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An Accounting Framework for the Public Sector: a New Perspective

Conference Paper · September 2004

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E Lande & JC Scheid Sankt Gallen – September 2nd and 3rd

An accounting framework for the public sector: a new

perspective
Evelyne Lande & Jean-Claude Scheid1
Summary
After presenting main current accounting framework, this article explains in the first part the French
attempt to decline business (enterprise) accounting framework (IASB framework) to the public sector
accounting. It shows that if State specificities necessitate adaptations, these adaptations are often not
very well defined and would be misleading for setters of new French accounting standards. The
second part focuses of new ways of defining public sector accounting framework either by adapting
the existing ones with the aim to solve practical questions not yet tractable or by imagining a quite
new one with principles far away from those of business accounting.

1 Current practices
Since 1990 about public sector accounting has undertaken big changes almost everywhere
in the world. Associated with those changes strong transformations have happened in public
sector budgeting and management. The starting point in these 3 fields was a common situation
rather modest: accounting was in cash, budgeting in given amounts by object, management
focus was the respect of stated rules. This bureaucratic situation could not evolve without
strong and obvious references: the business model was openly and easily something to follow
in order to change the public sector management. Specifically in accounting the private sector
made enormous progresses for the last three decades and was a good guide for both the new
ideas to look at and the way to conduct the change. In that respect, the idea of a conceptual
accounting framework was very appealing.
The first framework was written by the FASB between 1979 and 1986 (nothing else up to
2003 with SFAC 7) with the following structure: (1) Objectives of financial reporting; (2)
Qualitative characteristics of accounting information; (3) Elements of financial statements; (4)
Recognition and measurement in financial statements. The subsequent frameworks followed
this structure with a minimum of changes; they were formulated either explicitly or implicitly
(for instances: Spain, Tunisia wrote the same ideas without calling them framework). IASC
itself adopted such a framework in 1989 making only an original lip service to the capital
maintenance model widely ignored in the FASB framework. The success story of the FASB
framework gave inspiration to those looking for a new public sector accounting. Why not
doing the same for the public sector?
Historically the National Council on Governmental Accounting in USA was the first to
run that way. It published in 1982 a concept statement 1 on “objectives of accounting and
financial reporting for governmental units”. Aware of the FASB framework in progress at that
time but not being able to get the full text, the concept statement was rather detailed with
original ideas not taken in the other later frameworks in public sector accounting (for
instances: need to add non financial information to understand the financial report, need to
give performance evaluations, need to compute the full cost of activities). GASB took over

1
Evelyne Lande is Professor of Management Science, at the University of Poitiers (IAE – Institute of Business
Administration). Jean-Claude Scheid is Professor of fiancial accounting at the Conservatoire National des Arts et
Métiers in Paris.

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NCGA and published in 1987 a GASB Concept Statement 1 on “objectives of financial

