3.5 Public Sector Accounting Standards and Financial Procedures in Nepal

Public Sector Accounting Standards and Financial Procedures in Nepal

Public Sector Accounting Standards

Public Sector Accounting Standards provide guidelines for accounting and reporting in the public sector, ensuring transparency, accountability, and uniformity. In Nepal, these standards are based on the Nepal Public Sector Accounting Standards (NPSAS), aligned with the International Public Sector Accounting Standards (IPSAS) developed by the International Federation of Accountants (IFAC).

Definition: Public Sector Accounting Standards are principles and policies that guide the accounting and reporting of government financial activities, ensuring standardized and reliable financial statements.

Nepal Public Sector Accounting Standards (NPSAS)

NPSAS was introduced to modernize Nepal’s public sector accounting, making it realistic, reliable, and internationally comparable. Approved by the Government of Nepal on September 15, 2009 (2066 Bhadra 30), and updated with cash-based NPSAS on December 5, 2022 (2079 Mangsir 20), it applies to all three tiers of government: federal, provincial, and local.

Structure of NPSAS:

Part 1 (Mandatory Provisions): Focuses on cash-based accounting, covering cash receipts, payments, balances, and bank statements.
Part 2 (Encouraged Disclosures): Promotes additional disclosures to enhance accountability, decision-making, and transition to accrual-based IPSAS. Includes financial assets, investments, cash flows, liabilities, and commitments.

Forms Used:

Federal and Provincial: Form No. 271
Local Level: Form No. 272

Features of NPSAS:

Adopts cash-based accounting principles.
Based on Cash Basis IPSAS for global alignment.
Divided into mandatory and encouraged disclosures.
Prioritizes cash position identification and reporting.
Emphasizes simplicity, transparency, accountability, financial governance, and reliable data.
Focuses on reflecting the substance of transactions over formal procedures.
Promotes prudence, neutrality, and impartiality in accounting.
Ensures financial statements are complete, comparable, and internationally aligned.
Developed in English and translated into Nepali.
Provides a robust framework for reporting systems.

Objectives of NPSAS:

Enhance uniformity, reliability, and clarity in financial reporting.
Promote transparency and accountability.
Standardize reporting formats.
Integrate international accounting standards into Nepal’s system.
Provide objective financial data for evaluation and decision-making.
Promote good governance and fiscal discipline.
Prevent fraud and misappropriation.
Ensure comparability of financial reports across government tiers and internationally.

Example: A local government records NPR 10 million in cash receipts from taxes in Form No. 272. The mandatory provisions require reporting these receipts, while encouraged disclosures might include details of planned expenditures, enhancing transparency.

Accounting Standards Board

Under the Nepal Chartered Accountants Act, 2053 BS (1997), Section 15A, the Government of Nepal established the Accounting Standards Board to regulate accounting and financial reporting.

Composition:

Chairperson: A Fellow Chartered Accountant nominated by the government.
Members: Representatives from the Ministry of Finance, Office of the Auditor General, Financial Comptroller General Office (FCGO), Company Registrar’s Office, Inland Revenue Department, Securities Board, five Chartered Accountants, and one Registered Auditor nominated by the government on the recommendation of the Institute of Chartered Accountants of Nepal.

Functions and Responsibilities:

Develop and regulate accounting standards based on international standards.
Prepare methodologies for standard development and publish related materials.
Revise and improve accounting standards.
Interpret standards and perform related tasks.

Financial Statement Preparation Process under NPSAS

The process ensures standardized and transparent financial reporting across government entities:

Identify economic and reporting entities (e.g., FCGO for consolidated reporting).
Map economic entities and their transactions.
Prepare consolidated financial statements.
Convert non-budgetary and institutional transactions to cash basis.
Check for double-counting and ensure balance.
Prepare annual receipts and payments statements (controlled cash, single treasury account, direct budget payments, third-party payments).
Adjust inter-entity transactions to avoid duplication.
Compile unified cash receipts and payments for reporting entities.
Compare projected and actual receipts/payments.
Disclose accounting policies and procedures.
Include explanatory notes and additional disclosures for clarity.
Prepare interpretive notes for public understanding.

Challenges in NPSAS Implementation

Despite its robust framework, NPSAS faces several implementation challenges:

Lack of simplified explanations and effective communication with stakeholders.
Absence of mandatory legal enforcement for compliance.
Incomplete adoption across all government entities.
Insufficient training for employees.
Perception of annual reporting as an additional burden.
Limited application in monthly and quarterly reports.
Ineffective implementation of standards.
Lack of familiarity with new practices (e.g., third-party payments, cash-basis adjustments).
Inconsistencies in reporting across the Ministry of Finance, FCGO, and other entities.
Over-reliance on consultants for report preparation.
Lack of ownership and proactive engagement by responsible entities.
Underutilization of information and communication technology.
Incomplete inclusion of technical assistance details.
Lack of enthusiasm due to complex reporting requirements.
Delays in receiving data from subordinate entities due to poor coordination.
Discrepancies between centralized and NPSAS-compliant reports.

Recommendations for Improvement

Recommendations:

Simplify and widely disseminate NPSAS explanations.
Enforce mandatory compliance through legal amendments.
Ensure full adoption across all government entities.
Provide regular training for employees.
Mandate NPSAS for monthly, quarterly, and annual reports.
Strengthen inter-entity coordination and collaboration.
Develop an integrated information management system for efficient data sharing.
Train staff on new practices like third-party payments and cash-basis adjustments.
Standardize reporting formats to ensure consistency.
Enhance ownership and proactive engagement by responsible entities.
Leverage ICT for streamlined reporting processes.
Include comprehensive technical assistance details in reports.
Revise and develop necessary FCGO forms for better compliance.
Promote good governance and a reward-penalty system.

