To check wrong accounting methods followed by most States to record adjustments for errors made in past years’ accounts, the government has notified a new accounting standard for States, Union territories and the Union government on how to account for such prior period adjustments.
The standard, prescribed on the advice of the Comptroller Auditor General (CAG) of India, however, does not cover transactions such as payment of arrears arising due to increase in salaries or revision of pension or increase in dearness allowance as they cannot be attributed to errors or adjustments in government policies.
Under the cash system of accounting followed for government accounts, there are no rules for States for dealing with prior period adjustments to rectify errors and adjust financial statements for earlier years whose accounts have been closed.
“In a study of various Finance Accounts of States, it was observed that majority of the States are not taking cognizance of Prior Period Adjustments in their accounts or following a wrong practice of passing transfer entries to correct Prior Period Adjustments,” the Finance Ministry said.
The new standard “not only aims to disclose such information which pertains to prior period errors but also covers entries requiring Prior Period Adjustments arising out of changes in government decisions which may impact current balances and progressive amounts during the earlier years for which accounts have been closed,” it added.
The Ministry, which notified the new norm called the Indian Government Accounting Standards-4, has also stressed that defaults of loans and grants-in-aid shall not be included in its ambit. “It is only a process for rectification or adjustment of financial statements of prior periods,” it said.