reporting”, shorter than the previous one and more in line with the FASB framework (the
overall objective is accountability and accountability relates to service efforts, costs and
accomplishments mainly); GASB released an other concept statement (#2) in 1994 on
“service efforts and accomplishments reporting” where are discussed the different possible
views of accountability (three views indeed of which one was worth to mention:
accountability can deal with probity-legality, process-procedures, performance-program-
policy). Unfortunately the GASB was not able to make progress on SEA and the concept
statement remained a style exercise (in 2003 it published a report on “reporting performance
information: suggested criteria for effective communication”, a rather poor result of Concept
statement 2).
Always in USA, another accounting body wrote an accounting framework for the public
sector: the FASAB (Federal Accounting Standards Advisory Board) published four SFFAC
(Statement of Federal Financial Accounting Concept): #1 Objectives of federal financial
reporting (1993); #2 Entity and display (1995); #3 Management discussion and analysis
(1999) and #4 Intended target audience and qualitative characteristics for the consolidated
financial report of the United States Government (2003). Although classified as SFFAS
(Statement of Federal Financial Accounting Standard), another concept statement can be
added: 1995, SFFAS 4: managerial cost accounting concepts and standards. Compared to the
FASB statement, there are several differences. First, objectives are different. For SFFAC #1,
there are four objectives: budgetary integrity, operating performance, stewardship, systems
and controls (how well are they working). Secondly, financial statements are not the same.
For SFFAC # 2, any public federal entity must provide:
- a management discussion and analysis
- a balance sheet
- a statement of net costs (gross minus own revenues)
- a statement of changes in net position
- a statement of budgetary resources (budgeted amounts given and amounts spent)
- a statement of program performance measures (to present outputs and outcomes)
- a statement of financing (reconciliation between budgets and costs)
The six financial statements mix budget accounting and financial accounting and de facto
there is a dual-track system of accounting. Recognition and measurement are not dealt with in
a concept statement for the FASAB; they are considered separately in different accounting
standards (for instance: for revenues in SFFAS #7 “accounting for revenue and other
financing sources”); in that way, FASAB does not give an exact picture of recognition and
measurement principles it follows (accrual remains a variable concept).
Many other countries that undertook public sector accounting changes tried to set up a
special PSA framework in the 1990’s. One of them is UK; it established in 1996 the
“Financial Reporting Advisory Board” (FRAB) whose mission was to advice the UK
Treasury on financial reporting principles and standards for the Central Government. FRAB
did not publish a PSA framework nor the Treasury but was a major tool in defining the
principles of what has been called “resource accounting”, in fact accrual accounting, in lieu of
“appropriation accounting”, in fact cash accounting. To understand what has been done up to
now, is to give the financial statements that an governmental entity has to set up every year:
- foreword (sets out the aims and objectives and principal activities and achievements of
the department)
- a balance sheet
- an operating cost statement
- a cash flow statement

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- a summary of resource outturn (compares actuals with estimates for both resource
expenditure and overall cash requirement, with a reconciliation of resources to net
cash requirement)
- a statement of resources by departmental aim and objectives
Those statements compare with the US Federal financial statements (summary of resource
outturn is equivalent to statement of budgetary resources plus statement of financing). In both
cases, there is an accrual accounting system coupled with a cash budget system (the budget
providing for capital expenses and for operating expenses).
At the IFAC level, the Public Sector Committee (IFAC-PSC) established in 1987 never
published an accounting framework. Between 1991 and 2003, IFAC-PSC released 14 studies
of which one was an in-depth analysis of accounting principles for the public sector: study #
11 “Governmental financial reporting: accounting issues and practices” (2000). PSC made no
explicit choice about the accounting principles it could recommend but implicitly it chose to
follow the private sector accounting principles when it began to publish the IPSAS, that is to
say the accrual model (as far as we can say accrual since it seems that there are several
understandings of accrual). IPSAS #1 “presentation of financial statements” looks like a
framework in some ways: it gives several adapted definitions (i.e. assets, expenses), purposes
of financial statements, list and contend of four financial statements (financial position,
financial performance, changes in net assets/equity, cash-flow), qualities of information… but
it fails to discuss objectives, recognition and measurement principles… and looks a lot like
IASB # 1.
In France, there was no even an attempt to write an accounting framework for the private
sector. Almost everybody believed it was not worth to undertake such an effort since all
people would agree on the principles of business accounting. The same thinking prevailed for
the local public sector accounting but not for the central national public sector accounting.
The devoted Central Accounting Standard Committee set up in 2003 decided to write a
framework mainly in order to choose between several conceptions of financial accounting for
the Central State; the members of the committee believed that by fixing objectives for the
financial reporting of the Central State there will be no debate about what to do on principles.
The framework was written in 2003 and released early in 2004 together with the 13 standards.
It is a short document whom name is: “conceptual framework for the State accounting” (cadre
conceptuel de la comptabilité de l’Etat): 11 pages divided into:
- Objectives of the framework and users.
- Objectives of the financial statements (1) Assessment of the financial situation, (2)
Assessment of the performance (3) Reconciliation with budget and programs but there
are only three financial statements asked for: balance sheet, statement of net costs,
statement of cash-flows.
- Characteristics of the information (is quoted the accrual principle).
- The perimeter of financial statements
- The elements of financial statements (asset, liability…)
- Principles of recognition and measurement (problems of initial recording,
depreciation… are not dealt with, standards will fix them).
The framework fails to choose adapted principles and to solve crucial questions.
Provisory evidence. From this quick survey of PSA frameworks, two kinds of provisory
evidence can be drawn. First, all frameworks met serious difficulties to set up original
concepts for the public sector: more were taken from the initial FASB framework and the
main idea was to imitate the business accounting without tackling the public sector
specificities. It is fair to say that no research on those specificities was available. Secondly, it
is probably hard to say that those statements were leading the changes made in the PSA field;

