracts in progress at the reporting date [IPSAS 11.51]

• aggregate costs incurred and recognized surpluses (less recognized deficits)
• amount of advances received
• amount of retentions

The standard further states that an entity should present:

(a) The gross amount due from customers for contract work as an asset; and
(b) The gross amount due to customers for contract work as a liability.

IPSAS 12 (IAS 2): Inventories

Overview
IPSAS 12 prescribes the accounting treatment for most kinds of inventories. This
standard requires inventories to be measured at the lower of cost and net
realizable value (NRV) and provides guidance on the acceptable cost formulas,
including specific identification, first-in first-out (FIFO) and weighted average
cost.

Inventories
Inventories are assets [IAS 12.9]:
(a) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
(b) held for sale in the ordinary course of operations;
(c) in the process of production for such sale;
(d) Held for sale or distribution in the ordinary course of operations.
(e) To be consumed in the production of goods or services for sale;

Measurement of inventories
Inventories are required to be stated at the lower of cost and net realisable
value (NRV), except when [IAS 12.15]:
 Acquired through a non-exchange transaction: measurement at fair value
(FV) at the date of acquisition
 Held for distribution at no or for a nominal charge or held for the production
of these goods: measurement at lower of cost or replacement cost

Cost should include all [IPSAS 12.18]:

• costs of purchase (including taxes, transport, and handling) net of trade
discounts received
• costs of conversion (including fixed and variable manufacturing overheads) and
• other costs incurred in bringing the inventories to their present location and
condition
Cost of inventory specifically excludes [IPSAS 12.25 and 12.27]:
• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreign exchange differences arising directly on the recent acquisition of
inventories invoiced in a foreign currency
• interest cost when inventories are purchased with deferred settlement terms.

IPSAS 13: LEASES

Overview
IPSAS 13 prescribes the accounting treatment and related disclosures for
operational and financial leases, both for lessors and lessees. This standard
requires leases to be classified into financial and operational leases on the basis
of the transfer of the risks and rewards related to the ownership of the asset.

Key Definitions [IPSAS 13.8]

Lease: an agreement whereby the lessor conveys to the lessee the right to use
an asset for an agreed period of time, in return for a payment or series of
payments

Finance lease: a lease that transfers substantially all the risks and rewards
incidental to ownership of an asset. Title may or may not eventually be
transferred.

Operating lease: a lease other than a finance lease

The Commencement of the Lease Term: is the date from which the lessee is
entitled to exercise its right to use the leased asset. It is the date of initial
recognition of the lease (i.e. the recognition of the lease, as appropriate).

Contingent Rent: is that portion of the lease payments that is not fixed in
amount but is based on the future amount of a factor that changes other than
the passage of time (e.g. percentage of future sales, amount of future use,
future prices, and future market rates of interest)

Gross Investment in the lease: is the aggregate of:

(a) The minimum lease payments receivable by the lessor under a finance lease;
and
(b) Any unguaranteed residual value accruing to the lessor. Guaranteed residual
value is;
(i) For a lease, that part of the residual value that is guaranteed by the lessee or
by a party related to the lessee (the amount of the guarantee being the
maximum amount that could, in any event, become payable); and
(ii) For a lessor, that part of the residual value that is guaranteed by the lessee
or by a third party unrelated to the lessor that is financially capable of
discharging the obligation under the guarantee
The Inception of the lease: is the earlier of the date of the lease agreement
and date of commitment by the parties to the principal provisions of the lease.
As at this date:
(a) A lease is classified as either an operating or a finance lease; and
(b) In the case of a finance lease, the amounts to be recognised at the
commencement of the lease term are determined

Initial Direct Costs: are incremental costs that are directly attributable to
negotiating and arranging a lease, except for such costs incurred by
manufacturer or trade lessors.

The Interest Rate Implicit in the Lease: is the discount rate that, at the
inception of the lease, causes the aggregate present value of:
(a) The minimum lease payments; and
(b) The unguaranteed residual value; to be equal to the sum of :
(i) The fair value of the leased asset; and
(ii) Any initial direct costs of the lessor.

A Lease: is an agreement whereby the lessor conveys to the lessee in return for
a payment or series of payments the right to use an asset for an agreed period
of time.

The Lease Term: is the non-cancellable period for which the lessee has
contracted to leasee the asset together with any further terms for which the
lease has the option to continue to lease the asset, with or without further
payment, when at the inception of the lease it is reasonably certain that the
lessee will exercise the option.

The Lessee’s Incremental Borrowing Rate of Interest: is the rate of

interest the lessee would have to pay on a similar lease or, if that is not
determinable, the rate that, at the inception of the lease, the lessee would incur
to borrow over a similar term, and with a similar security,
the funds necessary to purchase the asset.

Minimum Lease Payment: are the payments over the lease term that the
lessee is, or can be, required to make, excluding contingent rent, costs for
services and, where appropriate, taxes to be paid by and reimbursed to the
lessor, together with:
(i) For a lessee, any amounts guaranteed by the lessee or a party related to the
lessee; or
(ii) For a lessor, any residual value guaranteed to the lessor by:
 The lessee;
 A party related to the lessee; or
 An independent third party unrelated to the lessor that is financially
capable of discharging the obligations under the guarantee.
However, if the lessee has an option to purchase the asset at a price that is
expected to be sufficiently lower than the fair value at the date the option
becomes exercisable for it to be reasonably certain, at the inception of lease,
that the option will be exercised, the minimum lease payments comprise
minimum payment required to exercise it.

Net Investment in the Lease: is the gross investment in the lease discounted
at the interest rate implicit in the lease.

A non- cancellable Lease: is a lease that is cancellable only:

(i) Upon the occurrence of some remote contingency;
(ii) With the permission of the lessor;
(iii) If the lessee enters into a new lease for the same or an equivalent asset
with the same lessor; or
(iv) Upon payment by the lessee of such an additional amount that, at inception
of the lease, continuation of the lease is reasonably certain.

Unearned Finance Revenue: is the difference between:

 The gross investment in the lease; and
 The net investment in the lease

Unguaranteed Residual Value: is that portion of the residual value of the

leased asset, the realization of which by the lessor is not assured or is
guaranteed solely by a party related to the lessor.

