Local Self Government | Meaning, Importance, Limitations, Accounting Treatment & Accounting for Local Bodies

What is meant by Local Self Government ?

India is one of the largest democratic countries in the world. According to 2001 census report the population of India was 102.70 crores. The area of our country is about 32, 92,054. If compare the area to other country, India stands on seventh position regarding area. The population of India lives in villages, towns and cities. It is difficult to manage the local problems by central and state government. So the concept of local self government was introduced. Understanding the local requirement, to fulfill them properly, and where local people co-operate with local administrator is known as local self-government. So, the organization set up by law to carry out administration is known as 'Local Self Government Organization'. Such local self-government have been established to make the administration easy scientific and simple and more so to involve the local resident.

This type of government solved local problems very fast and very effectively.
Local people are directly involved to solve the problems, because they know their real needs.
This is the first step of a democratic country and it is like a school of democracy. Local Self Government:

Meaning of Local Self Government

Local self-government organisation can be broadly classified into village area and urban area. In village area it is known as Gram Panchayat, Taluka Panchayat and District Panchayat. Where as in urban area is known as Municipality and Municipal Corporation.

According to rules the residential area where population is more then 15,000 and less than 5 lakhs are known as towns and in this type of towns there exist municipality. The area which have population is more than 5 lakhs known as 'cities' and in this type of city the cal self-government known as Municipal Corporation. The notified area council is constituted in a rapidly growing area which does not fit in the definition of municipality. The cantonment board is a creation of the central government and functions under the ministry of defense.

Importance of Local Self Government

1) Decentralization of Power :

The success of democracy depends on the decentralization of power. Through this system of local self-government, people can obtain their democratic rights. Through this system, power can be properly decentralized and every individual can get the scope to develop his or her personality fully and properly.

2) Democratic environment :

The local self-governmental institutions are the best centers for imparting democratic thoughts and education. People prefer democracy because they want to live in an environment of equality and liberty.

3) Reduce heavy responsibility :

The local self-government creates that scope for enjoying democracy. It is through these local self-governments that the local problems can be considered and solved adequately and properly. It also reduces the heavy responsibilities of the central and the state governments and establishes democracy in a wider context.

4) Knowledge of local problems :

Since the members of the local self-government are local people, they can realize and understand the gravity of local problems more seriously than the administrators of the State or Central government and can properly solve them.

5) Corruption free :

In local self government, the members have close and intimate contact with the local people. Naturally, it remains rather free from corruption and acts with real social welfare motif.

6) Active participation of People :

To implement various economic planning in local and regional levels the local self-government institutions are far more helpful than the state or central government. It also inspires the local people to actively participate in various governmental activities. It thus, enables the ordinary people to take part or make active participation in the lowest-level of administration. Naturally, the political socialization of local people becomes possible.

7) Unites to the local people :

The Local Self-government generally unites the people with democracy and encourages them to participate in its activities without any bias or prejudice. Naturally, it can consolidate the political values and faith of ordinary people and thereby influences the political activities and political culture of the people.

8) Experiments through local self-government :

Moreover, both the central and the state governments can make various administrative experiments through these local self-governments.

9) Conducive for people :

Moreover, the local self-government is conducive to equality and liberty and the perfect medium for satisfying the need and grievances of the people at local and regional level.

Limitations of Local Self Government

The local self-government system has some obvious limitations. These are as follows :

It has been alleged that the services rendered by the local self-government often becomes discriminatory.
The local self-government often makes residential arrangements for the elderly people or hostel accommodation for the handicapped students which may be considered as discriminatory services.
If the administration is run by the local self-governmental institutions, it may encourage not only regionalism but also narrow-mindedness and such a tendency will always go against the democratic system practiced in the national level.
Lack of strong leadership.
Too much responsibility for one person.

However, refuting these allegations the exponents of the local self-government institutions hold the view that such local self-governments are the basis of democracy and the best way to develop political consciousness among the people. Through the local self-government the regional and local interests convert into national interest.

Financial Statement of Local Self Government

The term 'Local Body' may defined as a local self-government at the third tier of governance in an administrative and geographical vicinity, e.g., a municipal corporation, a municipality or a panchayat. The Accounting Standard for Local Bodies (ASLB), 'Presentation of Financial Statements', issued by the Council of the Institute of Chartered Accountants of India, will be re-commendatory in nature in the initial years for use by the Local Bodies. This Standard will be mandatory for Local Bodies in a State from the date specified in this regard by the State Government concerned.

