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Reserve Funds - rtiallahabad.cag.gov.in

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Reserve Funds
Government AccountingStandards on ReserveFundsGASAB
In this presentation on reserve funds, topics will be covered thus:
IntroductionGASAB mandateObjectiveCurrent status on reserve fundsPublic Account of IndiaCessAudit ReportsFinance AccountsReceipts in Reserve FundsExpenditure in Reserve FundsInvestmentInterestGuidelines in general and Specific GuidelinesDisclosures in Finance Accounts
IntroductionThere are two types of funds in government1. Reserve Funds in the J section of the Accounting classification of LMMH2. Other Funds
GASAB mandate
Rules of Business of GASAB“…to improving standards of Governmental accounting and financial reporting which will enhance the quality of decision-making and public accountability.''
Objective
Standardization and transparencyare required for all funds that are accounted in reserve funds in the state government and the Union Govt of India.The objective of this Advisory on Reserve Funds is to have description of the prescribed rules, extent of adherence to the rules prescribed and mandatory reporting of deviations from the prescribed rules, which should also have reasons approved and laid out in a transparent manner. This would help transparency in accounting rules followed, rules and deviations in expenditure from Reserve Funds and scope for improvement in these by executive agencies.The objective could be amplified to say whether the rules are in consonance with the provisions of the Act, the accounting methodology followed for the purpose and their adherence in terms of expenditure met out of the fund and the investment of the balances in the fund are clearly brought out in a transparent manner.
Current status on reserve funds
Sources of data on Reserve FundsAccountingorganisationsin the Govt. of India and the states–Ministry of Finance_ Controller General of Accounts_ Pr As G in States_ Audit Reports_ Finance Accounts_ Experts and senior officers_ ministries/ departments_ GASABSecretatiat_ professionals(ICAI etc)_ Libraries/books/documents/gazette/finminwebsite etc
2. List Of Major Minor Heads of Accounts (LMMH)
Accounting procedure for showing expenditure from Reserve Funds by actual debit to functional head of the scheme and deduct entry under minor head that explicitly gives the name of the Reserve FundDetailed head will be “Inter Account Transfer”Same procedure for revenue, capital or loan under which actual expenditure stands debited
Public Account of India
Reserve Funds are located in the Public Account of IndiaDo not lapse with close of Financial yearAre contained in the J Section in LMMHPublic Account of IndiaI Postal and Small Savings etcIIJ Reserve FundsIII Deposit Accounts etc….
Accounting Procedure
Para 3.4 of the General Directions to LMMHThe AG in the state sees that the procedure adopted in budgeting and accounting for the reserve funds conforms to the principles mentioned in Para 3.4 of the General Directions to LMMHThe same is true for the Union Govt. - CCAs and CGA play a role here
Accounting classifications
The List of Reserve Funds under ‘J’ section in Public Account of India are in 2 categories:a) Reserve Funds Bearing interest8115Depre/Renewal Reserve Fund8116 Revenue Reserve Fund8117 Development Funds8118 Capital Reserve Fund8121 General and Other Reserve Funds
b)Reserve Funds not bearing Interest8222Sinking Funds8223 Famine Relief Fund8224 Central Road Fund8225 Roads and Bridges Fund8226Depre/Renewal Reserve Fund8228 Revenue Reserve Funds8229 Development and Welfare Funds8230 Special Railway Safety Fund8231 Railway Safety Funds8232 Rural Employment Guarantee Funds 3688235 General and Other Reserve Funds
Reserve Funds
Are for Specific expenditure as restricted by thepurpose of their creationReserve Funds are in the Public Account and therefore, do not get lapsed at the end of the accounting year, givingscope for using the same whenever required.Fund transactions are mapped… revenues are applied only for the specific approved purpose as per legislation (eg. Infrastructure building,afforestation, pollution control, environmental protection )There areusually provisions contained in an Act and there are Rules framed thereunderon details like accounting procedure investment policy etc.
Categories of Reserve Funds in the states
i.Earmarked funds:Earmarked funds are generally managed by RBI. Govt’s contribution to such funds, investments out of it, redemption of those securities and interest thereon are managed by RBI, Nagpur.For example : Consolidated Sinking Fund, Guarantee Redemption Fund. In these cases funds are locked up for some specified period and the amount is not available to the Government for incurring expenditure on any purposes other than the one for which it was created.
ii.Other Reserve Funds.The second category is operated by the Govt to keep aside some amount by way of contribution to a specific fund which can be utilised subsequently to meet the expenditure already incurred against a specific major head.For Example : Revenue collections out of cess or fee collection is initially classified under a revenue receipt head in Consolidated Fund and then transferred to the reserve fund/ deposit account which is in Public Account.