Useful Life: is the estimated remaining period, from the commencement of the
lease term, without limitation by the lease term, over which the economic
benefits or service potential embodied in the asset are expected to be consumed
by the entity

Accounting treatment by lessees

Lessee - Finance leases:
• an asset and a liability should be recorded
i. at commencement of the lease term
ii. at the lower of the fair value of the asset and the present value of the
minimum lease payments (discounted at the interest rate implicit in the lease, if
practicable to determine, otherwise the entity's incremental borrowing rate
should be used) [IPSAS 13.28]
• lease payments are apportioned between the finance charge and repayment of
principal by using the implicit rate of interest (the finance charge to be allocated
so as to produce a constant periodic rate of interest on the remaining balance of
the liability) [IPSAS 13.34]
• the assets held under finance leases should have consistent depreciation
policies with assets that are owned (in accordance with IPSAS 17 and IPSAS 31).
If no reasonable certainty exists that the lessee will obtain ownership at the end
of the lease – the asset should be depreciated over the shorter of the lease term
or the useful life [IPSAS 13.36]

Lessee – Operating leases:

• the lease payments are usually recognized as an expense in the income
statement over the lease term on a straight-line basis, unless another
systematic basis is more representative of the time pattern of the user's benefit
[IPSAS 13.42]

Accounting by lessors
Lessor - Finance leases:
• initially, the asset is derecognised and a receivable recognised, equal to the
net investment in the lease, at an amount equal to the net investment in the
lease [IPSAS 13.48]
• finance revenue should be recognized based on a pattern reflecting a constant
periodic rate of return on the lessor‘s net investment [IPSAS 13.51]
• manufacturers or trader lessors should recognize gains or losses in the same
period as they would for outright sales [IPSAS 13.54]. If artificially low rates of
interest are quoted gains resulting from the sale should be restricted to that
what would apply if a market conform rate of interest would have been charged
[IPSAS 13.55].
Lessor - Operating leases:
• assets held for operating leases should be presented in the statement of
financial position of the lessor according to the nature of the asset [IPSAS 13.62]
Lease revenue should be recognized over the lease term on a straight-line basis,
unless another systematic basis is more representative of the time pattern in
which use benefit is derived from the leased asset is diminished [IPSAS 13.63]
• for operating leases, initial direct costs incurred in negotiating and arranging
an operating lease should be added to the carrying amount of the leased asset
and recognise them as an expense over the lease term on the same basis as the
lease revenue [IPSAS 13.65]
• leased assets should have consistent depreciation policies with the lessor‘s
normal policies for similar assets (in accordance with IPSAS 17 and IPSAS 31)
[IPSAS 13.66].

Sale and leaseback transactions

For a sale and leaseback transaction resulting in a finance lease, any excess of
proceeds over the carrying amount should be deferred and amortized over the
lease term [IPSAS 13.71].

For a transaction resulting in an operating lease: [IPSAS 13.73]

• if clear that transaction is at fair value - the gain or loss should be recognized
immediately
• if the sales price is below fair value - gain or loss should be recognized
immediately, except if a loss is compensated for by future lease payments at
below market price, the loss should be amortized over the expected period of
use
• if the sale price is above fair value - the excess over fair value should be
deferred and amortized over the expected period of use
• if the fair value at the time of the transaction is below the carrying amount – a
corresponding loss equal to the difference should be recognized immediately
[IPSAS 13.75]

Disclosures
Disclosures: finance leases - lessees [IPSAS 13.40]
• the carrying amount for each class of assets at the reporting date
• reconciliation between total minimum lease payments and their present value
at the reporting date
• the aggregate amount of the minimum lease payments at the reporting date
and their present value for following periods:
i. the following year
ii. later than 1 year and no later than 5 years
iii. later than five years
• contingent rent recognized as an expense
• total expected income receivable of future minimum sublease payments under
non-cancellable subleases
• description, in general terms, of material leasing arrangements, including the
determination basis for contingent rent, renewal or purchase options, escalation
clauses and restrictions imposed on return of surplus or capital contributions,
dividends or similar distributions, borrowings, or further leasing

Disclosure: lessees – operating leases [IPSAS 13.44]

• the aggregate amount of minimum lease payments and their present value
under non-cancellable operating leases for following periods:
i the following year
ii later than 1 year and no later than 5 years
iii later than five years
• total expected income receivable of future minimum sublease payments under
non-cancellable subleases
• lease payments (including sublease) recognized as expense, splitted in
minimum lease payments, contingent rent and sublease expense
• description, in general terms, of material leasing arrangements, including the
determination basis for contingent rent, renewal or purchase options, escalation
clauses and restrictions imposed on return of surplus or capital contributions,
dividends or similar distributions, borrowings, or further leasing

Disclosures: finance leases - lessors [IPSAS 13.60]

• reconciliation between gross investment in the lease and the present value of
minimum lease payments;
• gross investment and present value of minimum lease payments receivable for
following periods:
i. the following year
ii. later than 1 year and no later than 5 years
iii. later than five years
• unearned finance revenue
• unguaranteed residual values
• accumulated allowance for uncollectible lease payments receivable
• contingent rent recognized in the statement of financial performance
• a description, in general terms, of the material leasing arrangements

Disclosure: operating leases – Lessors [IPSAS 13.69]

• the aggregate amount of minimum lease payments under non-cancellable
operating leases for following periods:
i. the following year
ii. later than 1 year and no later than 5 years
iii. later than five years
• contingent rent recognized in the statement of financial performance
• a description, in general terms, of the material leasing arrangements

IPSAS 14 EVENTS AFTER THE REPORTING DATE

Overview
IPSAS 14 prescribes when events that occur after the reporting date require
adjustments in the financial statements. Events providing evidence of conditions
that existed at the end of the reporting period are ―adjusting events‖, whereas
―non-adjusting events‖ indicate conditions that arose after the reporting date (to
be disclosed if material).
Key definitions
Reporting date: the last day of the reporting period to which the financial
statements relate [IPSAS 14.6].

Event after the reporting date: an favorable or unfavorable event, that occurs
between the reporting date and the date that the financial statements are
authorised for issue [IPSAS 14.5].

Adjusting event: An event after the reporting date providing evidence of

conditions that existed at the reporting date [IPSAS 14.5], including an event
that indicates that the going concern assumption is not appropriate [IPSAS
14.1].

Non-adjusting event: An event after the reporting date that is indicative of a

condition that arose after the reporting date [IPSAS 14.5].
Key principle of IPSAS 14
• Adjusting events: Adjust financial statements for adjusting events after the
reporting date [IPSAS 14.10]

• Non-adjusting events: Do not adjust financial statements [IPSAS 14.12],

disclosure might be required if material [IPSAS 14.30]

• Dividends or similar distributions declared after the reporting date: the

entity should not recognize those dividends or distributions as a liability at
the reporting date [IPSAS 14.14].

Disclosures
The following disclosures are required:
• The date the financial statements were authorized for issue [IPSAS 14.26]

• The name of the individual or body who gave the authorization [IPSAS
14.26]

• If another body has the power to amend the financial statements after
issuance, this fact shall be disclosed [IPSAS 14.26]

• An entity should update disclosures that relate to conditions that existed at

reporting date to reflect any new information that it receives after the
reporting date about those conditions [IPSAS 14.28]
• Non-adjusting events should be disclosed if they are material. The required
disclosures are [IPSAS 14.30]:
a) the nature of the event
b) an estimate of its financial effect or a statement that an estimate of
the effect cannot be made

If the entity is not considered as a going concern:

• the fact that the entity is not considered as a going concern [IPSAS
14.24(a)]

• the basis of preparation of the financial statements [IPSAS 14.24(a)]

• the reason why an entity is not considered as a going concern [IPSAS

14.24(a)]

• uncertainties, that may arise after the reporting date, that may cast
significant doubt upon the entity‘s ability to continue as a going concern
[IPSAS 14.24(b)]

