#1 Concept of Public Financial Management:

✔ In narrowest & traditional sense, Public Financial Management (PFM) is

concerned with how governments manage the budget in its established
phases—formulation, approval & execution.
✔ It deals with the set of processes & procedures that cover all aspects of
expenditure management in government.
✔ It is also interdisciplinary, drawing from economics, political science, & public
administration, as well as accounting and auditing.
✔ But, as its relevance in fiscal policymaking has evolved, PFM has broadened its
focus
• from the narrowly defined budget
• to all aspects of managing public resources, including
o resource (revenue) mobilization & debt management,
o with a progressive extension to the medium to long-term implications
and risks to public finances from today’s policy decisions.
✔ The coverage of PFM has thus expanded from the narrowly defined central
government budget to all levels of government & the broader public sector,
including state enterprises & public-private partnerships.
✔ Furthermore, PFM is now seen as an “umbrella” definition,
• covering a set of systems
• aimed at producing information, processes, & rules
• that can help to support fiscal policymaking as well as provide instruments
for its implementation.
✔ Having in place inappropriate budgetary processes and rules can cause
unsustainable increases in expenditure and unbudgeted liabilities.
✔ Poor or non-existent financial information (that may result from unrealistic
projections of economic growth or non-disclosure of fiscal risks) can undermine
government finances.
#2 Purpose/Objective of the Public Financial Management System:

The purpose of a good PFM system is to ensure that the policies of governments
are implemented as intended and achieve their objectives. The outcome of open and
orderly PFM system are: -
(a) Aggregate fiscal discipline
• Aggregate fiscal discipline refers to the alignment of public expenditures
with total revenues (domestic revenues plus a sustainable level of foreign
borrowing).
 • PFM system should ensure that aggregate levels of tax collection and
public spending are consistent with targets for the fiscal deficit, and do
not generate unsustainable levels of public borrowing.
• In layman’s terms, it means don’t spend more than what you can afford.
(b) Strategic allocation of resources (or Allocative Efficiency)
• It involves planning and executing the budget in line with government
priorities aimed at achieving policy objectives.
• A PFM system should ensure that public resources are allocated to agreed
strategic priorities and should spur re-allocation from lesser to higher
priorities
• Precondition: there should be clearly defined national objectives and
strategic priorities.

(c) Efficient service delivery (or Operational Efficiency) requires using budgeted
revenues to achieve best levels of public services within available resources.

#3 Importance of the PFM

A strong PFM system is an essential aspect of the institutional framework for an

effective state.
✔ Effective delivery of public services is closely associated with poverty
reduction & growth.
• countries with strong, transparent, accountable PFM systems tend
✓ to deliver services more effectively & equitably &
✓ regulate markets more efficiently and fairly.
• In this sense, good PFM is a necessary condition for most development
outcomes.
• Poor PFM encourages the spread of corruption & allows waste which has a
negative impact on the services offered to the public.
✔ A key element of statehood is the ability to tax fairly & efficiently & to spend
responsibly.
• These are fundamental characteristics of ‘inclusive’ state institutions, which
generate trust, promote innovative energies & allow societies to flourish.
✔ Transparent and well-managed PFM system boosts the public confidence
towards the government.
Improving the effectiveness of a PFM system
✔ can generate widespread & long-lasting benefits &
✔ may in turn help to reinforce wider societal shifts towards inclusive institutions,
& thus towards stronger states, reduced poverty, greater gender equality
& balanced growth.
#4 Pillars of PFM and Budget Cycle