IiiSource of Fund:Grants made by another government.(egCentral Road Fund)Funds accumulated from sums set aside by the State Govt from the Consolidated Fund for the expenditure incurred by themselves on a particular purposesegDepreciation or Renewal Reserve Funds.Funds accumulated from contributions made by outside agencies to State Government ( grants made ICAR).
Issues in Reserve funds
Audit Reports have brought out some of the issues in the operation of Reserve Funds. For Example, Non operative Reserve Funds and the need to close such dormant funds.Finance Accounts Volume I of the States have brought out many issues in detail. For Example, non creation of fund, non provision of interest in budget, not routing revenues where required through Funds in the Public Account.
Cess
There are a number of issues we see in the context ofcessbased reserve funds:Accounting Rules have not been createdCollection fromcessesare for a particular scheme or activity like in education. But funds not fully utilized.Labourwelfare funds fromlabourcess. Supreme Court directions onutilisationand investment.
Audit Reports
ExamplesI CHATTISGARH17 Reserve Funds earmarked for specific purposes, out of which, 13 funds were active, and 4 funds have been inactive between2011-2012 to 2014-15. The total accumulated balance at the end of 31 March 2015 in these funds was Rs 3,190.53cr (Rs 3,171.65cr in active funds and Rs 18.88cr in inactive funds), out of which Rs 1,343.64cr (42.11 %) was invested.Non Discharge of Interest Liabilitiesthat the State Government is required to discharge. No Budget Provision by the State Government despite balances in such Reserve Fund. Interest due Rs.37.53crore.
Audit Reports
ExamplesShortfall in state contribution: Consolidated Sinking Fund (CSF) as notified by the State Government, annual contributions to the Fund are to be made - at least 0.5 per cent of the outstanding liabilities. State Government was required to contribute Rs 124.52cr (0.5 per cent). Against this requirement, the State Government contributed Rs 100 crore to the Fund, a shortfall of Rs 24.52 crore.
CHATTISGARHcontd…
Reserve Fund not created:Guarantee Redemption Fund (GRF): The Twelfth finance Commission had recommended. However, the Finance Department, Government of Chhattisgarh vide their letter dated 15 May 2015, decided not to create the Guarantees Redemption Fund against the outstanding guarantees of Rs 2,314.47cras of 31 March 2015.Investment not done: State Disaster Response Fund (SDRF): As per the notification on SDRF, the balance of the fund is to be invested in Government of India securities, auctioned treasury bills, interest earning deposits and certificate of deposits with Scheduled Commercial Banks. Detail of Investment of the balances of the Fund was not furnished.Unused Funds:GraminVikasFund State Government constituted in 2001-02, no transaction has been made from this Fund since inception.(Finance Accounts Vol. I, 14-15)
ARUNACHAL PRADESH (14-15)
Non discharge of interest liability on Reserve Funds. Balance at the beginning of 2014-15 was Rs. 44.54 cr. and Interest Due Rs. 3.34 cr.Arunachal Pradesh- Non discharge of interest liability. No budget provision made by state govt despite balances in Reserve Funds as on 1st April 2015 (Finance Accounts, 2015-16)State Disaster Response Fundproportion of 90:10 (Centre: State). Contrary to the guidelines, the State Government transferred the total contribution to SDRF of RS 44.66cr (Central share of Rs. 40.20 cr. and State Government’s matching share of Rs. 4.46cr) together with the grants towards NDRF to a Current Bank Account opened for this purpose.
ARUNACHAL PRADESH (14-15)
Investment: As on 31 March 2015, an amount of Rs 44.54cr remained in the Fund, which, however, has not been invested which is contrary to guidelines.Central Road Fund, since the amount has not been routed through Public Account, there is no assurance of utilization of the grant of Rs. 55.00cr.
Issues in Reserve Funds
Purpose: Purpose for which the fund is to be used and on which expenditure can be incurred from the fund should be disclosed. E.g. petroleumcessfor what purpose to be utilized.Sourcesform which the fund would be created must be specified (e.g.cessor from Union Government to state etc.)Accounting Procedure: for receipts & expenditure should be there in Guidelines and standards..
Issues in Reserve Funds
A fund administrationwho maintains the particular Reserve fund. The standard must require the disclosure of the fund Administrator [Name, designation, order by which made fund administrator, period for which (dates) she was the ““ ].Audit: The Accounts (Fund Administrator) should be openi) To internal Audit and ii) tostatutaryaudit. This should be made part of the guidelines.