IPSAS 16 (IAS 40): INVESTMENT PROPERTY

Overview
IPSAS 16 prescribes the accounting treatment for property (land and/or
buildings) held to earn rentals or for capital appreciation (or both). Investment
properties are initially measured at cost except when the investment property is
derived from a non-exchange transaction, than it is initially measured at fair
value. Subsequently investment properties shall be measured using a cost model
or fair value model, with changes in the fair value under the fair value model
being recognised in profit or loss.
Investment property
Definition Investment property: property (land or a building or part of a
building or both) held to earn rentals or for capital appreciation or both [IPSAS
16.7].
Examples of investment property included in the standard [IPSAS 16.12]
• land held for long-term capital appreciation
• land held for undetermined future use
• building leased out under an operating lease
• vacant building held to be leased out under an operating lease
• property that is being constructed or developed for future use as investment
property

The following are not investment property and, therefore, are outside the scope
of IPSAS 16:
 property held for use in the production or supply of goods or services or
for administrative purposes [IPSAS 16.5]
 property held for sale in the ordinary course of operations or in the
process of construction of development for such sale (IPSAS
12 Inventories) [IPSAS 16.5 and 16.13]
 property being constructed or developed on behalf of third parties (IPSAS
11Construction Contracts) [IPSAS 16.13]
 owner-occupied property (IPSAS 17 Property, Plant and Equipment),
including property held for future use as owner-occupied property,
property held for future development and subsequent use as owner-
occupied property, property occupied by employees and owner-occupied
property awaiting disposal [IPSAS 16.13]
 property leased to another entity under a finance lease [IPSAS 16.13]
 property held to provide a social service and which also generates cash
inflows (e.g. social housing facilities) [IPSAS 16.13]
 property held for strategic purposes which would be accounted for in
accordance with IPSAS 17 Property, Plant and Equipment [IPSAS 16.13]

Initial measurement
Investment property is initially measured:
• at cost, including any transaction costs [IPSAS 16.26]
• at fair value, if the asset is acquired through on non-exchange transaction
[IPSAS 16.27]

If the investment is measured at cost, the cost should include any directly
attributable costs but should exclude start-up costs, abnormal waste, or initial
operating losses incurred before the investment property achieves the planned
level of occupancy [IPSAS 16.30].

Subsequent Measurement
IPSAS 16 permits the application of two models [IPSAS 16.39]:
• the fair value model
• the cost model.

Fair value model

If the fair value model is applied, investment property is remeasured at fair
value [IPSAS 16.42]. Gains or losses arising from changes in the fair value of
investment property must be included in surplus or deficit for the period in which
it arises [IPSAS 16.44].

Cost model
If the cost model is elected by the entity, the investment property is
subsequently accounted for in accordance with the cost model as set out in
IPSAS 17 Property, Plant and Equipment – cost less accumulated depreciation
and less accumulated impairment losses [IPSAS 16.65]

Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a
change in use. Following items may provide evidence for the changed use
[IPSAS 16.66]:
 commencement of owner-occupation (transfer from investment property
to owner-occupied property)
 commencement of development with a view to sale (transfer from
investment property to inventories)
 end of owner-occupation (transfer from owner-occupied property to
investment property)
 commencement of an operating lease to another party (transfer from
inventories to investment property)

Disposal
An investment property should be derecognized [IPSAS 16.77]:
 on disposal or
 when the investment property is permanently withdrawn from use and no
future economic benefits or service potential are expected from its
disposal (i.e. retirement)

The gain or loss on disposal or retirement should be determined as the

difference between the net disposal proceeds and the carrying amount of
the asset, and should be recognized in surplus or deficit [IPSAS 16.80].
Compensation from third parties should be recognized in surplus or deficit
when it becomes receivable [IPSAS 16.83].
Disclosures
Required disclosures for both Fair Value Model and Cost Model[IPSAS 16.86]
whether the entity uses the fair value or the cost model
 only when the fair value model is used: whether and in what
circumstances property interests held under operating leases are classified
and accounted for as investment property
 if classification is difficult, the criteria used to make the classification
between investment property, owner-occupied property and property held
for sale
 methods and significant assumptions applied in determining the fair value
of investment property
 the extent to which the fair value of investment property is based on a
valuation by a independent valuer with professional qualifications; if there
has been no such valuation, that fact has to be disclosed
 the amounts recognised in surplus or deficit for:
i. rental revenue from investment property
ii. direct operating expenses (including repairs and maintenance)
arising from investment property that generated rental revenue
during the period
iii. direct operating expenses (including repairs and maintenance)
arising from investment property that did not generate rental
income during the period
 restrictions on the realizability of investment property or the remittance of
revenue and proceeds of disposal, if these exist that fact should be
disclosed together with the related amounts.
 contractual obligations to purchase, construct, or develop investment
property or for repairs, maintenance or enhancements
IPSAS 17 (IAS 16): Property, Plant and Equipment (Revised 2003)
Overview
IPSAS 17 prescribes the accounting treatment for property, plant and
equipment. Generally, property, plant and equipment is initially measured at its
cost except when the property, plant or equipment is derived from a non-
exchange transaction, than it is initially measured at fair value. Subsequently
property, plant and equipment is measured either using a cost or revaluation
model, and depreciated so that its depreciable amount is allocated on a
systematic basis over its useful life. Impairment testing should be performed at
least once a year at the annual reporting date and should be executed according
to IPSAS 21 or IPSAS 26.
Scope
This standard applies to entities that prepare and present financial statements
under the accrual basis of accounting [IPSAS 17.1]. IPSAS 17 applies to all
public sector entities other than GBEs [IPSAS 17.3].

Following items are excluded from the scope of the standard [IPSAS 17.2 and
6]:
(a) Items for which a different accounting treatment has been elected in
accordance with IPSASs (e.g. IPSAS 13 Leases)
(b) Heritage assets – except for the required disclosures with regard to these
assets
(c) Biological assets related to agricultural activity (IPSAS 27 Agriculture)
(d) Mineral rights and mineral reserves such as oil, natural gas, and similar non-
regenerative resources

Key definitions [IPSAS 17.13]

Property plant and equipment: tangible items:
• held for (i) use in the production or supply of goods and services, (ii) rental to
others or (iii) administrative purposes
• expected to be used more than one year
Depreciable amount: the cost of an asset, or other amount substituted for
cost, less its residual value.
Depreciation: Depreciation is the systematic allocation of the depreciable
amount of an asset over its useful life
Recoverable amount: for a cash-generating asset, the higher of:
• the fair value lest costs to sell
• the value in use
Recoverable service amount: for a non-cash-generating asset, the higher of:
• the fair value lest costs to sell
• the value in use

Impairment loss: the excess of the carrying amount over the recoverable
(service) amount

Property, Plant and Equipment in the context of the Public Sector

Property, plant and equipment are assets held for use in the production or
supply of goods and services rental to others or administrative purposes and are
expected to be used more than one year. In the public sector context these
assets can be cash-generating or non-cash generating, heritage assets
(monuments, artworks, historical buildings, etc), infrastructure (roads, water
and power supply networks, sewerage, etc).

Recognition
Property, plant and equipment should be recognized as an asset if [IPSAS
17.14]:
• it is probable that the future economic benefits or service potential that are
associated with the item will flow to the entity
• the cost or the fair value of the item can be reliably measured.

PPE acquired for safety or environmental reasons are recognised as assets

because they may be necessary for an entity to obtain future economic benefits
or service potential from other assets [IPSAS 17.22].