Financial Procedures and Legal Framework

Financial procedures govern public revenue, expenditure, and financial management, ensuring accountability, transparency, and fiscal discipline. These procedures cover budget formulation, expenditure, accounting, reporting, internal controls, audits, and macroeconomic stability.

Democratic Principles: Global principles like "No taxation without representation" and "No spending without legislation" guide Nepal’s financial procedures, as enshrined in the Constitution and various laws.

Legal Framework:

Constitutional Provisions:
- Exercise of financial powers (Article 59).
- Revenue distribution (Article 60).
- Financial procedures for all government tiers (Parts 10, 16, 19).
Key Legislation:
- Financial Procedures and Fiscal Accountability Act, 2076 BS (2019) and Regulations, 2077 BS (2020).
- Intergovernmental Fiscal Management Act, 2074 BS (2017).
- Local Government Operation Act, 2074 BS (2017).
- National Natural Resources and Fiscal Commission Act, 2074 BS (2017).
- Public Procurement Act, 2063 BS (2007) and Regulations, 2064 BS (2008).
- Audit Act, 2075 BS (2018).
- Travel Expense Regulations, 2064 BS (2008).
- Government Accounting Guidelines, 2073 BS (2016).
- FCGO forms, accounting standards, audit standards, and economic classifications.

Key Provisions of the Financial Procedures and Fiscal Accountability Act, 2076 BS

Consolidated Fund Operations and Accounting:

The FCGO manages the federal consolidated fund, updates accounts, and prepares annual financial statements.
Provincial consolidated funds are managed by Provincial Financial Comptroller Offices.
Local consolidated funds are managed by chief administrative officers and accounting heads.
Accounting officers submit periodic reports, budget estimates, and expenditure details.

Budget and Program Formulation:

Federal: Ministry of Finance.
Provincial: Ministry of Economic Affairs and Planning.
Local: Village/Municipal Executive.
Offices prepare budgets within prescribed formats and submit to parent offices.
Revenue estimates and foreign aid must be included in budgets.

Budget Authorization and Release:

Expenditure is authorized under the Appropriation Act or Advance Expenditure Act.
Ministries allocate budgets with performance indicators within seven days of the Act’s issuance.
FCGO and Treasury Offices release funds through bank accounts.
Local levels receive quarterly releases via Treasury Offices.

Expenditure Procedures:

Expenditure must align with approved budgets and legal provisions.
Only authorized officers can approve expenditures.
Expenditure considerations include budget limits, project approval, and verified funding sources.
Internal controls prevent asset misuse and ensure proper documentation.

Accounting Procedures:

Accounting follows formats approved by the Auditor General.
FCGO maintains centralized accounts for revenue, grants, loans, and deposits.
Offices submit expenditure details within 15 days of the fiscal year’s end.

Advance Payments and Settlement:

Advances are limited to one-third of the budget during appropriation delays.
Advances require detailed justifications and must be settled within 21 days.
Bank guarantees are mandatory for procurement advances.
Unsettled advances incur 10% annual interest.

Foreign and Internal Borrowing:

Only the federal government can accept foreign grants or loans.
Provinces and local levels require federal approval for foreign aid.
Internal borrowing is subject to limits set by the National Natural Resources and Fiscal Commission.

Medium-Term Expenditure Framework (MTEF):

All tiers prepare a three-year expenditure projection.
Includes budget frameworks, project costs, expected outcomes, and past expenditure details.

Revenue and Expenditure Estimates:

Federal estimates are presented to Parliament by May 29.
Provinces and local levels submit estimates by June 15 and June 24, respectively.

Budget Implementation and Performance Contracts:

Accounting officers implement budgets per approved plans.
Performance contracts outline objectives, activities, timelines, and quality metrics.

Monitoring and Evaluation:

Ministries conduct quarterly and monthly reviews.
Annual and semi-annual evaluation reports are published by November 15 and January 31, respectively.

Transparency:

Financial operations must be transparent and audited.
Annual financial statements are published within 15 days of audit completion.

Local-Level Expenditure:

Chief administrative officers receive expenditure authority within seven days of budget approval.
Expenditure adheres to approved budgets and legal frameworks.

Forms Used in Financial Procedures:

Form	Form No.	Purpose
Federal/Provincial Financial Statement	271	Record cash-based financial transactions
Local-Level Financial Statement	272	Record local government transactions

Conclusion

Nepal’s public sector accounting and financial procedures, guided by NPSAS and robust legal frameworks, ensure transparency, accountability, and fiscal discipline. Addressing implementation challenges through training, IT integration, and legal enforcement will further strengthen these systems, aligning them with international standards.

References

Constitution of Nepal, 2072 BS (2015).
Financial Procedures and Fiscal Accountability Act, 2076 BS (2019).
Financial Procedures and Fiscal Accountability Regulations, 2077 BS (2020).
Intergovernmental Fiscal Management Act, 2074 BS (2017).
Local Government Operation Act, 2074 BS (2017).
Public Procurement Act, 2063 BS (2007).
Audit Act, 2075 BS (2018).
Government Accounting Guidelines, 2073 BS (2016).