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the main change was to adopt a kind of accrual for accounting not for budgeting (with quite a
few exceptions; see below the New Zealand case) remaining essentially in cash and to set up
new statements to reconcile budget in cash with accounting in accrual. But this point did not
receive big consideration in the PSA frameworks where it was mentioned (some frameworks
did not mention at all this reconciliation).
In a first step, the recent French State accounting framework can be taken as an example
to point out all discrepancies and shortcomings a PSA framework copied from the FASB
business (private) framework can bear. In a second step, it can be imagined ways to change
the actual frameworks to be more suitable for the public sector. Are they able to be mended?
Or do we have to rebuild them completely?

2 Is private accounting framework successful and

relevant for State accounting? The case of French State
accounting framework
At the beginning of 2004, French Ministry of Finance released a conceptual accounting
framework for the French State. This framework draws partly on accounting frameworks well
known like the IASB one and makes also references to French private sector accounting
standards2. The French State framework reminds: “fundamental options presented in this
framework are consistent with concepts presented in main frameworks” (§133, part II).
“France ought, moreover, to put its accounting reform into the perspective of international
standardisation works to which it actively participates” (§14). “Hence the actual framework is
conceived by reference to three documents: (1) General accounting plan for enterprises and
regulations set up by the French standards-setting body CRC (Committee of accounting
regulation); (2) IFAC PSC framework in the process of development; and (3) IASB
framework. These three references are, for all that, in a convergence phase” (§15).
Nevertheless, there is some specificity to the public sector that is not included in
traditional conceptual accounting frameworks for enterprises. In this sense, how French
Ministry of Finance managed to include these specificities? We can read in the framework: “It
is also possible for French State specificities, that some original solutions ought to be adapted:
in any case, they must be justified and consistent with the conceptual framework” (§16). But
in details how is it taking into account?

2.1 Accounting framework purpose and users

Objectives to achieve and users’ needs are two key items because they are constituent of
the characteristics of future standards. These elements usually form the basis of any
accounting framework. In the following parts we will examine key items of an accounting
framework in the private sector and how the setters of French State accounting framework
translated them to taking into account the specificities of State public sector.

2
French private enterprises ought to follow an accounting plan named PCG (Plan Comptable Général) based on
accrual accounting. We can translate this PCG by General Accounting Plan – GAP. We will use this last named
in this article.
3
In the French State accounting framework paragraphs are not numbered. The authors of this article numbered
them for the entire framework independently of the parts.

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2.1.1 Purpose and objectives of accounting framework

According to French accounting framework, “the importance and the specificity of some
State operations justify that [State accounting statements] elaboration is enlightened and put
into perspective by preliminary considerations on scope, objectives and limits of this financial
accounting” (Part I, §6). In order to achieve theses considerations, French State accounting
framework assigns three objectives that are (§6):
- To present the underlying hypotheses of the State accounting standards,
- To define the main concepts deriving from these hypotheses,
- To clarify scope and limits of financial information provided by financial statements.
According to IASB framework, this reasoning is consistent: “the Board recognises,
however, that governments, in particular, may specify different or additional requirements for
their own purposes. These requirements should not, however, affect the financial statements
published for the benefit of the other users unless they also meet the needs of those other
users” (§5, Preface of IASB Framework). The "users" are understood as users making
economic decisions by means of the published information.
Now, besides the specificities of State operations, French State accounting framework has
the purpose to define State accounting perimeter: what is the scope of State accounting, what
are its objectives and especially what are its limits? With this framework, the State wished to
clarify accounting rules applicable to it: “French State conceptual accounting framework is
not a standard. It intends to provide elements of understanding and interpretation of rules. It
addressed standards setters, accountants in charge of keeping and establishing State financial
statements, auditors in charge of making an opinion on them and users of the financial
information provided” (§7). The framework is then a guide for:
- standards setters "it constitutes an conceptual reference allowing to verify the coherence
of the various rules and standards" (§8);
- accountants and auditors, "interpretations can be necessary to handle specific cases or
new operations, for which existing rules would be insufficient" (§9);
- computer specialists: "the accounting framework can also be useful for technical
organization definition of accounting systems by putting in light purposes of these
systems" (§10);
- Users of financial information, "in understanding better its scope and limits" (§11).
These objectives are rather similar to those assigned by IASB framework even if the latter
focuses more on development and promotion of international standards in the first two points
(§1 IASC framework):
- To assist the board of IASC in the development of future international accounting
standards and in its review of existing international accounting standards;
- To assist the board of IASC in promoting harmonisation of regulations, accounting
standards and procedures relating to the presentation of financial statements, by providing
a basis for reducing the number of alternative accounting treatments permitted by
international accounting standards;
- To assist national standard-setting bodies in developing national standards;
- To assist preparers of financial statements in applying international accounting standards
and in dealing with topics that have yet to form the subject of an international accounting
standard;