A) Balance Sheet

In the Balance sheet there is Current/Non-current Distinction :

An entity should present current and non-current assets, and current and non current liabilities, as separate classifications on the face of its balance sheet except when a presentation based on liquidity provides information that is reliable and is more relevant. When that exception applies, all assets and liabilities should be presented broadly in order of liquidity.
Whichever method of presentation is adopted, for each asset and liability line item that combines amounts expected to be recovered or settled (a) no more than twelve months after the reporting date and (b) more than twelve months after the reporting date, an entity should disclose the amount expected to be recovered or settled after more than twelve months.
When an entity supplies goods or services within a clearly identifiable operating cycle, separate classification of current and non-current assets and liabilities on the face of the balance sheet provides useful information by distinguishing the net assets that are continuously circulating as working capital from those used in the entity's long-term operations. It also highlights assets that are expected to be realized within the current operating cycle, and liabilities that are due for settlement within the same period.
An entity is permitted to present some of its assets and liabilities using a current/ non-current classification, and others in order of liquidity, when this provides information that is reliable and is more relevant. The need for a mixed basis of presentation might arise when an entity has diverse operations.
Information about expected dates of realization of assets and liabilities is useful in assessing the liquidity and solvency of an entity. Information on the expected date of recovery and settlement of non-monetary assets and liabilities such as inventories and provisions is also useful, whether or not assets and liabilities are classified as current or non-current.

a) Current Assets :

An asset should be classified as current when it satisfies any of the following criteria:

It is expected to be realized in, or is held for sale or consumption in, the entity's normal operating cycle;
It is held primarily for the purpose of being traded;
It is expected to be realized within twelve months after the reporting date; or
It is cash or a cash equivalent (as defined in proposed ASLB on 'Cash Flow Statements' unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date).

Current assets include assets (such as taxes receivable, user charges receivable, fines and regulatory fees receivable, inventories and accrued investment revenue) that are either realized, consumed or sold, as part of the normal operating cycle even when they are not expected to be realized within twelve months after the reporting date. Current assets also include assets held primarily for the purpose of trading and the current portion of long-term investments.

b) Non-current Assets :

All other assets should be classified as non-current. This Standard uses the term non-current assets to include tangible, intangible and long-term Investments. It does not prohibit the use of alternative descriptions as long as the meaning is clear.

c) Current Liabilities :

A liability should be classified as current when it satisfies any of the following criteria :

It is expected to be settled in the entity's normal operating cycle;
It is held primarily for the purpose of being traded;
It is due to be settled within twelve months after the reporting date; or
The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date.

Some current liabilities, such as government transfers payable and some accruals for employee and other operating costs, are part of the working capital used in the entity's normal operating cycle. Such operating items are classified as current liabilities even if they are due to settled more than twelve months after the reporting date. The same normal operating cycle applies to the classification of an entity's assets and liabilities. When the entity's normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months.

d) Non-Current Liabilities :

All other liabilities should be classified as non-current.

e) Share Capital :

When an entity has no share capital, it should disclose equity, either on the face of the balance sheet or in the notes, showing separately :

Contributed capital, being the cumulative total at the reporting date of contributions from owners, less distributions to owners;
Accumulated surpluses or deficits;
Reserves, including a description of the nature and purpose of each reserve within equity; and
Minority interests.

B) Income and Expenditure Statement

a) Surplus or Deficit for the Period :

All items of revenue and expense recognized in a period should be included in the determination of surplus or deficit unless an ASLB requires otherwise. Normally, all items of revenue and expense recognized in a period are included in the determination of surplus or deficit. This includes the effects of changes in accounting estimates. However, circumstances may exist when particular items may be excluded from surplus or deficit for the current period.

1) As a minimum, the face of the Income and expenditure statement should include line items that present the following amounts for the period :

Revenue
Employee costs
Finance costs
Depreciation and amortization
Other operating expenditure
Share of the surplus or deficit of associates and joint ventures accounted for using the equity method
Minority interest share of surplus or deficit
Surplus or deficit

2) The following items should be disclosed on the face of the income and expenditure statement as allocations of surplus or deficit for the period:

Surplus or deficit attributable to minority interest.
Surplus or deficit attributable to owners of the controlling entity.

b) Revenue :

i) Includes:

Revenue includes only the gross inflows of economic benefits or service potential received and receivable by the entity on its own account. Amounts collected as agent of the government or another government organisation or on behalf of other third parties are not economic benefits or service potential which flow to the entity and do not result in increases in assets or decreases in liabilities. Therefore, they are excluded from revenue. Similarly, in a custodial or agency relationship, the gross inflows of economic benefits or service potential include amounts collected on behalf of the principal and which do not result in increases in net assets/equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of any commission received or receivable for the collection or handling of the gross flows.

ii) Excludes :

Financing inflows, notably borrowings, do not meet the definition of revenue because they result in an equal change in both assets and liabilities and have no impact upon net assets/equity. Financing inflows are taken directly to the statement of financial position and added to the balances of assets and liabilities.