Issuescontd…
Utilization certificatealso should be there in accounts of the Reserve Funds. That will clearly identify the purpose for which expenditure from the fund was incurred.Pre-Check: In many cases e.g. in Karnataka, Pr.AG pointed out that the bills pertaining to expenditure from the fund follow the same procedure like other bills. Every transaction is passed by the PAO like regular bills - similar to cheques procedure for payment followed in PAO payments from the consolidated fund of India. There are 16 to 20 Funds accounting done by the AG in March There are advantages in this too, as pre-check is done completely.
Receipts into Reserve Funds
Accounting in one placeE.g. KERC : they want to maintain a bank account and the rest with Government in fund. Such practices should not be acceded to - fiscal discipline.
Receipts into Reserve Funds
Dedicated Head for accounting receiptis important. Head of Accounts for Operating Reserve Fund should be defined, decided by AG/CGA (and CAG concurrence)and then budget be made accordingly for Reserve funds. Role of AG should be defined. There should not be a requirement of Executive orders where Executive (Finance Department) issues letter to AG of how much should be part of Reserve Funds and how balance should be left out of Reserve Funds.
Receipts contd.
Reconciliation :Another reason where the total amounts of receipts is not reflected in the Reserve Fund is because reconciliation has not happened e.g. Green tax is not transferred because reconciliation had not taken place. Therefore, they do not know how much exactly to transfer. So reconciliation is mandatory every month.Eg. Green tax inCFl.
Expenditure from Reserve Funds
Completion of Accounts: One example is of Forest Development (Tax) Reserve Fund. While receipts are taken into the Reserve Fund, expenditure is not taken into account in the Reserve Fund fully. The Executive being concerned with fiscal target and when that has been achieved/ reached, there is no requirement of completing the accounts according to the executive agencies.Where expenditure booked in Reserve Funds at end of the F.Y. in March, then e.g.Capital expenditureand later from fund, then Assets position is not shown in Capital head, but as less after final booking in Reserve Funds. Disclosure here is required to show transparent accounting procedure.
Issuescontd…
Time frame: Every fund should have an act and thus legislative backing. Act itself indicate why reserve fund is being created, and sunset clause, that only for a particular period should be clearly indicated.Role of the bank -also importantchallansand scrolls are important for reconciliation of receipts into Reserve Funds.Different from PD Account: The ‘j’ category/ section of Reserve Funds do not have cheque book facility as used in Public Deposit Account. So the ‘J Reserve Funds’ follow a procedure where bills pertaining to the fund come to the PAO. Expenditure is initially done through bills passed by PAO and then sorted out at the end of the year. It is not so in Public Deposit Accounts.
Investments
Investment of Balances :It should be automatic, as per M/o Finance order. These rules should be scrupulously followed. There should not be a choice for executive to do or not do regarding investment. If Executive has a choice, then accounts are not complete. Balances in Fund be invested and if not invested, reasons for not investing the balances must be specified and brought out, and certified by the fund Administrator. Executive Role in accounting matters should be stopped. Therefore roles of executive/AG/CGA etc. be defined clearly.
Investments
No Surplus: Since Reserve Funds are created for a specific purpose, so should not have surplus accumulating in the Reserve Fund. Alsoegs. Loans to Bangalore Metro (BMRCL) when they have Rs 2000crorefund balance. This should not happen. In Karnataka Rs 26000crore fund balances ; they are not investing the balances. The balances should be invested.Disinvested: all disinvestment amounts should come through CFI to the Reserve Funds and not directly to the Reserve Funds. Disclosure in Budget Document is important and should be stringently followed for all Reserve Funds.
Interest
Interest from investment: RBI is investing balances, and the interest from investment is re-invested by RBI, so interest is not being shown in the fund Accounts, e.g. in Consolidated Sinking fund Rs 300crore from interest on investment has been re-invested. But this Rs 300crore is not shown in accounts of the Reserve fund. Thus Accounts are not complete.
Guidelines in general and Specific Guidelines
Objective therefore in creating standards for accounts in Reserve Funds are:1.Creationof guidelines– general and specific-Aim is to create transparency in accounting practices and rules of reserve funds;- creation of accounting procedures for reserve funds- including creating subsidiary accounts- specific guidelines may be created for particular reserve funds
Disclosures in Finance Accounts
2. disclosures in accounts– Finance Accounts of States and the Union of Indiaif subsidiary accounts are in detail the best would be to retain single line for each reserve fund in a document as large as the Finance Accounts3. FRBM Act: There should be transparency in Budget documents also about the Reserve Funds. Disclosures are important. FRBM act may include about Reserve Funds and the fund should be compliant.4. Legal compliance -eg.Labourlawsetc
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Reserve Funds - rtiallahabad.cag.gov.in