Initial measurement
Property, plant and equipment is initially measured:
• at cost, including any transaction costs [IPSAS 17.26]
• at fair value, if the asset is acquired through on non-exchange transaction
[IPSAS 17.27]

Cost is the amount of cash paid or the fair value of other assets given (exchange
of assets) to acquire an asset. Discounting may be needed if payment is
deferred [IPSAS 17.37]

If the investment is measured at cost, the cost should included any directly
attributable costs [IPSAS 17.30] but should exclude costs of opening a new
facility, costs related to the introduction of a new facility, cost of conducting a
business in a new location or with a new class of customers, administration and
general overhead costs [IPSAS 17.34].

Subsequent Measurement
IPSAS 17 permits the application of two models [IPSAS 17.42]:
• the fair value model (―the revaluation model‖)
• the cost model.

One accounting policy shall be elected by the entity for each significant class of
property, plant and equipment and apply this policy to the whole entire class
[IPSAS 17.42].

Fair value model

If the fair value model is applied, the item of PPE is carried at a revalued
amount, being its fair value at the date of revaluation less subsequent
depreciation and impairment losses. Revaluations should be performed on a
regular basis to ensure that the carrying amount is not materially different from
the fair value at the reporting date [IPSAS 17.44].

If the entity elects to revalue an item of certain class of PPE, the entire class of
PPE should be revalued [IPSAS 17.51].

The accounting treatment of revaluation gains or losses (―increase or decrease‖)

is as follows:
• Gains (―increase‖): the increase shall added to revaluation surplus (as a
component of net assets/equity) except when the increase concerns a reversal
of an earlier decrease recognized in surplus or deficit [IPSAS 17.54]
• Losses (―decrease‖): the decrease shall be recognized in surplus or deficit (i.e.
Statement of Financial Performance‖) except when the decrease concerns a
reversal of an earlier increase recognized in revaluation surplus [IPSAS 17.55]
• Offsetting: revaluation increases and decreases should be offset within that
class of PPE, but is not allowed between different classes of PPE [IPSAS 17.56]
• Derecognition: Upon derecognition the revaluation surplus is directly added to
accumulated surplus or deficit (net assets/equity) and not through
surplus/deficit [IPSAS 17.57].

Cost model
If the cost model is elected by the entity, the item of property, plant and
equipment is subsequently carried at cost less accumulated depreciation and less
accumulated impairment losses [IPSAS 17.43]

Component approach: Each part of an item of PPE with a cost that is significant
in relation to the total cost of the item shall be depreciated separately [IPSAS
17.59].

The residual value and the useful life of an item of PPE should be reviewed at
least at each annual reporting date and when expectations differ from earlier
estimates, any change should be treated as an change in accounting estimate in
accordance with IPSAS 3, i.e. prospectively [IPSAS 17.67].

Depreciation starts when item of PPE is available for use [IPSAS 17.71] and is
continued even when the fair value of the item is higher than the carrying
amount [IPSAS 17.68].
Derecognition
An item of PPE should be derecognized [IPSAS 17.82]:
• on disposal
• when no future economic benefits are expected from its use or disposal

Gain or loss is the difference between the payment received (discounted if

payment is deferred) and the carrying amount (NBV) of the item [IPSAS 17.86].

Gains or losses are recognized in surplus or deficit [IPSAS 17.83] (except for
sale and leaseback, refer to IPSAS 13).

Upon disposal of an item of property, plant and equipment valued under the ―fair
value model‖, the possible revaluation surplus included in net assets/equity
should be added directly to accumulated surpluses or deficits (as part of net
assets/equity). Transfers to accumulated surpluses/deficits are not performed
through surplus or deficit (Statement of Financial Performance) [IPSAS 17.57].

Heritage assets
Heritage assets are assets of value because of its cultural, environmental,
educational or historical significance for a nation or society (not as such defined
in IPSAS)

An entity is not required to recognize heritage assets. If the recognition criteria

for these assets are met and the entity elects to recognize these assets the
entity may (not obligatory) apply the measurement criteria of IPSAS 17 and is
required (obligatory) to the disclosure requirements of the standard [IPSAS
17.9].

Examples of heritage assets are:

- historical buildings
- monuments
- archaeological sites
- conservation areas
- nature reserves
- works of art
Disclosures
Required disclosures for each class of property, plant, and equipment [IPSAS
17.88]
• basis for measuring gross carrying amount
• depreciation method applied
• useful lives or depreciation rates
• gross carrying amount and accumulated depreciation and impairment losses at
beginning and end of the period
• reconciliation of the carrying amount at the beginning and the end of the
period, showing:
i. additions
ii. disposals
iii. acquisitions through entity combinations
iv. revaluation increases or decreases
v. impairment losses
vi. reversals of impairment losses
vii. depreciation
viii. net exchange differences
ix, other changes

For a class of PPE stated at revalued amounts [fair value model], following
additional disclosures are required: [IPSAS 17.92]
• the effective date of the revaluation
• whether an independent valuer was involved
• the methods and significant assumptions used for the estimation of fair values
• the extent to which fair values were determined directly by reference to
observable prices in an active market or recent market transactions on arm's
length terms or were estimated using other valuation techniques
• revaluation surplus, indicating the change for the period and any restrictions
on the distribution of the balance to shareholders or other equity holders
• the aggregate of all revaluation surpluses within that class
• the aggregate all revaluation deficits within that class

IPSAS 18 (IAS 14): Segment Reporting

Objective
The objective of IPSAS 18 is to establish principles for reporting segmented
financial information. Disclosure of this information should enhance transparency
and allow the users of the financial statements to evaluate the entity‘s past
performance and to identify the resources allocated to support the major
activities.
Key definitions
Segment: is a distinguishable activity or group of activities of an entity for which
it is appropriate to separately report financial information for the purpose of
[IPSAS 18.9].
(a) evaluating the entity‘s past performance in achieving its objectives
(b) making decisions about the future allocation of resources
Service segment: a distinguishable component of an entity that is engaged in
providing related outputs or achieving particular operating objectives consistent
with the overall mission of each entity [IPSAS 18.17].
Geographical segment: a distinguishable component of an entity that is engaged
in providing outputs or achieving particular operating objectives within a
particular geographical area [IPSAS 18.17].
Segment accounting policies: the accounting policies adopted for preparing and
presenting the financial statements of the consolidated group or entity as well as
those accounting policies that relate specifically to segment reporting [IPSAS
18.27].
Segment assets and liabilities: operating assets and liabilities that either are
directly attributable to the segment or can be allocated to the segment on a
reasonable basis [IPSAS 18.27].
Segment revenue and expense: revenues and expense directly attributable to a
segment and the relevant portion of a revenue or expense that can be allocated
on a reasonable basis to the segment [IPSAS 18.27].

The standard presumes that the information reported to governing body contains
the basis for the segmented information and usually referred to as [IPSAS
18.17]:
• Service segments
• Geographical segments

Factors that usually are considered in dentifying geographical segments [IPSAS

18.22]:
• similarity of economic, social, and political conditions in different regions
• relationships between the primary objectives of the entity and the different
regions
• whether service delivery characteristics and operating conditions differ in
different regions
• whether this reflects the way in which the entity is managed and financial
information is reported to senior managers and the governing board; and
• special needs, skills, or risks associated with operations in a particular area.