C) Statement of Changes in Equity

1) Following information should be shown on the face of the statement :

Surplus or deficit for the period.
Each item of revenue and expense for the period that, as required by other Standards, is recognized directly in equity, and the total of these items.

2) The entity may also present the total revenue and expense for the period, showing separately the total amounts attributable to owners of the controlling entity and to minority interest.

3) An entity should also present, either on the face of the statement of changes in equity or in the notes :

The amounts of transactions with owners acting in their capacity as owners, showing separately distributions to owners;
The balance of accumulated surpluses or deficits at the beginning of the period and at the reporting date, and the changes during the period; and
To the extent that components of equity are separately disclosed, a reconciliation between the carrying amount of each component of equity at the beginning and the end of the period, separately disclosing each change.

D) Cash Flow Statement

Cash flow information provides users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilize those cash flows. ASLB on, 'Cash Flow Statements'. sets out requirements for the presentation of the cash flow statement and related disclosures.

Accounting Treatment of Local self Government

A) Moving from the Cash Basis to the Accrual Basis :

A Local Body in the process of moving from cash basis of accounting to accrual basis of accounting may wish to include particular accrual-based disclosures during this process. Such accrual-based disclosures may or may not be audited. The location of such additional information (for example, in the notes to the financial statements or in a separate supplementary section of the financial statements) will depend on the characteristics of the information (for example reliability and completeness)
The CASLB also attempts to facilitate compliance with the Accounting Standards for local Bodies (ASLBS) through the use of transitional provisions in certain standards. Where transitional provisions exist, they may allow a Local Body additional time to meet the full requirements of a specific Accounting Standard or provide relief from certain requirements when initially applying an Accounting Standard. A Local Body may at any time elect to adopt the accrual basis of accounting in accordance with the Accounting Standards. At this point, the Local Body should apply all the Accounting Standards including the transitional provisions in an individual Accounting Standard.
Having decided to adopt accrual accounting in accordance with the Accounting Standards, the transitional provisions would govern the length of time available to make the transition. On the expiry of the transitional provisions, the Local Body should report in full in accordance with all the Accounting Standards.

B) Measurement of Revenue :

Revenue should be measured at the fair value of the consideration received or receivable.

The amount of revenue arising on a transaction is usually determined by agreement between the entity and the purchaser or user of the asset or service. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity.
In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable. For example, an entity may provide interest free credit to the purchaser or accept a note receivable bearing a below-market interest rate from the purchaser as consideration for the sale of goods. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest, where the effect of time value of money is material. Ordinarily, when the inflow of cash or cash equivalents is deferred beyond a period of twelve months, the effect of time value of money is likely to be material. The imputed rate of interest is the more clearly determinable of either :

The prevailing rate for a similar instrument of an issuer with a similar credit rating; or
A rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.

C) Sale of Goods :

Revenue from the sale of goods should be recognized when all the following conditions have been satisfied :

The entity has transferred to the purchaser the significant risks and rewards of ownership of the goods.
The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
The amount of revenue can be measured reliably.
It is probable that the economic benefits or service potential associated with the transaction will flow to the entity.
The costs incurred or to be incurred in respect of the transaction can be measured reliably.

D) Interest, Royalties and Dividends :

Revenue arising from the use by others of entity assets yielding interest, royalties and dividends should be recognized using the accounting treatments set out when :

It is probable that the economic benefits or service potential associated with the transaction will flow to the entity.
The amount of the revenue can be measured reliably.

Revenue should be recognized using the following accounting treatments :

Interest should be recognized on a time proportion basis that takes into account the effective yield on the asset.
Royalties should be recognized as they are earned in accordance with the substance of the relevant agreement.
Dividends or equivalents should be recognized when the shareholder's or the entity's right to receive payment is established.

E) Inventories :

Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by an entity and held for resale, or land and other property held for sale. Inventories also encompass finished goods produced, or work-in-progress being produced, by the entity: Inventories also include (a). materials and supplies awaiting use in the production process, and (b) goods purchased or produced by an entity, which are for distribution to other parties for no charge or for a nominal charge, for example, educational books produced by a health authority for donation to schools. In many entities, inventories will relate to the provision of services rather than goods purchased and held for resale or goods manufactured for sale. In the case of a service provider, inventories include the costs of the service for which the entity has not yet recognized the related revenue (guidance on recognition of revenue can be found in ASLB 3, "Revenue from Exchange Transactions.")

