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Government Accounting and The Use of The Accruals Basis
Government Accounting and The Use of The Accruals Basis
Relatively uniform
Well-documented
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Simple to learn and operate
Easy to consolidate
Staff
Cash book
Payroll
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See paper four for a fuller discussion)
2
Payables
Receivables
The performance of government accounting systems varies from extremely good, down
to utterly inadequate. Many World Bank borrowers have inadequate accounting systems
implying a range of difficulties in:
Given such possibilities the need for accounting reform is obvious. It presents a number
of issues:
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5.2 Bases of accounting
cash basis
The cash basis measures cash flows at the time those flows actually take place. The
modified cash basis allows a short period of time after the year-end for settling liabilities
of the year just ended (and treats this expenditure as occurring in the year just ended).
The full accrual basis records expenditures and revenues when they become due (i.e. in
many cases before the associated cash flows take place). It records assets and liabilities
and is therefore associated with the production of balance sheets. It is also associated
with providing depreciation on assets with finite lives. The modified accruals 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).
The basis of accounting determines the extent of information that an accounting system
can collect and therefore report. A pure, cash-based system can only report on cash
balances and cash flows (inward and outward). But cash payment or receipt is usually
only a small element in the history of a transaction. For instance a purchase transaction
might go through the following stages, each of which could generate accounting
information:
Commitment of funds
Payment of invoice
Pure cash accounting does not provide useful information for managing payables and
receivables. In the above example, an accrual system would show the amount owing to
the supplier. Then when full payment occurred, the amount owing would be
extinguished. Of more practical importance is the lack of an accounting sub-system for
receivables in a pure cash-based system. Without this, managing revenues is far less
efficient. For instance if sums due are noted only in files, and not entered into a double-
entry accounting system, they can easily escape attention. Moreover the files may be
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displaced or lost. An accrual accounting system provides a systematic method of
recording and managing sums due, something which many governments badly lack.
Why then is the cash basis the predominant basis of accounting for governments? The
answer is that the cash basis is:
Easy to learn and carry out. It requires care, but no special accounting skills.
In most governments the cash basis is used in conjunction with the commitment basis for
budgetary control purposes. Under the commitment basis, expected expenditures are first
entered into the accounting system as commitments (sometimes called obligations).
Authorized expenditure (the available budget) is reduced by commitments which have
not been liquidated (i.e. not been followed by a cash payment). However, when the cash
payment occurs, the sum committed is extinguished.
Cash accounting does not generate enough useful information e.g. about
payables and receivables.
These are strong and valid arguments. However, the possibility remains that accrual
features could be added to a cash-based accounting system. The Bank funds several
treasury modernization projects. They aim to improve budgeting, accounting and cash
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management. They all use the cash basis and in all cases accrual-based sub-systems are
added to cover payables and receivables and sometimes asset management (inventory and
fixed assets). Moreover, liabilities arising from government borrowing are tracked and
accounted for outside the treasury system. Is this a satisfactory halfway house?
Part of the cost of using accrual-based data is the cost of understanding it.
Accrual-based data cannot be easily understood by non-accountants.
The adoption of full accrual accounting is more complex and more costly than
the simple cash basis. Asset valuation is an example of complexity and cost.
Poor countries usually lack accounting skills, and therefore have few trained
people who can either produce complex accounting information or use it.
IPSAS are intended for national, regional and local governments and related
government entities such as agencies, boards and commissions.
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The case of Mongolia seems to be an exception. It has been attempting to adopt full accrual accounting.
No assessment has yet been made of the degree of success.
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At present such entities have diverse reporting practices and there are no
authoritative international standards.
PSC’s primary focus is ensuring that its pronouncements are consistent with
those of the International Accounting Standards Committee.
PSC started work on the basis of four alternative accounting bases: cash basis; modified
cash basis; modified accrual basis; and accruals basis. The cash and modified cash bases
were defined as being practically the same (the only difference being that under the
modified basis the books were left open for a period of months after the year end for the
settlement of bills). The modified accrual and accrual basis differ principally in that the
latter requires the capitalization of fixed assets and their depreciation. PSC assumed that
countries would evolve along a continuum between cash and full accruals.
However, support for the two modified bases was judged to be inadequate (despite
vociferous opposition from Canada) and the focus was shifted to two bases: cash and full
accruals. Thus to comply with IPSAS a government must either use the cash or the full
accruals basis for its principal general-purpose financial statements. Using the full
accruals basis implies financial statements similar to those produced by large
corporations.
PSC has produced one standard for the cash basis and is in course of producing a series
of standards similar to those of IAS for the accruals basis. For a government entity to be
in compliance with IPSAS its general-purpose financial statements must not mix bases of
accounting (i.e. must be produced either on the cash or on the full accruals basis), and
they must consolidate all the entities controlled by that entity. In other words a national
government must produce fully consolidated financial statements for all the entities
which it controls. This is an elegant solution to the shenanigans following the coming
into force of the Maastricht Treaty. Governments changed the definition of the reporting
entity at will in order to fall inside the Maastricht criteria (general government budget
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deficit no more than 3%, and government borrowing no more than 60% of Gross
Domestic Product). However elegant the solution, very few governments of developing
countries consolidate accounting information to this level, very few are able to do so and
even fewer are likely to wish to do so.
Despite such issues there is strong support for IPSAS including virtual IMF endorsement
in its new approach to Government Finance Statistics.
Are there differences between the accountability models which should be applied to
governments and to companies? Should government’s financial statements reflect
concepts which apply to commercial entities (profitability, keeping capital intact)?
Can governments be managed properly without the full range of accounting information
that only an accrual-based system can supply?
What advantages and disadvantages are there in governments valuing their fixed assets
and depreciating them?
What are the implications of PSC/IFAC requirements that in order to claim compliance
with IPSAS all government controlled entities should be consolidated for the purpose of
producing financial statements and (b) that only one accounting basis should be used in
those statements?
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Why, given its obvious defects, has the cash basis survived so long in government
accounting?
Why do the Bank’s treasury modernization projects use the cash basis supplemented by
systems for payables, receivables and commitments?
Is there a continuum between cash and accruals along which countries are likely to
progress and if so how important is the modified accruals basis as a convenient staging
post?
Sources
British Government (1994) Better accounting for taxpayers’ money: resource accounting
and budgeting in government, Her Majesty’s Stationery Office, London.
Organisation for Economic Cooperation and Development (1993), Accounting for what?
The value of accrual accounting to the public sector, PUMA, Paris.