Disclosures
Following disclosures are required for each segment [IPSAS 18.51]:
• segment revenue and expenses (distinguishing between external and inter-
segment) [IPSAS 18.52]
• carrying amount of segment assets and liabilities [IPSAS 18.53-54]
• costs incurred for segment assets that are expected to be used during more
than one period [IPSAS 18.55]
• aggregate equity method income (JV‘s, associates, other investments) of the
entity net surplus or deficit [IPSAS 18.61]
• if JV‘s, associates and other investments accounted for under the equity
method is disclosed by segment, the aggregate investment is these investments
shall be disclosed by segment [IPSAS 18.63]
• reconciliation of segment revenue to consolidated revenue [IPSAS 18.64]
• segment expenses should be reconciled to a comparable measure of
consolidated expense [IPSAS 18.64]
• reconciliation between segment assets and entity assets [IPSAS 18.64]
• reconciliation between segment liabilities and entity liabilities [IPSAS 18.64]
• basis of pricing inter-segment transfers and any change therein [IPSAS 18.67]
• in case of changes in accounting policies adopted for segment reporting that
have a material effect [IPSAS 18.68]:
i. disclosure of the change, including the nature and reasons for the change
ii. restatement of comparative information, and the fact that it has been restated
(or its impractibility)
iii. the financial effect of the change

IPSAS 19 (IAS 37) Provisions, Contingent Liabilities and Contingent Assets

Objective
To prescribe appropriate recognition criteria and measurement bases for
provisions, contingent liabilities and contingent assets, and to ensure that
sufficient information is disclosed in the notes to the financial statements to
enable users to understand their nature, timing, and amount. IPSAS 19 thus
aims to ensure that only genuine obligations are dealt within the financial
statements. Planned future expenditure, even where authorized by
management, is excluded from recognition, as are accruals for self-insured
losses, general uncertainties, and other events that have not yet taken place.
Summary
 Recognize a provision only when:
 A past event has created a present legal or constructive obligation
 An outflow of resources embodying economic benefits or service
potential required to settle the obligation is probable
 And the amount of the obligation can be estimated reliably
 Amount recognized as a provision is the best estimate of settlement
amount of the expenditure required to settle the obligation at reporting
date.
 Requires a review of provisions at each reporting date to adjust for
changes to reflect the current best estimate.
 If it is no longer probable that an outflow of resources embodying
economic benefits or service potential is required to settle the obligation,
the provision shall be reversed.
 Utilise provisions only for the purposes for which they were originally
intended.
 Examples of provisions may include onerous contracts, restructuring
provisions, warranties, refunds, and site restoration.
 A restructuring provision shall include only the direct expenditures arising
from the restructuring, which are those that are both:
 Necessarily entailed by the restructuring
 Not associated with the ongoing activities of the entity
 Contingent liability arises when:
 There is a possible obligation to be confirmed by a future event that
is outside the control of the entity
 A present obligation may, but probably will not, require an outflow
of resources embodying economic benefits or service potential
 A sufficiently reliable estimate of the amount of a present obligation
cannot be made (this is rare)
 Contingent liabilities require disclosure only (no recognition). If the
possibility of outflow is remote, then no disclosure.
 Contingent asset arises when the inflow of economic benefits or service
potential is probable, but not virtually certain, and occurrence depends on
an event outside the control of the entity.
 Contingent assets require disclosure only (no recognition). If the
realisation of revenue is virtually certain, the related asset is not a
contingent asset and recognition of the asset and related revenue is
appropriate.
 If an entity has an onerous contract, the present obligation (net of
recoveries) under the contract shall be recognized and measured as a
provision.

IPSAS 20 (IAS 24) Related Party Disclosures

Objective
To ensure that financial statements disclose the existence of related-party
relationships and transactions between the entity and its related parties. This
information is required for accountability purposes and to facilitate a better
understanding of the financial position and performance of the reporting entity.
Summary
  Related parties are parties that control or have significant influence over
the reporting entity (including controlling entities, owners and their
families, major investors, and key management personnel) and parties
that are controlled or significantly influenced by the reporting entity
(including controlled entities, joint ventures, associates, and
postemployment benefit plans). If the reporting entity and another entity
are subject to common control, these entities are also considered related
parties.
 Requires disclosure of:
 Relationships involving control, even when there have been no
transactions in between
 Related-party transactions
 Management compensation (including an analysis by type of
compensation)
 For related-party transactions, disclosure is required of the nature of the
relationship, the types of transactions that have occurred, and the
elements of the transactions necessary to clarify the significance of these
transactions to its operations and sufficient to enable the financial
statements to provide relevant and reliable information for decision
making and accountability purposes.
 Examples of related-party transactions that may lead to disclosures by a
reporting entity:
 Purchases or transfers/sales of goods (finished or unfinished)
 Purchases or transfers/sales of property and other assets
 Rendering or receiving of services
 Agency arrangements
 Leases
 Transfers of research and development
 Transfers under license agreements
 Transfers under finance arrangements (including loans and equity
contributions)
 Provision of guarantees or collateral

IPSAS 21 (IAS 36) Impairment of Assets

Objective
To ensure that noncash-generating assets are carried at no more than their
recoverable service amount, and to prescribe how recoverable service amount is
calculated.
Definitions
The following terms are used in this standard with the meanings specified:
(a) Active market is a market in which all the following conditions exist:
(i) The items traded within the market are homogeneous;
(ii) Willing buyers and sellers can normally be found at any time; and
(iii) Prices are available to the public.

(b) Carrying amount is the amount at which an asset is recognized in the

statement of financial position after deducting any accumulated depreciation and
accumulated impairment losses there on.

(c) Cash-generating assets are assets held with the primary objective of
generating a commercial return.

(d) Costs of disposal are incremental costs directly attributable to the disposal
of an asset, excluding finance cost and income tax expense.

(e) Depreciation (amortisation) is the systematic allocation of the depreciable

amount of an asset over its useful life.
(f) Fair value less costs to sell: is the amount obtainable from the sale of an
asset in an arm‘s length transaction between knowledgeable, willing parties, less
the costs of disposal.
(g) Impairment loss of a non-cash-generating asset is the amount by
which the carrying amount of an asset exceeds its recoverable service amount.

(h) Non-cash-generating assets are assets other than cash-generating

assets.

(i) Recoverable service amount is the higher of a non-cash-generating asset‘s

fair value less costs to sell and its value in use.

(j) Useful life is either: □ The period over which an asset is expected to be
available for use by an entity; or □ The number of production or similar units
expected to be obtained from the asset by an entity. (k) Value in use of a non-
cash-generating asset is the present value of the asset remaining service
potential.