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- To assist auditors in forming an opinion as to whether financial statements conform with

international accounting standards;
- To assist users of financial statements in interpreting the information contained in
financial statements prepared in conformity with international accounting standards; and;
- To provide those who are interested in the work of IASC with information about its
approach to the formulation of international accounting standards.
Contains of these two frameworks are quite similar, and apparently State specificities do
not have impact on purpose or objectives.

2.1.2 Users of accounting framework

For the French State accounting framework, “the main users of information are citizens
and their representatives. Naturally, accounting information has to meet needs of stewardships
and managers of State missions and activities. It is also intended for international public
institutions, financial markets and investors in Treasury bonds. The multiplicity of users
implies , as a consequence, a general and exhaustive information, based on all elements
having an impact on the financial position” (§12).
International framework aims at a series of more specific users in the world of enterprises:
investors, employees, lenders, suppliers, State and its public agencies and finally the public in
a broad sense. In front of the multiplicity of users and therefore of the wide scope of their
needs, the framework postulates, “While all of the information needs of these users cannot be
met by financial statements, they are needs which are common to all users. As investors are
providers of risk capital to the enterprise, the provision of financial statements that meet their
needs will also meet most of the needs of other users susceptible that financial statements can
satisfy” (§10, IASC Framework). So for IASB the privileged user are investors.
For the French framework, the users are citizens and their representatives, thus elected
members or political class in a broad sense. It is at least the wish formulated by the French
standard-setting body because in practice political debates are more focused on budget
statements (the authorizations of commitment) than on accounting statements and the
financial position. Could the framework be a means of promoting financial accounting
statements for elected members? However in term of communication, mentioning that citizens
and their representatives as privileged users is a means to draw their attention. It will remain
to know if it will be enough.
Moving from the private sector to the public sector leads to choose a different group of
users because from a political point of view we cannot say that investors are more important
than citizens and their representatives.

2.2 Nature of information disclosed and contents of financial statements

The IASC accounting framework indicates: "the objective of financial statements is to

provide information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making economic decisions"
(§12, IASC Framework). "Financial statements also show the results of the stewardship of
management or the accountability of management for the resources entrusted to it. Those
users who wish to assess the stewardship or accountability of management do so in order that
they may make economic decisions; these decisions may include, for example, whether to
hold or sell their investment in the enterprise or whether to reappoint or replace the
management" (§14, IASC Framework). These notions of financial position, performance and

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performance can lead to divergent analyses when we transpose them in the public sector. That
is why the French accounting framework defines assets, financial position, equity statement,
commitments, and net income in a public environment.