Public Expenditure and Financial Accountability (PEFA) identifies seven pillars of

performance in an open & orderly PFM system that are essential to achieving these
objectives. The seven pillars thereby define the key elements of a PFM system
(which also covers budget cycle). The pillars are as follows: -
(1) Budget reliability
• The government budget is realistic and is implemented as intended.
• This is measured by comparing actual revenues and expenditures (the
immediate results of the PFM system) with the original approved budget.
(2) Transparency of public finances
• Information on PFM is comprehensive, consistent, and accessible to users.
• Transparency is achieved through comprehensive budget classification,
transparency of all government revenue and expenditure including
intergovernmental transfers, published information on service delivery
performance and ready access to fiscal and budget documentation.
(3) Management of assets and liabilities
Effective management of assets and liabilities ensures that
• public investments provide value for money,
• assets are recorded and managed,
• fiscal risks are identified, and
• debts and guarantees are prudently planned, approved, and monitored.
(4) Policy-based fiscal strategy and budgeting
The fiscal strategy and the budget are prepared with due regard to government
fiscal policies, strategic plans, and adequate macroeconomic and fiscal
projections.
(5) Predictability and control in budget execution
The budget is implemented within a system of effective standards, processes,
and internal controls, ensuring that resources are obtained and used as
intended.
(6) Accounting and reporting
Accurate and reliable records are maintained, and information is produced and
disseminated at appropriate times to meet decision-making, management,
and reporting needs.
(7) External scrutiny and audit
Public finances are independently reviewed and there is external follow-up on
the implementation of recommendations for improvement by the executive.
Interrelationship of the seven pillars of the PFM system and Budget Cycle

#5 Public Expenditure and Financial Accountability (PEFA)

✔ PEFA is basically a framework for strengthening public expenditure system
of a country.
✔ It pays high priority to transparency & accountability in utilizing & managing
public funds.
✔ The core objective of PEFA is
• to enhance expenditure management of the public funds and
• to reduce associated fiduciary risk.
✔ The PEFA initiative has developed a robust tool for
• measuring (PFM) performances &
• providing sound assessment of quality of PFM for countries of all income
levels.
✔ Nepal has assessed PEFA indictors and adopted action plan that serve as the
national policy for the overall improvement in PFM system, process and
institutions.
✔ Effective implementation of Action Plan contributes to improve PFM
performances that eventually help to achieve better service delivery & bringing
efficiency in public expenditure management.
How to measure performance under PEFA framework?

✔ As per PEFA framework, the PFM performance is measured under seven pillars
of a PFM (details is given below) comprising 31 indicators.
✔ The set of indicators
o identifies key elements in the PFM &
o also measures the operational performance of the PFM system,
processes & institutions of a country
✔ The 31 indicators include several dimensions that help to measure the PFM
performance.
✔ Scoring of all performance indicators & its dimensions are performed. Scoring of
the 31 performance indicators is the heart of the PEFA process.
✔ Each dimension is scored separately according to precise criteria established
for each dimension.
✔ After assessment, PFM performance report is prepared.
✔ Objective of PEFA Assessment is to ensure whether PFM systems, processes &
institutions meet performance standards within PFM pillars.
Nepal PEFA Assessment

