11 Accounting for Liabilities

Table of Contents

11.1 Introduction 11.3

11.2 General Policy 11.4

11.2.1 Introduction 11.4

11.2.2 Definition of liabilities 11.4

11.3 Categories of Liabilities 11.5

11.3.1 Domestic debt 11.5

11.3.2 External debt 11.5

11.3.3 Deferred liabilities 11.5

11.3.4 Cash balance utilisation 11.6

11.3.5 Uncleared cheques 11.6

11.3.6 Employee entitlements 11.6

11.3.7 Contingent liabilities 11.6

11.4 Accounting Policies 11.8

11.4.1 General 11.8

11.4.2 Accounting records 11.8

11.4.3 Accounting entries 11.8

11.5 Accounting Procedures 11.10

11.5.1 Introduction 11.10

11.5.2 Loan receipts 11.10

11.5.3 Loan repayments 11.10

11.5.4 Deferred liabilities 11.11

11.5.5 Employee entitlements 11.12

11.6 Reconciliation of Liability Records 11.14

11.7 Reporting of Liabilities 11.15

11.7.1 Annual Accounts 11.15

11.2 General Policy

11.2.1 Introduction

11.2.1.1 The major categories of liabilities covered in this chapter are:

· domestic debt

· external debt

· deferred liabilities

· employee entitlements.

11.2.1.2 The payment procedures for GP fund and other payments that are associated with liabilities are covered in Chapter 4 of this Manual, ‘Expenditures’.

11.2.1.3 The accounting treatment for commitments, which also represent liabilities, are covered in Chapter 4 of this Manual ‘Expenditures’.

11.2.2 Definition of liabilities

11.2.2.1 In accordance with the Manual of Accounting Principles, liabilities are defined as ‘future sacrifices of economic benefits that an entity is presently obliged to make as a result of past transactions or other past events’.

11.2.2.2 Also in accordance with the Manual of Accounting Principles, a liability will be recognised when

· it is probable that the future sacrifice of economic benefits will be required

· the amount of the liability can be measured reliably.

11.3 Categories of Liabilities

11.3.1 Domestic debt

11.3.1.1 Domestic debt is debt raised by the Government within Pakistan, through forms of permanent and floating debt:

· Permanent debt - debt raised through the issue of Government Bonds and raising of loans at fixed rates of interest and fixed maturity terms.

· Floating debt - debt raised through the issue of Treasury Notes and Treasury Bills for Ways and Means at variable market rates and variable maturity terms. This includes Opened Market Operations by the SBP and short-term finance provided by State Bank of Pakistan (eg. purchase of 6 month Treasury Bills).

· Institutional debt – debt raised from various financial institutions at various fixed and floating rates of interest.

11.3.1.2 Domestic debt is managed by Ministry of Finance. The procedures for domestic loans are regulated by the Public Debt Act (1944) with supplementary procedures set out in the Government Securities Manual.

11.3.2 External debt

11.3.2.1 External debt is finance obtained from abroad, in the form of long term, medium term, and short term debt. The Federal and Provincial Governments obtain loans (and grants) from foreign donor agencies, such as foreign banks and organisations, as well as foreign Governments. External loans may be obtained for particular development projects (project assistance) or be provided for general budgetary support (non-project assistance).

11.3.2.2 External debt is managed by the Economic Affairs Division. Detailed rules and regulations issued by MoF, governing the administration of foreign loans shall be followed.

11.3.2.3 External debt should be distinguished from grants received from overseas donors. Such foreign assisted grants are not liabilities.

11.3.2.4 Where external loans are provided in the form of commodities, such as supplies, equipment and food, the liability shall be recorded at the cash (Rupee) equivalent.

11.3.3 Deferred liabilities

11.3.3.1 These are liabilities which arise when monies raised from various savings schemes and funds launched by the Government are utilised in operations. These liabilities are ‘deferred’ in the sense that they will be funded by future revenues of the Government, and repaid upon expiry of the relevant scheme or fund. Deferred liabilities include Savings and Deposits Certificates, Savings Bank Accounts and Provident Funds.

11.3.3.2 These liabilities shall be recorded on the Liabilities Register and form part of the budgeting process in the subsequent years as stated in section 3.3.5 of Chapter 3 – Budgetary Control of this Manual.