2.2.1 Assets, financial position, equity statement and commitments

According to the French accounting framework, assets are defined as “all rights and
obligations for a person. The financial position is the financial and accounting translation of
this” (§18). For setters of the French accounting framework, it raised a series of questions in
relation to the State operations specificities.
Specificities generating a limitation of the perimeter of recorded operations, "because of
the number and of the extreme variety of the rights and the obligations of the State" which
implies that only will be retained "elements having a considerable impact on the financial
position that is an increase, a decrease or a change of structure of this position" (§19). But,
how to determine when an element has a considerable impact? For example, pension
retirements provisions for civil servants could be considered as having a considerable impact
on the State financial position, but up to now they are not recorded (even in new French
standards).
Specificities generating difficulties of recognition or evaluation. These specificities are
linked to the fact that firstly the State does not possess an initial capital and as a consequence
the notion of stockholders' equity is inappropriate. Secondly, the valuation of heritage assets
raises specific problems: what is value of ancient memorials? Is it even interesting to evaluate
them? Associated to these difficulties of evaluation, also raises the problem of asset
definition. Indeed, the definition “adopted by the private sector, does not perfectly report the
situation of the State, which possesses a very particular immaterial asset, sovereignty, and the
related right: the right to levy tax" (§19). This sovereignty also affects "the notion of
liabilities, which requires original solutions for the State, beyond the classic recognition of
liabilities identical to those of the enterprise" (§19). Nevertheless, this presentation of
recognising difficulties in State assets and liabilities definitions is not satisfactory. For
example, why sovereignty does constitute an immaterial asset? Is it about a postulate or a
hypothesis? Other example, how sovereignty and capacity to levy tax do affect in practice the
notion of liabilities? Why would it raise the question of adapting accounting treatments?
Specificities link to “the State role as ‘insurer of the last stage’ (…) necessitates to define
clearly commitment types to put in the Notes” (§22). As above, one can ask in what insurer's
role in last instance does bring inevitably new kinds of commitments? What are the related
cases? What are the consequences? It is not mentioned in the framework.
Specificities link to the inadequacy of the matching principles. The framework mentions:
"the matching of asset and liabilities of the State, necessary to temporal consistency and
accurateness of accounting recordings, as in the analysis of its financial position (…) would
not give place to an interpretation similar to the one for enterprise" (§ 20). It is however
somewhat disappointing that it is not better argued or demonstrated.
These State specificities underline the limits of private accounting framework for the
public sector and setters of the French accounting framework have made an effort in trying to
give definitions adapted to State specificities. Nevertheless, we can express some
dissatisfaction in the lack of precision on notions so complex as sovereignty, public assets or
State commitments. To their discharge, the objective of this accounting framework is not to
provide practical answers but to guide the elaboration of standards, which will have to
respond practical problems. However, the current accounting framework presentation seems

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more oriented towards authorizing derogatory treatments because of very general terms used
in definitions of these notions. Therefore standards are free to choose "original solutions"
(§16) and, globally, these formulations bring more questioning on the interpretations to be
made and their implications on the future standards than a real accounting framework / guide
for standards setters.

2.2.2 Net income

The notion of net income is analysed within the framework of IASB through the notion of
performance: "information about the performance of an enterprise, in particular its
profitability, is required in order to assess potential changes in the economic resources that it
is likely to control in the future. Information about variability of performance is important in
this respect. Information about performance is useful in predicting the capacity of the
enterprise to generate cash flows from its existing resource base. It is also useful in forming
judgments about the effectiveness with which the enterprise might employ additional
resources" (§17, IASC Framework).
In the same way, the French framework underlines: “In frameworks for enterprises,
financial statements objectives are in general to present a true and fair view of assets,
financial position and net income of enterprise. Contains of these concepts (…) must be
clarified in the State case. Fundamentally, the organic law makes an important difference with
this approach because the article 27 mentions ‘State financial statements must be regular,
sincere and give a true and fair view of its assets and its financial position’ without
mentioning the net income” (§17, French framework).
In fact, the notion of net income is problematic in public sector because it cannot be
directly connected with the notions of performance and profitability. There are some
problems, for example, to apply the matching concept in the case of the State. Indeed,
"incomes do not correspond, for the main part, to the sale of goods or services produced by
the activity which engendered expenses. Products are in most cases independent from
expenses and, moreover, on principle 4, not imputed" (§24). So, if the matching concept for
expenses is "indispensable if we want to calculate costs by programs (…) it is on the other
hand impossible to propose the transposition of the matching concept to income" (§26). As a
consequence, "the net income cannot be thus interpreted as in the case of an enterprise.
Nevertheless, and if accounting rules for expenses and incomes were determined and are
applied with the consistency policies principle, the net income variation during a period gives
an important information about the consequences of the financial and budget policies" (§27).