Inventories in the local bodies may include :

Consumable stores
Maintenance materials
Spare parts for plant and equipment, other than those dealt with in standards on Property, Plant and Equipment.
Work-in-progress, including educational/training course materials.
Land/property held for sale.

F) Borrowing Costs :

Borrowing costs may include :

Interest and commitment charges on bank borrowings and other short-term and long-term borrowings.
Amortization of discounts or premiums relating to borrowings.
Amortization of ancillary costs incurred in connection with the arrangement of borrowings.
Finance charges in respect of assets acquired under finance leases or under similar arrangements.
Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Exchange differences arising from foreign currency wings and considered as borrowing costs are those exchange differences which arise on the amount of principal of the foreign currency borrowings to the extent of the difference between interest on local currency borrowings and interest on foreign currency borrowings. Thus, the amount of exchange difference not exceeding the difference between interest on local currency borrowings and interest on foreign currency borrowings is considered as borrowing costs to be accounted for under this Standard and the remaining exchange difference, if any, will be accounted for under Accounting Standard for Local Bodies (ASLB) on The Effects of Changes in Foreign Exchange Rates' For this purpose, the interest rate for the local currency borrowings is considered as that rate at which the entity would have raised the borrowings locally had the entity not decided to raise the foreign currency borrowings. Guidance on accounting for the effects of changes in foreign exchange rates can be found in Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates', until the ASLB on this subject is formulated.

Illustration :

Local Body XYZ has taken a loan of USD 10,000 on April 1, 20X3, for a specific project at an interest rate of 5% p.a., payable annually. On April 1, 20X3, the exchange rate between the currencies was Rs. 45 per USD. The exchange rate, as at March 31, 20X4, is Rs. 48 per USD. The corresponding amount could have been borrowed by Local Body XYZ in local currency at an interest rate of 11 per cent per annum as on April 1, 20X3.

Solution :

The following computation would be made to determine the amount of borrowing costs for the purposes of paragraph 4(e) of this Accounting Standard for Local Bodies :

Interest for the period = USD 10,000 x 5% x Rs. 48/USD= Rs. 24,000/-
Increase in the liability towards the principal amount =USD 10,000 x (48-45)= Rs. 30,000/-
Interest that would have resulted if the loan was taken in Indian currency = USD 10000 x 45 x 11% = Rs. 49,500/-
Difference between interest on local currency borrowing and foreign currency borrowing =Rs. 49,500 - Rs. 24,000 = Rs. 25,500 /-

Therefore, out of Rs. 30,000 increase in the liability towards principal amount, only Rs. 25,500 will be considered as the borrowing cost. Thus, total borrowing cost would be Rs.49,500 being the aggregate of interest of Rs. 24,000 on foreign currency borrowings (covered by paragraph 4(a) of this Accounting Standard for Local Bodies) plus the exchange difference to the extent of difference between interest on local currency borrowing and interest on foreign currency borrowing of Rs. 25,500. Thus, Rs. 49,500 would be considered as the borrowing cost to be accounted for as per this Accounting.

Standard for Local Bodies and the remaining Rs. 4,500 would be considered as the exchange difference to be accounted for as per Accounting Standard for Local Bodies (ASLB) on 'The Effects of Changes in Foreign Exchange Rates! 5. Guidance on accounting for the effects of changes in foreign exchange rates can be found in Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates',. until the ASLB on this subject is formulated.

In the above example, if the interest rate on local currency borrowings is assumed to be 13% instead of 11%, the entire exchange difference of Rs. 30,000 would be considered as borrowing costs, since in that case the difference between the interest on local currency borrowings and foreign currency borrowings (i.e., Rs. 34,500 (Rs. 58,500 - Rs. 24,000)) is more than the exchange difference of Rs. 30,000. Therefore, in such a case, the total borrowing cost would be Rs. 54,000 (Rs. 24,000+ Rs. 30,000) which would be accounted for under this Accounting Standard for Local Bodies and there would be no exchange difference to be accounted for under proposed ASLB on 'The Effects of Changes in Foreign Exchange Rates'.

Accounting Standards for Local Bodies

Accounting for Local Bodies :

A) Accounting Standard for Local Bodies (ASLB) 1 for "Presentation of Financial Statement" :

The Accounting Standard for Local Bodies (ASLB) 1, 'Presentation of Financial Statements', issued by the Council of the Institute of Chartered Accountants of India, will be re-commendatory in nature in the initial years for use by the Local Bodies. This Standard will be mandatory for Local Bodies in a State from the date specified in this regard by the State Government concerned.