Identifying an asset that may be impaired

An entity shall assess at each reporting date whether there is any indication that
an asset may be impaired. If any such indication exists the entity shall estimate
the recoverable service amount of an asset. In assessing whether there is any
indication that an asset may be impaired, an entity shall consider, as a
minimum, the following indications:
(a) External sources of information
(i) Cessation, or near cessation, of the demand or need for the services provided
by the asset;
(ii) Significant long-term changes with an adverse on the entity have been taken
place during the period or will take place in the near future, in the technological,
legal or government policy environment in which the entity operates.
(b) Internal sources of information
(i) Evidence is available of physical damage of an asset;
(ii) Significant long-term changes with an adverse on the entity have taken place
during the period or are expected to take place in near future, in the extent to
which, or manner in which, an asset is used or expected to be used. These
changes include the asset becoming idle, plans to discontinue or restructure the
operation to which an asset belongs, or plans to dispose of an asset before the
previously expected date;
(iii) A decision to halt the construction of an asset before it is completed or in a
usable condition; and
(iv) Evidence is available from internal reporting that indicates that the service
performance of an asset is, or will be, significantly worse than expected.

Recognising and measuring an impairment loss

If, and only if, the recoverable service amount of an asset is less than its
carrying amount, the carrying amount of an asset shall be reduced to its
recoverable service amount. That reduction is an impairment loss. An
impairment loss shall be recognised immediately in surplus or deficit. When the
amount estimated for an impairment loss is greater than the carrying amount of
the asset to which it relates, an entity shall recognise a liability if, and only if,
that is required by another IPSAS. After the recognition of an impairment loss,
the depreciation (amortisation) charge for the asset shall be adjusted in future
periods to allocate the asset‘s revised carrying amount, less its residual value (if
any), on systematic basis over its remaining useful life.
Reversing an impairment loss
An entity shall assess at each reporting date whether there is an indication that
an impairment loss recognised in prior periods for an asset may no longer exist
or may have decreased, if any such indication exists, the entity shall estimate
the recoverable service amount of the asset.

Disclosure :
An entity shall disclose the following for each class of assets:
(a) The amount of impairment losses recognized in surplus or deficit during the
period and the line item(s) of the statement of financial performance in which
those impairment losses are included;
(b) The amount of reversals of impairment losses recognised in the surplus or
deficit during the period and the line item(s) of the statement of financial
performance in which those impairment losses are reversed.

IPSAS 26- Impairment of cash generating assets

Introduction
The objective of the standard is to prescribe the procedures that an entity
applies to determine whether a cash generating asset is impaired and to ensure
that impairment losses are recognised. This standard also specifies when an
entity should reverse an impaired lost and prescribe disclosures.
Definitions
The following terms are used in this standard with the meanings specified:
(a) Cash-generating assets are assets held with the primary objective of
generating a commercial return.
(b) A cash-generating unit is the smallest identifiable group of assets held
with the primary objective of generating a commercial return that generates
cash inflow from continuing use that are largely independent of the cash inflow
from otherassets or groups of assets.
(c) An impairment loss of a cash-generating asset is the amount by which
the carrying amount of an asset exceeds its recoverable account
(d) Non-cash generating assets are assets other than cash generating asset
(e) The recoverable amount of an asset or a cash-generating unit is its fair value
less costs to sell and its value in use.
(f) Value in use of a cash-generating asset is the present value of the
estimated future cash flows expected to be derived from the continuing use of
an asset and from its disposal at the end of its useful life.
Value in use
The following elements shall be reflected in the calculation of an asset‘s value in
use:
(a) An estimate of the future cash flows the entity expects to derive from the
asset;
(b) Expectations about possible variations in the amount or timing of those
future cash flows;
(c) The time value of money, represented by the current market risk free rate of
interest;
(d) The price for bearing the uncertainty inherent in the asset; and
(e) Other factors, such as illiquidity that market participants would reflect in
pricing the future cash flows the entity expects to derive from the asset.

Reversing an impairment loss

An entity shall assess at each reporting date whether there is an indication that
an impairment loss recognised in prior periods for an asset may no longer exist
or may have decreased, if any such indication exists, the entity shall estimate
the recoverable service amount of the asset. In assessing whether there is an
indication that an impairment loss recognised in prior periods for an asset may
no longer exist or may have decreased, an entity shall consider, as a minimum
the following indications:

(a) External sources of information

i. The asset‘s market value has increased significantly during the period.
ii. Significant changes with a favourable effect on the entity have taken place
during the period, or will take place during the period, or will take place in the
near future, in the technological market, economic or legal environment in which
the entity operates or in the market to which the asset is dedicated.
iii. Market interest rate or other market rates of return on investments have
decreased during the period, and those decreases are likely to affect the
discount rate used in calculating an asset‘s value in use and increase in the
asset‘s recoverable amount materially.
(b) Internal sources of information
i. Significant changes with a favourable effect on the entity have taken place
during the period, or are expected to take place in the near future, in the extent
to which, or manner in which, the asset is used or is expected to be used. These
changes include costs incurred during the period to improve or enhance the
asset‘s performance or restructure the operation to which the asset belongs; and
ii. Evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, better than expected.

Disclosure
An entity shall disclose the criteria developed by the entity to distinguish cash
generating assets from non-cash-generating assets. An entity shall disclose the
following for each class of assets:
(a) The amount of impairment losses recognised in surplus or deficit during the
period and the line item(s) of the statement of financial performance in which
those impairment losses are included.
(b) The amount of reversals of impairment losses recognised in the surplus of
deficit during the period and the line item(s) of the statement of financial
performance in which those impairment losses are reversed. An entity is
encouraged to disclose assumptions used to determine the recoverable amount
of assets during the period. An entity is required to disclose information about
the estimates used to measure the recoverable amount of cash-generating unit
when an intangible asset with an indefinite useful life is included in the carrying
amount of that unit.

IPSAS 22 Disclosure of Financial Information About the General

Government Sector

Objective
To prescribe disclosure requirements for governments which elect to present
information about the GGS in their consolidated financial statements. The
disclosure of appropriate information about the GGS of a government can
provide a better understanding of the relationship between the market and
nonmarket activities of the government and between financial statements and
statistical bases of financial reporting.
Summary
 Financial information about the GGS shall be disclosed in conformity with the
accounting policies adopted for preparing and presenting the consolidated
financial statements of the government, with two exceptions:
 The GGS shall not apply the requirements of IPSAS 6, ―Consolidated and
Separate Financial Statements‖ in respect of entities in the public
financial corporations and public nonfinancial corporations sectors.
  The GGS shall recognize its investment in the public financial
corporations and public nonfinancial corporations sectors as an asset and
shall account for that asset at the carrying amount of the net assets of its
investees.
 Disclosures made in respect of the GGS shall include at least of the following:
 Assets by major class, showing separately the investment in other
sectors
 Liabilities by major class
 Net assets/equity
 Total revaluation increments and decrements and other items of
revenue and expense recognized directly in net assets/equity
 Revenue by major class
 Expenses by major class
 Surplus or deficit
 Cash flows from operating activities by major class
 Cash flows from investing activities
 Cash flows from financing activities
 The manner of presentation of the GGS disclosures shall be no more
prominent than the government‘s financial statements prepared in
accordance with IPSAS.
 Disclosures of the significant controlled entities that are included in the GGS
and any changes in those entities from the prior period must be made,
together with an explanation of the reasons why any such entity that was
previously included in the GGS is no longer included.
 The GGS disclosures shall be reconciled to the consolidated financial
statements of the government showing separately the amount of the
adjustment to each equivalent item in those financial statements.

IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and

Transfers)
Objective
To prescribe requirements for the financial reporting of revenue arising from
non-exchange transactions, other than non-exchange transactions that give rise
to an entity combination.
Summary
 Exchange transactions are transactions in which one entity receives assets
or services, or has liabilities extinguished, and directly gives
approximately equal value (primarily in the form of cash, goods, services,
or use of assets) to another entity in exchange.
 Non-exchange transactions are transactions that are not exchange
transactions. In a non-exchange transaction, an entity either receives
value from another entity without directly giving approximately equal
value in exchange, or gives value to another entity without directly
receiving approximately equal value in exchange.
 Transfers are inflows of future economic benefits or service potential from
non-exchange transactions, other than taxes.
 Stipulations on transferred assets are terms in laws or regulation, or a
binding arrangement, imposed upon the use of a transferred asset by
entities external to the reporting entity.
 Conditions on transferred assets are stipulations that specify that the
future economic benefits or service potential embodied in the asset is
required to be consumed by the recipient as specified or future economic
benefits or service potential must be returned to the transferor.
 Restrictions on transferred assets are stipulations that limit or direct the
purposes for which a transferred asset may be used, but do not specify
 that future economic benefits or service potential is required to be
returned to the transferor if not deployed as specified.
 An inflow of resources from a non-exchange transaction, other than
services in-kind, that meets the definition of an asset shall be recognized
as an asset when, and only when the following recognition criteria are
met:
 It is probable that the future economic benefits or service
potential associated with the asset will flow to the entity; and
 The fair value of the asset can be measured reliably.
 An asset acquired through a non-exchange transaction shall initially be
measured at its fair value as at the date of acquisition.
 An inflow of resources from a non-exchange transaction recognized as an
asset shall be recognized as revenue, except to the extent that a liability
is also recognizedin respect of the same inflow.
 As an entity satisfies a present obligation recognized as a liability in
respect of an inflow of resources from a non-exchange transaction
recognized as an asset, it shall reduce the carrying amount of the liability
recognized and recognize an amount of revenue equal to that reduction.
 Revenue from non-exchange transactions shall be measured at the
amount of the increase in net assets recognized by the entity.
 A present obligation arising from a non-exchange transaction that meets
the definition of a liability shall be recognized as a liability when, and only
when the following recognition criteria are met:
 It is probable that an outflow of resources embodying future
economic benefits or service potential will be required to settle the
obligation; and
 A reliable estimate can be made of the amount of the obligation.
 Conditions on a transferred asset give rise to a present obligation on initial
recognition that will be recognized when the recognition criteria of a
liability are met.
 The amount recognized as a liability shall be the best estimate of the
amount required to settle the present obligation at the reporting date.
 An entity shall recognize an asset in respect of taxes when the taxable
event occurs and the asset recognition criteria are met.
 Taxation revenue shall be determined at a gross amount. It shall not be
reduced for expenses paid through the tax system (e.g. amounts that are
available to beneficiaries regardless of whether or not they pay taxes).
 Taxation revenue shall not be grossed up for the amount of tax
expenditures (e.g. preferential provisions of the tax law that provide
certain taxpayers with concessions that are not available to others).
 An entity recognizes an asset in respect of transfers when the transferred
resources meet the definition of an asset and satisfy the criteria for
recognition as an asset. However, an entity may, but is not required to,
recognize services in-kind as revenue and as an asset.
 An entity shall disclose either on the face of, or in the notes to, the
general-purpose financial statements:
 The amount of revenue from non-exchange transactions
recognized during the period by major classes showing separately
taxes and transfers.
 The amount of receivables recognized in respect of non-exchange
revenue.
 The amount of liabilities recognized in respect of transferred assets
subject to conditions.
 The amount of assets recognized that are subject to restrictions
and the nature of those restrictions.
 The existence and amounts of any advance receipts in respect of
non-exchange transactions.
  The amount of any liabilities forgiven.
 An entity shall disclose in the notes to the general-purpose financial
statements:
 The accounting policies adopted for the recognition of revenue
from non-exchange transactions.
 For major classes of revenue from non-exchange transactions, the
basis on which the fair value of inflowing resources was measured.
 For major classes of taxation revenue which the entity cannot
measure reliably during the period in which the taxable event
occurs, information about the nature of the tax.
 The nature and type of major classes of bequests, gifts, donations
showing separately major classes of goods in-kind received.

IPSAS 24 Presentation of Budget Information in Financial

Statements
Objective
To ensure that public sector entities discharge their accountability obligations
and enhance the transparency of their financial statements by demonstrating
compliance with the approved budget for which they are held publicly
accountable and, where the budget and the financial statements are prepared on
the same basis, their financial performance in achieving the budgeted results.
Summary
o IPSAS 24 applies to public sector entities, other than GBEs, that are
required or elect to make publicly available their approved budget.
o Original budget is the initial approved budget for the budget period.
o Approved budget means the expenditure authority derived from laws,
appropriation bills, government ordinances, and other decisions related to
the anticipated revenue or receipts for the budgetary period.
o Final budget is the original budget adjusted for all reserves, carry over
amounts, transfers, allocations, supplemental appropriations, and other
authorized legislative, or similar authority, changes applicable to the
budget period.
o An entity shall present a comparison of budget and actual amounts as
additional budget columns in the primary financial statements only where
the financial statements and the budget are prepared on a comparable
basis.
o An entity shall present a comparison of the budget amounts either as a
separate additional financial statement or as additional budget columns in
the financial statements currently presented in accordance with IPSAS.
The comparison of budget and actual amounts shall present separately for
each level of legislative oversight:
The original and final budget amounts
The actual amounts on a comparable basis
By way of note disclosure, an explanation of material differences
between the budget and actual amounts, unless such explanation
is included in other public documents issued in conjunction with
the financial statements and a cross reference to those documents
is made in the notes
o An entity shall present an explanation of whether changes between the
original and final budget are a consequence of reallocations within the
budget, or of other factors:
By way of note disclosure in the financial statements
In a report issued before, at the same time as, or in conjunction
with the financial statements, and shall include a cross reference to
the report in the notes to the financial statements
 o All comparisons of budget and actual amounts shall be presented on a
comparable basis to the budget.
o An entity shall explain in notes to the financial statements the budgetary
basis and classification basis adopted in the approved budget, the period
of the approved budget, and the entities included in the approved budget.
o An entity shall identify in notes to the financial statements the entities
included in the approved budget.
o The actual amounts presented on a comparable basis to the budget shall,
where the financial statements and the budget are not prepared on a
comparable basis, be reconciled to the following actual amounts presented
in the financial statements, identifying separately any basis, timing, and
entity differences:
If the accrual basis is adopted for the budget, total revenues, total
expenses and net cash flows from operating activities, investing
activities, and financing activities
If a basis other than the accrual basis is adopted for the budget,
net cash flows from operating activities, investing activities, and
financing activities
The reconciliation shall be disclosed on the face of the statement of comparison
of budget and actual amounts or in the notes to the financial statements.