2.2.3 Costs and performance measurement

The organic law in its article 27 indicates that the French State has to run besides its
financial accounting, an accounting intended to analyse costs of actions, called management
or cost accounting. The accounting framework reminds conveniently that accounting
principles applicable to these two accounting systems must be defined in an identical way "so
as to be able to operate relevant comparisons between units of management. So, the notion of
full cost should be defined with regard to accrual accounting concept. Such a requirement
does not mean that the managers will inevitably have to establish full costs, but only that the
costs established (…), will have to be able to be linked to accrual costs" (§33). This
formulation remains however ambiguous, the establishment of full accrual costs is not
apparently strictly compulsory; but the computed costs ought to have the same basis as the

4
By reference to budget principles

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one of financial statements. The objective of an accounting framework is not to define

principles governing management accounting, so we can admit this lack of precision.
Nevertheless, the accounting framework indicates that performance analysis will go
through matching the management accounting (set up from the financial accounting) with
indicators allowing the performance measurement and assessing public policies. In an
underlying way, it is outlined a new domain, the evaluation of public policies: "The matching
of expenses to incomes issued from activity (…), allows to calculate net costs. These costs
can be compared to non-monetary indicators concerning the quality or other characteristics of
services realized, or still used to establish objectives. Connections between costs, objectives
and net income constitute a useful information on management performance" (§34).

2.3 Definition and recognition of State specific items

Purpose of the accounting framework is to give some general definitions about concepts;
these concepts and definitions will be then used in standards and developed. Non-transaction
revenue and infrastructure assets are typically State specific in accounting. In this way, it is
interesting to examine how the French accounting framework deals with these notions 5. For
this we will see the definition then the recognition principles applied to them.

2.3.1 Non-transaction revenue

The French accounting framework gives the following definition: “Non-transaction
revenues constitute the main State resources. They are not, in principle, matched to expenses,
by contrast with others revenues (…)” (§69). “Non-transaction revenues are products coming
from mandatory taxation authorised by the current legislation. They are not consequences of
contractual agreements. They should be considered as revenues deriving from intangible
assets linked to the sovereignty exercise (capacity to levy tax, to establish and raise fines), but
these elements do not include all conditions to be computed as assets and the products that
could be linked to them constitute a specific category” (§70). Then non-transaction revenues
are intangible assets revenues but with specificity linked to the fact that these intangible assets
are not recognised in financial statements.
About non-transaction revenue recognition, the French accounting framework says:
“Revenues are accounting in financial statements of the period during which they are
acquired. (…) For non-transaction revenue, this correspond to the moment where the revenue
collection is authorised and where a reliable amount can be computed” (§79). So there is a
double condition or constraint for the recognition of non-transaction revenue.

2.3.2 Infrastructure assets

“For some assets, as real-estate park and some infrastructure, the generic method supposes
the acknowledgement of the entry value, unverified hypothesis in numerous cases” (§92).
“Thus, it is necessary to proceed to an assessment at the date of establishment of the first
financial statements following the new standards. These assets can be put in two categories:
those for which a value is observable (for example for buildings used as office premises), and
those for which this value is not observable (for example for road infrastructure), even if their
theoretical existence cannot be excluded. If the value is observable, it will be retained as entry
cost, in the other case alternative methods will be defined in standards, for example the
depreciated replacement cost” (§93). This presentation is then an attempt to use, aside from
5
We will no study standards dealing with these two points.

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the historical cost, other methods as current value, replacement cost… which are not well
known by French preparers of financial statements and to justify their development in further
standards.
These attempts to define State specificities in the framework justify the presence of
specific treatments in standards. In this sense, French framework reached its purpose even if
some questions remain without answer. But, could we improve this State framework?