B) Accounting Standard for Local Bodies (ASLB) 11 for "Construction Contract" :

The Accounting Standard for Local Bodies (ASLB) 11, 'Construction Contracts', issued by the Council of the Institute of Chartered Accountants of India, will be re-commendatory in nature in the initial years for use by the local bodies. This Standard will be mandatory for Local Bodies in a State from the date specified in this regard by the State Government concerned.

For the purposes of this Standard, construction contracts include :

Contracts for the rendering of services that are directly related to the construction of the asset, for example, those for the services of project managers and architects;
Contracts for the destruction or restoration of assets, and the restoration of the environment following the demolition of assets.
For the purposes of this Standard, construction contracts also include all arrangements that are binding the parties to the arrangement, but which may not take the form of a documented contract. For example, components of local body may enter into a formal arrangement for the construction of an asset but the arrangement may not constitute a legal contract because the individual departments of the local body may not be separate legal entities with the power to contract. However, provided that the arrangement confers similar rights and obligations on the parties to it as if it were in the form of a contract, it is a construction contract for the purposes of this Standard. Such binding arrangements could include (but are not limited to) a decision of the body governing the local body, or a memorandum of understanding.

C) Accounting Standard for Local Bodies (ASLB) 3 for "Revenue from Exchange Transactions" :

The Accounting Standard for Local Bodies (ASLB) 3, 'Revenue from Exchange Transactions, issued by the Council of the Institute of Chartered Accountants of India, will be re-commendatory in nature in the initial years for use by the local. bodies. This Standard will be mandatory for Local Bodies in a State from the date specified in this regard by the State Government concerned.

Local Bodies may derive revenues from exchange or non-exchange transactions. An exchange transaction is one in which the entity transfers goods or services, or use of assets, and receives some value (primarily in the form of cash, goods, services or has liabilities extinguished) from the other party in exchange.

Examples of exchange transactions include :

The purchase or sale of goods or services.
The lease of property, plant and equipment.

D) Accounting Standard for Local Bodies (ASLB) 4 for "Borrowing Cost" :

The Accounting Standard for Local Bodies (ASLB) 4, 'Borrowing Costs', issued by the Council of the Institute of Chartered Accountants of India, will be re-commendatory in nature in the initial years for use by the local bodies. This Standard will be mandatory for local bodies in a State from the date specified in this regard by the State Government concerned.

Borrowing costs may include :

Interest and commitment charges on bank borrowings and other short-term and long-term borrowings.
Amortization of discounts or premiums relating to borrowings.
Amortization of ancillary costs incurred in connection with the arrangement of borrowings.
Finance charges in respect of assets acquired under finance leases or under similar arrangements.
Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Exchange differences arising from foreign currency borrowings and considered as borrowing costs are those exchange differences which arise on the amount of principal of the foreign currency borrowings to the extent of the difference between interest on local currency borrowings and interest on foreign currency borrowings. Thus, the amount of exchange difference not exceeding the difference between interest on local currency borrowings and interest on foreign currency borrowings is considered as borrowing costs to be accounted for under this Standard and the remaining exchange difference, if any, will be accounted for under Accounting Standard for Local Bodies (ASLB) on 'The Effects of Changes in Foreign Exchange Rates For this purpose, the interest rate for the local currency borrowings is considered as that rate at which the entity would have raised the borrowings locally had the entity not decided to raise the foreign currency. borrowings. Guidance on accounting for the effects of changes in foreign exchange rates can be found in Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates, until the ASLB on this subject is formulated.

E) Accounting Standard for Local Bodies (ASLB) 5 for "Property, Plant and Equipment" :

The Accounting Standard for Local Bodies (ASLB) 5, Property, Plant and Equipment', issued by the Council of the Institute of Chartered Accountants of India, will be re-commendatory in nature in the initial years for use by the local bodies. This Standard will be mandatory for Local Bodies in a State from the date specified in this regard by the State Government concerned.

This Standard does not apply to :

Biological assets, i.e., living animals or plants, related to agricultural activity.
Mineral rights and mineral reserves such as oil, natural gas and similar non regenerative resources.
Natural resources like natural lakes.

F) Accounting Standard for Local Bodies (ASLB) 12 for "Inventories" :

The Accounting Standard for Local Bodies (ASLB) 12, 'Inventories', issued by the Council of the Institute of Chartered Accountants of India, will be re-commendatory in nature in the initial years for use by the Local Bodies. This Standard will be mandatory for Local Bodies in a State from the date specified in this regard by the State Government concerned.