11.3.3.3 Any initiatives launched by the Government that do not require repayment (eg. certain classes of debt retirement scheme) are not considered liabilities, and shall not be recorded as such.

11.3.4 Cash balance utilisation

11.3.4.1 Further to domestic and external borrowings and the use of deferred liabilities, the Government may obtain additional short-term finance from the State Bank of Pakistan to fund the overall fiscal deficit, if it arises. This is referred to as ‘Cash Balance Utilisation’.

11.3.5 Uncleared cheques

11.3.5.1 The balance contained in the cheque clearing account, representing cheques issued by the DAO/AG/AGPR, self-accounting entities and project directors, but not yet cleared by the bank.

11.3.6 Employee entitlements

11.3.6.1 The following are classes of liability that exist in relation to employee entitlements. The recognition of such liabilities in the accounts shall be determined, in light of the recognition criteria set out in the Manual of Accounting Principles, by the Auditor-General.

· Pension - the liability arising from a Government employee’s entitlement to a stream of payments after they retire from service. Such liability shall be subject to periodic review by a professional actuaries and updated by actuaries estimates.

· Encashment of Leave - liability arising from entitlements to the various forms of leave earned by Government employees.

11.3.7 Contingent liabilities

11.3.7.1 In certain cases, amounts may be borrowed by public enterprises, provinces and autonomous agencies on the guarantee of the Federal Government or its agencies. These are not liabilities because there is no present obligation for the Government to pay the loan, unless the loan defaults. Such guarantees are referred to as ‘contingent liabilities’ and will be disclosed in notes to the financial statements. If the loan under guarantee does default, then a liability will be recognised to the extent that the guarantee is expected to be fulfilled.

11.3.7.2 Contingent liabilities, where identified, shall be recorded in the Liabilities Register.

11.4 Accounting Policies

11.4.1 General

11.4.1.1 All loan monies received must be recorded as a capital receipt in the Federal or Provincial Consolidated Fund. This includes any direct loans from donors to beneficiaries within the Government.

11.4.1.2 The debt servicing cost (i.e. interest) and loan repayments must both be treated as charged items under the Federal or Provincial Consolidated Fund, and recognised in the accounts when paid.

11.4.1.3 In certain cases foreign loans obtained by the Government are re-lent to autonomous bodies and agencies, at a rate different from that on which the original loan was obtained. The difference in interest earned and interest paid in this case shall be retained in a separate head and treated as income or expense of the Government.

11.4.2 Accounting records

11.4.2.1 Cash transactions arising from liabilities (eg. loan receipts, repayments of interest and principal) shall be recorded in the Sub-Ledger and General Ledger of the respective DAO/AG/AGPR offices.

11.4.2.2 The related non-cash transactions arising from liabilities (eg. loan liability, loss or gain on exchange), shall also be recorded for incorporation into the Annual Accounts. Where any non-cash transactions are recorded in the liability records, a corresponding direct adjustment to equity shall be made, rather than to expenditures or receipts. A non-cash transactions is a financial transaction which do not involve a cash movement but can effect the outstanding liability e.g. loss or gain on foreign exchange can change the liability amount without any movement of cash.

11.4.2.3 The detail of all liabilities recognised shall be held in a Liabilities Register by the AGPR and AG offices, and periodically updated as advised from the appropriate entities. This Register shall hold a formal detailed and aggregated record of all recognised liabilities for the respective Federal or Provincial Governments.

11.4.3 Accounting entries

11.4.3.1 The following accounting entries are applicable to transactions involving liabilities. These entries shall be made in the Sub-ledger at a transaction level, and subsequently transferred into the General Ledger.

11.4.3.2 The accounting entry posted , upon receipt of loan monies is:

Dr Bank Account

Cr Capital Receipts - loans

[recording of loan monies received]

11.4.3.3 Also upon receipt of loan money, the liability record shall be updated and supporting details recorded in the Liabilities Register.

11.4.3.4 Repayments of principal and interest shall be accounted for under separate heads of account in the Chart of Accounts. The accounting entries required are as follows:

Dr Interest Expenditure and/or

Dr Loan Principal Repayments

Cr Bank Account

[to record the repayment of principal and interest on loans]

11.4.3.5 Also upon repayment of the loan, the liability record shall be updated and supporting details recorded in the Liabilities Register.