3 Is a better Public sector accounting framework

possible? The ways to find it
It can be two ways of building a more suitable framework for the PSA: (1) either to adapt
the existing ones with the aim to solve practical questions not yet tractable or (2) to imagine a
quite new one with principles far away from those of business accounting. To take an
example, initial recording of fixed assets is not well taken into account (for instance very
difficult to price old infrastructure assets still in use) by the present frameworks; a quite
simple and modest solution would be to record in the balance sheet separately the existing
assets not yet priced from the new ones of which prices are well-known; that is adaptation;
another solution would be to quit the historical cost for a model of permanent evaluation; that
is imagination, the second way. Let begin with the first way: adaptation

3.1 First path for a better framework: adaptation of the present PSA frameworks

One possible way of searching for adaptation is to look at the unresolved questions inside
the present frameworks. A non-complete list of unsolved questions can be attempted.
Initial recording of not yet recorded assets: see above.
Depreciation. There are three possible ways to record depreciation – to compute on the
entry cost an yearly allowance over the forecasted life of the asset, to estimate on a yearly
basis the replacement cost of the asset, to record the maintenance cost keeping the asset in the
initial State – and more in fact because of the possibility of combining two or three of them.
Generally speaking, frameworks leave the three ways open to the standards-setters without
giving consideration to the differences between the three or to the nature of the asset.
Contingent liabilities. Central governments bear much more risk than a corporation as big
as it may be and there is no study of this question in the frameworks; the absence has some
hindrance such as the way to recognise civil servant pensions or social benefits (see the IFAC
ITC on those subjects).
Non-exchange revenue recognition. It is not clear if taxes are recognized either when they
are legally enforceable, or when they are fixed in amounts, or when the taxable basis is earned
by taxpayers; very often, effective solutions depend upon the tax nature and the way they are
collected; in consequences, discrepancies between countries can be hugged; moreover, there
is in general no consideration given to the way the taxpayer recognises taxes, the symmetry of
recognition is not an accounting principle.
Matching principle. Almost all PSA frameworks State that this principle does not work as
it does in business enterprises accounting; all public sector costs are consequently and
implicitly taken as period costs that is to say costs are public service costs of a period
provided they are engaged or cashed in the same period; there are not inventories or works in

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progress, and this a problem for multi-year programs (different from the problem of multi-
year capitalisation projects).
Asset definition. When a framework gives this definition, it almost always the same: the
one of FASB framework where has been added the formula service potential: “(…) which
future economic benefits or service potential are expected to flow to the entity”; there are at
least two problems with this definition. First, some kind of public sector asset is not formally
excluded: the right to levy tax, the right to expropriate (to make publicly owned) private
property (land, building…), the bases of taxation (i.e. the taxable individual income of a year
or the corporate taxable income). Secondly, service potential is not always a clear concept: it
can apply to human services, it is often difficult to estimate (for a curb, a road, a park…) and
it can vary a lot from one period to another one (a harbour, an airport…).
Looking at possible practical solutions to these unresolved questions is quite a Herculean
work but probably inescapable because solutions are needed by public sector accounting
practitioners.

3.2 Second path for better framework: building new accounting principles in PSA

For the public sector, there are big features that make differences with the private sector. It
is rather hard to find all of them; it is possible to enumerate some.
The multi-annuality principle. Every people agrees with the objective of financial
statements in public sector: accountability; it means accountability by the elected people to
electing citizens. (it could mean also by executive to legislative or by management to
executive). But the mandate (the length of time between two ballots) of elected people
exceeds generally one year and the financial statements of a year do not give a good reporting
and a true picture of what they have done; the best accountability would be to set up financial
statements for the whole mandate with of course interim reporting in order not to leave
elected people with no control for four, five or more years.
The historical cost principle. It is a strong principle quite easy to handle and not so bad in
the business field because of the limited time horizon (30 or 40 years is the upper limit of
most of the private undertakings) and of the limited effect of inflation (except of course in
some cases); in the public sector the time horizon is infinite usually and even at small annual
rates of inflation and technical changes, prices cannot be kept at the initial recording. Leaving
historical cost principle is a big challenge but there is a useful reference: the national
accounting is rather accustomed to deal with price changes and could offer its solutions. The
new principle could be named something like permanent valorisation principle.
The matching principle. It is not worthy in PSA: there is no revenue enabling to track the
related expenses; there are only costs and more emphasis ought to be put on unequivocal cost
definitions; costs are the unique basis of comparison between two entities with identical
purposes; in public sector, cost comparison principle is the principle for matching two public
sector entities and say one is better than the other; of course, defining precisely cost
components of a public service is quite a new experience since standardisation efforts in the
field of cost standardisation never succeeded (e.g. administrative costs were never
standardised).
The accrual principle. The word accrual is used with very different meanings in the public
sector accounting. For instance, Toronto city says it applies accrual principle but does no
compute depreciation, US Federal government says it applies accrual principle but recognize
interest expense when it falls due (not with elapsed time); French cities say they apply accrual