IPSAS 25 Employee Benefits

Objective
To prescribe the accounting and disclosure for employee benefits, including
short-term benefits (wages, annual leave, sick leave, bonuses, profit-sharing
and nonmonetary benefits); pensions; post-employment life insurance and
medical benefits; termination benefits, and other long-term employee benefits
(long-service leave, disability, deferred compensation, and bonuses and long-
term profit-sharing), except for share-based transactions and employee
retirement benefit plans.
Summary
 The standard requires an entity to recognize:
 A liability when an employee has provided service in exchange for
employee benefits to be paid in the future
 An expense when the entity consumes the economic benefits or
service potential arising from service provided by an employee in
exchange for employee benefits
 Underlying principle: The cost of providing employee benefits shall be
recognized in the period in which the benefit is earned by the employee,
rather than when it is paid or payable.
 Current service cost is the increase in the present value of the defined
benefit obligation resulting from employee service in the current period.
 Defined benefit plans are post-employment benefit plans other than
defined contribution plans.
 Defined contribution plans are post-employment benefit plans under which
an entity pays fixed contributions into a separate entity (a fund) and will
have no legal or constructive obligation to pay further contributions if the
fund does not hold sufficient assets to pay all employee benefits relating
to employee service in the current and prior periods.
 Short-term employee benefits (payable within 12 months) shall be
recognized as an expense in the period in which the employee renders the
service.
 An entity shall measure the expected cost of accumulating compensated
absences as the additional amount that the entity expects to pay as a
result of the unused entitlement that has accumulated at the reporting
date.
  Bonus payments and profit-sharing payments are to be recognized only
when the entity has a legal or constructive obligation to pay them and the
obligation can be reliably estimated.
 Post-employment benefit plans (such as pensions and post-employment
medical care) are categorized as either defined contribution plans or
defined benefit plans.
 Under defined contribution plans, expenses are recognized in the period
the contribution is payable. Accrued expenses, after deducting any
contribution already paid, are recognized as a liability.
 Under defined benefit plans, a liability is recognized in the statement of
financial position equal to the net total of:
 The present value of the defined benefit obligation (the present
value of expected future payments required to settle the obligation
resulting from employee service in the current and prior periods)
 Plus any deferred actuarial gains minus any deferred actuarial
losses minus any deferred past service costs
 Minus the fair value of any plan assets at the reporting date
 Actuarial gains and losses may be (a) recognized immediately in surplus
or deficit, (b) deferred up to a maximum, with any excess amortized in
surplus or deficit (the ―corridor approach‖), or (c) recognized immediately
directly in net assets/equity (in the statement of changes in net
assets/equity).
 An entity shall recognized gains or losses on the curtailment or settlement
of a defined benefit plan when the curtailment or settlement occurs.
Before determining the effect of a curtailment or settlement, an entity
shall remeasure the obligation using current actuarial assumptions.
 Plan assets include assets held by a long-term employee benefit fund and
qualifying insurance policies.
 For group plans, the net cost is recognized in the separate financial
statements of the entity that is legally the sponsoring employer unless a
contractual agreement or stated policy for allocating the cost exists.
 Long-term employee benefits shall be recognized and measured the same
way as post-employment benefits under a defined benefit plan. However,
unlike defined benefit plans, actuarial gains or losses and past service
costs must always be recognized immediately in earnings.
 Termination benefits shall be recognized as a liability and an expense
when the entity is demonstrably committed to terminate the employment
of one or more employees before the normal retirement date or to provide
termination benefits as a result of an offer made to encourage voluntary
redundancy.
 An entity may pay insurance premiums to fund a post-employment benefit
plan. The entity shall treat such a plan as a defined contribution plan
unless the entity will have (either directly or indirectly through the plan) a
legal or constructive obligation to either:
 Pay the employee benefits directly when they fall due
 Pay further amounts if the insurer does not pay all future employee
benefits relating to employee service in the current and prior periods
If the entity retains such a legal or constructive obligation, the entity
shall treat the plan as a defined benefit plan.
 On first adopting this IPSAS, an entity shall determine its initial liability for
defined benefit plans at that date as:
 The present value of the obligations at the date of adoption
 Minus the fair value, at the date of adoption, of plan assets out of
which the obligations are to be settled directly
 Minus any past service cost that shall be recognized in later periods
The entity shall not split the cumulative actuarial gains and losses. All
cumulative actuarial gains and losses shall be recognized in opening
accumulated surpluses or deficits. Some exemptions are applicable regarding the
disclosures when applying this IPSAS for the first time.

IPSAS 27 Agriculture
Objective
To prescribe the accounting treatment and disclosures for agricultural activity.
Summary
 Agricultural activity is the management by an entity of the biological
transformation of living animals or plants (biological assets) for sale, or
for distribution at no charge, or for a nominal charge, or for conversion
into agricultural produce, or into additional biological assets.
 All biological assets (including those acquired biological assets through a
nonexchange transaction) are measured at fair value less costs to sell,
unless fair value cannot be measured reliably.
 Agricultural produce is measured at fair value at the point of harvest less
costs to sell. Because harvested produce is a marketable commodity,
there is no ‗measurement reliability‘ exception for produce.
 Any change in the fair value of biological assets during a period is
reported in surplus or deficit.
 Exception to fair value model for biological assets: If there is no active
market at the time of recognition in the financial statements, and no other
reliable measurement method, then the cost model is used for the specific
biological asset only. The biological asset is measured at depreciated cost
less any accumulated impairment losses. Quoted market price in an active
market generally represents the best measure of the fair value of a
biological asset or agricultural produce. If an active market does not exist,
IPSAS 27 provides guidance for choosing another measurement basis.
 Fair value measurement stops at harvest. IPSAS 12 applies after harvest.

Key definitions [IPSAS 27.9]

Agricultural activity: the management by an entity of the biological
transformation and harvest of biological assets for:
• Sale
• Distribution at no charge or for a nominal charge
• Conversion into agricultural produce or into additional biological assets for sale
or for distribution at no charge or for a nominal charge.
Agricultural produce: is the harvested product of the entity‘s biological assets.
Biological asset: a living animal or plant.
Harvest: the detachment of produce from a biological asset or the cessation of a
biological asset‘s life processes.
Costs to sell: the incremental costs directly attributable to the disposal of an
asset, excluding finance costs and income taxes.

Recognition
A biological asset or agriculture produce should be recognized only when [IPSAS
27.13]
• the entity controls the asset as a result of past events
• it is probable that future economic benefits will flow to the entity
• the fair value or cost of the asset can be measured reliably
Measurement
Biological assets must be measured on initial recognition and at subsequent
reporting dates at its fair value less costs to sell, except when fair value cannot
be reliably measured [IPSAS 27.16]. At the point of harvest, agricultural produce
must be measured at fair value less costs to sell [IPSAS 27.18].
Disclosures
Following disclosures are required:
• aggregate gain or loss arising [IPSAS 27.38]
o on initial recognition of biological assets and agricultural produce
o from the change in fair value less costs to sell of biological assets
• description of an entity's biological assets that distinguishes between
o Consumer and bearer biological assets
o Biological assets held for sale and those held for distribution at no charge or
for a nominal charge

Disclosure of methods and significant assumptions with regard to the

determination of the fair value of each group of agricultural produce at the point
of harvest and for each group of biological assets [IPSAS 27.45].

For agricultural produce, the entity is required to disclose the fair value less
costs to sell determined at the time of harvest [IPSAS 27.46].