11.4.3.6 Where the Government receives loan monies on behalf of other bodies, the loan receipt should be recorded in the Public Account against an appropriate head, from which the loan monies will be transferred. The required accounting entries are as follows:

Dr Bank Account

Cr Loans received (Public Account)

[to record the receipt of loan monies by the Government, on behalf of other bodies]

Dr Loans received (Public Account)

Cr Bank Account

[to record the transfer of loan monies by the Government, to recipient bodies]

11.5 Accounting Procedures

11.5.1 Introduction

11.5.1.1 The following accounting procedures covers the treatment of loans and other liabilities.

11.5.1.2 The following key controls shall be observed when processing receipts and repayments of loans:

· cash transactions arising from loans should be identified against the proper receipt and payments heads, giving reference to the concerned Federal or Provincial Government

· reconciliation of loan liability records of AG/AGPR with EAD/MoF, in relation to domestic and external debt

· reconciliation of loan receipts and repayment transactions between AGPR/AG and EAD/MoF records

· reconciliation of loan liability records of AG/AGPR with other concerned ministries and departments in relation to recognised liabilities.

11.5.2 Loan receipts

11.5.2.1 Loan monies may be received from lending agencies in the form of an advance (eg. mobilisation advance) or reimbursement of expenditure previously incurred by the beneficiary. In the case of external loans, the funds are received initially by the National Bank of Pakistan branch in New York, who then place the funds (through the NBP-HQ Karachi) into the relevant bank accounts of the Government, including assignment accounts where applicable. These balances shall be reported to the SBP-HQ on a daily basis.

11.5.2.2 SBP-HQ shall advise both AG/AGPR and EAD/MoF, by daily bank scroll, of the loans received from lending agencies. EAD/MoF shall also seek independent confirmation from the lending agency of the funds deposited.

11.5.2.3 EAD/MoF/FD shall then provide AG/AGPR with the required accounting details relating to the loan receipt (amount, date received, receipt head to be charged etc.). Upon receipt of this advice, AG/AGPR shall make the Sub-ledger accounting entry specified in Direction 11.4.3.2, to record the capital receipt and increase in cash, and at the same time update the liability record/Liabilities Register in accordance with Direction 11.4.3.3.

11.5.3 Loan repayments

11.5.3.1 The scheduling of loan repayments is undertaken by EAD (in relation to external loans) and MoF (in relation to domestic loans), in accordance with the schedules provided in loan agreements. When a repayment needs to be made, EAD/MoF shall authorise the State Bank of Pakistan to make the repayment, informing them of the relevant details.

11.5.3.2 Prior to authorisation, EAD/MoF will conduct a certification exercise, to ensure the accuracy of the following:

· repayment schedules of the loan agreement

· amount (principal and interest)

· payment of related fees and charges

· currency

· demand notice from the lender

· account heads to be used (principal, interest, related expenses), and check against available budget (i.e. debt servicing budget)

11.5.3.3 If, for any reason, the above checks are not satisfied, then the repayment authority shall not be given to SBP, and instead be referred back the relevant authority in EAD/MoF.

11.5.3.4 Immediately after a loan repayment is made, SBP shall inform EAD/MoF of the repayment, with a copy to AGPR (or in the case of a Provincial Government, the relevant AG office). All relevant details of the repayment should be included in this advice, including loan identifier, relevant account heads, date of repayment and interest and principal components of the repayment, in Rupees, as well as the relevant foreign currency.

11.5.3.5 AGPR/AG shall then make the Sub-ledger accounting entry specified in Direction 11.4.3.4 to record the loan principal and interest repayments, and at the same time update the liability record/Liabilities Register in accordance with Direction 11.4.3.5.of this chapter.

11.5.4 Deferred liabilities

11.5.4.1 This section briefly outlines the accounting procedure to be followed in relation to the recording of deferred liabilities. Specific procedures for each scheme or provident fund, as issued by the Government, shall be followed in all cases. This subject is also covered in Chapter 14 of this Manual, ‘Public Account Transactions’.

11.5.4.2 The receipt of funds in regard to the various savings and deposits schemes operated by the Government is undertaken by designated banks, savings centres and post offices. These collections are reported to the National and State Bank who then produce daily scrolls of receipts in accordance with Chapter 5 of this Manual, ‘Receipts’.