First PEFA Assessment

✔ First PEFA Assessment was carried out in 2008 to assess the performance of
the country‟s PFM system
o in comparison with internationally accepted benchmarks,
o with the initiation of GON and supported by the World Bank
o to provide a basis for objectively assessing the country's PFM system.
✔ Following the PEFA assessment in 2008,
o the GON formulated a Public Financial Management Reform Program
(PFMRP) Strategy Phase I,
o with the objective of adopting a holistic government-wide approach
to PFM reforms encompassing both the institutional and technical
aspects.
✔ This is intended to be gradual and long-term process that requires strong
political will and commitment which will contribute
o to reducing fiduciary risks as well as
o to improve transparency and accountability of public financial
management.
✔ After implementing PFMRP Strategy Phase I, 2nd PEFA assessment were carried
out in 2014/2015.
Second PEFA Assessment
✔ This PEFA assessment highlights progress made in financial management
information systems (FMIS), Treasury systems including the TSA, planning and
budgeting, accounting and reporting, adoption of Government Finance
Statistics (GFS) standards, taxation, audit, procurement, external oversight,
accountability & foreign aid management.
✔ Despite the progress made, 2nd Assessment also identifies gaps
o in budget formulation and execution,
o internal control, internal audit and oversight,
o accounting, recording and reporting,
o procurement, debt, revenue and investment management,
o access to information, human resource management and capacity
development,
o payroll control and pension management,
o usage of FMIS, foreign aid management, and monitoring and evaluation.
✔ Based on the strengths & weakness identified in 2nd PEFA assessment and
challenges brought by federal structures of the government,
o the Government has prepared the PFMRP Strategy Phase II by having
extensive consultation
o with key stakeholders in national level PFM seminars, regional meetings of
FCGO, peer group discussions with MOF, OAG, PPMO, ICAN & line ministries
& consultations with DPs.
PFM Reform Program (PFMRP) Strategy Phase II
#6 Government Accounting:
✔ Accounting is concerned with the recording & reporting of financial
transactions.
✔ Government Accounting is concerned with the recording & reporting on the
collection & expenditure of public fund.
✔ Government accounting is the
✓ process of recording, analyzing, classifying, summarizing communicating &
interpreting
✓ financial information about government in aggregate and in detail
✓ reflecting transactions & other economic events involving the receipt,
spending, transfer, usability & disposition of assets and liabilities
✔ The purposes of government accounting are:
✓ To carry out the financial business of government in a timely, efficient
& reliable manner subject to necessary financial controls (e.g. to make
payments, settle liabilities, collect sums due, buy and sell assets etc.)
✓ To keep systematic, easily accessible accounting & documentary records
as evidence of past transactions & current financial status,
▪ so that detailed transactions can be identified & traced & all aggregates
can be conveniently broken down into their constituent parts.
✓ To provide periodic financial statements, containing appropriately
classified financial information, as a basis for
(a) stewardship and accountability and
(b) decision-making.
✓ To maintain financial records suitable for budgetary control, internal
control & the needs of auditors.
✓ To provide means for effective management of government assets,
liabilities, expenditures and revenues.
✔ Accounts are kept for a wide variety of administrative entities: ministries,
departments, taxing authorities & spending units.
✔ There are four main bases of accounting for government accounting: -
✓ Cash basis [this basis measures cash flows at the time those flows actually take
place]
✓ Modified cash basis [this basis allows a short period of time after the year-end for
settling liabilities of the year just ended & treats this expenditure as occurring in the
year just ended]
✓ Accrual basis (this basis records expenditures & revenues when they become due)
✓ Modified Accrual basis [this basis is similar to the full accruals basis, but it is
simpler because it does not involve the capitalisation of fixed assets (nor the provision
of depreciation of fixed assets)]
✔ Till now, Government of Nepal are using cash basis of accounting for recording
& reporting of financial information.
✔ Pure cash accounting does not provide useful information for managing
payables & receivables. Hence,
Features Of Government Accounting
✔ It is based on Budget,
✔ It is governed by Government Regulations,
✔ Cash basis of accounting is applied,
✔ Accounting maintained under double entry system,
✔ Use of budget heads & formats approved by the Office of Auditor General/Office
of comptroller general,
✔ Consolidated Fund,
✔ Internal Audit by office of Comptroller general & final audit by office of auditor
general.
#7 Nepal Public Sector Accounting Standards (NPSAS)
✔ Public Sector Committee of the Accounting Standards Board of Nepal has
formulated cash basis based NPSAS.
✔ Such standards establishes guidelines for & standardize the financial reporting
of Public Sector Entities in Nepal,
✓ resulting into the improvement of both quality & comparability of the
financial reporting.
✔ NPSAS are incompliance with Cash Basis International Public Sector Accounting
Stand (IPSAS).
Benefit of Implementation of NPSAS:

✔ Improvement of quality & comparability of financial information

✔ Greater accountability & transparency (NPSAS provide greater clarity on the
financial position)
✔ Improved efficiency (Increased standardisation supports the delivery of more
effective audits & helps mitigate the risks of significant material misstatements)
✔ Professionalisation and access to talent (the adoption of NPSAS plays a
significant part in increasing ‘professionalisation’ of the finance function and
accounting across the public sector.
✔ Broader economic & social advantages (F/S prepared as per NPSAS provide
confidence & comparability for investors at an international level which helps to
attracting ongoing inward investment into public sector)
Objective of NPSAS

✔ Improving quality & comparability of financial information

✔ Ascertaining the Cash Position of the entity
✔ Comprehensive and transparent financial reporting of cash receipts, cash
payments and cash balance of the entity
✔ Compliance with International Public Sector Accounting Standards (IPSAS)
✔ Enhancing public accountability
Previous Reporting vs NPSAS Cash Basis Reporting format

Previous Reporting system NPSAS Reporting Requirement

Several OAG forms being used for financial Standard forms for financial reporting:
reporting such as (a) Consolidated Statement of Receipt
(a) Revenue Reports (OAG No. 193) & Payment
(b) Expenditure Reports (OAG No. 208 & 210) (b) Statement of Budget Comparison
(c) Deposits Reports (OAG No. 194) (c) Notes to the accounts
(d) Advance Reports (OAG No. 14) (d) Accounting Policies
(e) Liabilities Reports (OAG No. 18)
Clear identification of opening, receipt and Clear identification of cash position is
closing cash position is not found. made in the form of restricted and
unrestricted cash balances.
No recording of the third-party transactions. Third party transaction are required to
be identified, recorded & reported.
No practice of issuing separate audit opinion. Auditors’ opinion is expressed on the
financial statement of Controlled entity
No practice of “Commitment Accounting”. Initiate record of commitment
accounting and report through notes.
Structure of NPSAS Cash Basis
Part I (Mandatory)
✔ NPSAS cash basis of Part I is applicable to all public sector entities (except
Government Business Entities-GBEs) preparing general purpose financial
statements.
✔ Part I of NPSAS
✓ defines the cash basis of accounting,
✓ establishes requirements for the disclosure of information in the financial
statements & supporting notes, &
✓ deals with a number of specific reporting issues.
✔ Financial statements should not be described as complying with this standard
unless they comply with all requirements of Part 1.
Part I (Encouraged Additional disclosure)
✔ It defines additional accounting policies & disclosures that an entity is
encouraged to adopt to enhance its financial accountability & the transparency
of its financial statements.
✔ Such Disclosure May be: -
✓ disclosure of going concern uncertainties,
✓ disclosure of nature & amount of each extraordinary item,
✓ disclosure of administered transactions (i.e. nature & amount of cash flows
& cash balance collected as a agent on behalf of others),
✓ related party disclosure,
✓ disclosure of information about the assets & liabilities
✓ disclosure of Comparison with Budgets (if not publicly available)
✔ It includes explanations of alternative method for presenting certain
information.
NPSAS implementation in Nepal

✔ In 2009, government gave executive approval for implementation of NPSAS in

all public sector entities. An implementation process was initiated by the
Financial Comptroller General Office (FCGO), under which central government
was first to adopt NPSAS, before operational entities did the same.
✔ A steering committee for implementation was established, led by the Joint
Financial Comptroller General, the Auditor-General, MOF, ICAN and the
Accounting Standards Board.
✔ Implementation & reform was funded by the World Bank (Multi Donor Trust Fund
– MDTF)
✔ The project aims to Pilot NPSAS at one or two ministries for preparation of
consolidated financial statements
✓ through capacity development program like training & workshops.
Accordingly, NPSAS was piloted by two ministries (Ministry of Physical
infrastructure & Transport AND Ministry of women, children & social welfare ) in
2011/12 & 2012/13.
✔ The piloting is expected
✓ to deliver experiences which will be used to explore with relevant
stakeholders and
✓ to devise a roadmap for the GON to implement NPSAS across the whole of
government.
✔ In 2015, Rolling out to 15 economic entities for NPSAS implementation
✔ In 2016, Rolling out to additional 15 economic entities totaling 31 entities.
✔ In 2018/19, Full Implementation in whole of Nepal Government in all entities.
Constraints/Limitation on Implementation of NPSAS