11.5.4.3 When funds are received on account of various deposit and savings schemes, the transaction shall be recorded in the Sub-Ledger/General Ledger of the AG/AGPR/DAO against the appropriate head within the Public Account:

Dr Bank Account (Public Account)

Cr Relevant Public Account head*

[*such as Savings Bank Deposits, Federal Savings Certificates, Federal Deposits Certificates and National Savings and Deposits Certificates]

11.5.4.4 At the same time as recording the receipt transaction, the AG/AGPR shall update the liability records/Register maintained in that office. In the case of DAOs, their monthly account of receipts against these Public Account Heads shall be reported to the AG/AGPR who shall then update their liability records/Liability Register accordingly.

11.5.4.5 Where the Government makes use of these funds held in the deferred liability accounts, a receivable entry will be made in the Public Account. Refer to Chapter 14 of this Manual ‘Public Account Transactions’ for details of these entries.

11.5.4.6 Funds held in savings and deposit schemes shall be repaid when an investor submits their certificate for encashment to the designated bank, savings centre or post office, subject to the terms and conditions of the individual scheme and procedures undertaken by these offices. All payments from the schemes shall be reported to the relevant AG/AGPR office.

11.5.4.7 Upon repayment of funds from a savings or deposit scheme to its investors, the following accounting transaction shall be recorded in the Sub-Ledger/General Ledger:

Dr Relevant Public Account Head

Cr Bank Account (Public Account)

11.5.4.8 At the same time as recording the payment, the AG/AGPR shall update the liability record to reflect the reduction in liability from the scheme, and also update the details of the Liabilities Register.

11.5.5 Employee entitlements

11.5.5.1 In accordance with the policy laid down in Section 11.3.6 of this chapter, employee entitlements shall be recognised as liabilities when the recognition criteria (indicated in Direction 11.2.2.2) have been met.

11.5.5.2 These liabilities may not necessarily arise from a cash transaction. For example, a periodic actuarial estimate of pension liability may be considered more cost-effective than maintaining a detailed recording process. The method of liability estimation in these cases will be determined by the Auditor-General, in consultation with the MoF.

11.5.5.3 Where such liabilities are recognised, they will be raised by AG/AGPR in the liability records included in the Liability Register and updated on an annual basis.

11.5.5.4 Contributions into and payments from the General Provident and other provident funds will be recorded as transactions in the relevant heads of the Public Account. The procedures for such entries are covered in Chapter 4 of this Manual, ‘Expenditures’.

11.5.5.5 Payments of pension are made from the Federal or Provincial Consolidated Fund, in accordance with the procedure laid down in Chapter 4 of this Manual, ‘Expenditures’.

11.5.5.6 Periodic adjustments in the liability records will be made prior to the end of the financial year, to bring the liability balances up to date.

11.6 Reconciliation of Liability Records

11.6.1.1 On a monthly basis, AGPR/AG shall reconcile the balances of external and domestic debt held in its liability records/registers to the monthly report provided by EAD, in accordance with the reporting requirements identified in Direction 11.7.1.2.

11.6.1.2 The reconciliation between AG/AGPR and EAD/MoF balances shall identify any gains and losses arising from foreign currency loans. A record of such foreign exchange gains and losses shall be kept by AG/AGPR by adjusting (increasing for a loss, decreasing for a gain) the liability record and making a corresponding adjustment to equity. The losses and gains identified during reconciliation shall be agreed with EAD/MoF at the end of each financial year.

11.6.1.3 Also, on a monthly basis the balances contained in the accounts of receipts and payments in respect of loans and other liabilities shall be reconciled by AG/AGPR to the movement in the liability records/registers maintained by these offices.

11.6.1.4 On a monthly basis, EAD/MoF shall reconcile:

· the sum of all domestic and foreign loan receipts advised by SBP, to the accounts of loan receipts as recorded by AG/AGPR

· the sum of all authorised loan repayments confirmed by SBP to the accounts of loan repayments (interest and principal)

11.7 Reporting of Liabilities

11.7.1 Annual Accounts

11.7.1.1 Balances of liabilities, in their various forms, will be reported in the quarterly, six monthly and annual accounts. In accordance with the Financial Reporting Manual, the classes of liability to be recognised shall include:

· public debt