✔ weak capacity of staff, especially in finance and audit,

✔ lack of qualified staff, resulting in non-accountants being involved in
government accounting,
✔ lack of stakeholder engagement,
✔ insufficient change management to enable entities to take responsibility for the
reform and be accountable for the results,
Challenging on Implementation of NPSAS

✔ difficulty in collecting the data required for disclosures of third-party

information
✔ formulation of general & specific accounting policies revenue, deposit, special
funds, and financing are complex task,
✔ preparation of cash flow statement by capturing all the cash and cash
equivalents is challenging task.
✔ availability of complete information for preparing cash & comparison of budget
statement at district level entity is another challenge [because Information
regarding external assistance, third party payments, & exchange rate adjustment
would only be available at ministry/department level]
✔ Elimination of duplications of fund flow transactions between entities is another
challenging task.

#8 Role Of Financial Comptroller General Office to Improve Government

Accounting and Public Financial Management System
• Financial Comptroller General Office (FCGO) is the main agency responsible for
the treasury operation of Government of Nepal.
• FCGO is responsible for tracking all expenditure against budget, revenue
collections and preparation of consolidated financial statements of GON.
Various systems have been adopted to manage such transaction such as
(a) Treasury Single Account (TSA)
(b) Computerized Government Accounting System (CGAS) – It is a accounting
system which will capture transactions & their accounting, book keeping,
reporting in respect of expenditure, revenue & retention money of government.
(c) Public Assets Management System (PAMS) – It is a assets management
system develop for efficient & proper management of the public assets.
(d) Sub-national Treasury Regulatory Application (SUTRA) – It is a planning,
budgeting & accounting software developed for facilitating & implementing a
structured financial management procedure of the sub-national government
(provincial or local government)
• FCGO also carries out internal audit functions for Government‘s expenditures,
revenues and retention money.
• FCGO has been undertaking various reform activities in the field of PFM
including Cash Management, Financial Reporting through PEFA Program.
• Information and Communication Technology (ICT) is intensively being applied
to capture the transactions on budget expenditure, revenue collections &
retention money in all districts.
• Treasury Single Account (TSA)
✓ A TSA is a unified structure of government bank accounts that gives a
consolidated view of government cash resources.
✓ In the TSA system, government transactions are done through a single or
limited set of linked bank accounts operated by the district treasury
comptroller offices.
✓ The principle of unity follows from the fungibility of all cash irrespective of
its end use.
✓ While it is necessary to distinguish individual cash transactions for control
& reporting purposes, this purpose is achieved through the accounting
system and not by holding/depositing cash in transaction specific bank
accounts.
✓ This enables the treasury to delink management of cash from control at a
transaction level.
✓ Each district treasury comptroller office within treasury single account
districts has only four main bank accounts: recurrent expenditure, capital
expenditure, revenue & deposits.
✓ Objective of TSA
(a) To ensure effective aggregate control over government cash balances,
(b) To minimize borrowing cost (In the absence of a TSA, idle balances are
maintained in several bank accounts)
(c) To minimize transaction costs during budget execution by controlling
the delay in the receipt of government revenues by collecting banks, &
making rapid payments of government expenses,
(d) To improve budget execution by facilitating real time management and
monitoring of public expenditure.
(e) To facilitate reconciliation between banking & accounting data,
(f) To facilitate efficient control & monitoring of funds allocated to
various government agencies, &
(g) To facilitate better coordination with the monetary policy
implementation.
(h) To ensure transparency and accountability in spending of revenue and
foreign aid.