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but they fail to record all fixed assets (and the related depreciation) in use before 1997. James
Chan (2004) wrote an article to distinguish between four applications of accrual principle in
the public sector. Beyond those different interpretations of accrual, one can wonder if the
accrual principle as it is in the business sector, is a good principle that can suit all long-term
public commitments. For instance, when an act is passed giving a social benefit to certain
categories of people not now but in two years from now, there is of course no expenditure for
the year the act is passed nor an accrued expense since the social benefit is not yet due but an
entry could be recorded in order to show in the financial statements, the financial effect of
promises in a full year. Or to turn the principle another way around, recording now a social
benefit in the balance sheet is like recording a borrowing at its inception: a future liability is
accounted for. It could be better to say commitment principle instead of accrual principle in
the public sector.
The symmetry principle. The public sector can develop its own accounting framework and
standards without taking care of private sector accounting standards and national accounting
systems. For instance, recognizing tax when cashed in public sector and when due in private
sector is possible but it gives birth to a gap and doubt to the logical analysis made in one
sector (or even both). Recognizing a contingent liability for risk in the private sector and not
in the public sector nor in the national accounts has the same drawbacks. But the symmetry
principle does not mean that public sector and national accountings must follow the private
principles. It means that before deciding a solution for the public sector (or another one)
examination of the solutions in the two other accounting standards is required.
The budget principle. There is no public sector accounting without a budget, to-day almost
everywhere. What is important with the budget is the link to accounting and strange enough
IFAC-PSC did not issue up to recently something on the link or even on budget. It has
released in May 2004 a research report “budget reporting” in which there are formulated ten
recommendations; perhaps the main ones are:
- IFAC-PSC should issue an IPSAS on budget reporting including budgetary accounting
procedures
- Governments should be encouraged to operate their budgeting and accounting systems
on the same basis; if the budgetary system is on a different basis than the accounting
system, a statement should be developed to reconcile key differences between the two
systems.
- A IFAC-PSC conceptual framework is recommended with a part devoted to budget
reporting.
In fact, accounting as it has evolved in the public sector has had already a strong influence on
budgeting: sailing from cash to accrual PSA now challenges the cash budget. It seems the aim
in future budgeting is to apply the accrual (or something extended) principle in the making of
budget. This transformation will be hard to perform: political people do not like to be
accountable for the long-term commitments they decide, they prefer keeping on cash. So there
are two main ideas associated with the budget principle: this principle could mean either any
new standard in PSA must state its relationship with budget (not only in terminology but also
in recognition and measurement) or any new standard in PSA has to have an equivalent
standard in budgeting, that is to say a weak budget principle and a strong budget principle.
The public sector management principle. Accounting concepts depend on the way an
activity is managed:
- Business like management: accounting has to record sales, expenses and compute
incomes;

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E Lande & JC Scheid Sankt Gallen – September 2nd and 3rd

- Bureaucratic like management: accounting has to record what is required by the

instructions (pay such an amount of wages…);
- Results oriented management: accounting has to record as far as possible the goals to
reach and goals reached meanwhile taking into account the manager’s freedom to
spend at his will according to what he thinks to be the best expenses he can make to
attain the goals.
In public sector, business-like management is rather rare since there are no sales of public
goods and services. Nevertheless, a few National governments (New Zealand for instance)
have set up prices to build budget of public departments: e.g. the education budget gives to
the department of education a stated amount for each student, for each scholar… and the
department has on one side revenues to account for and on the other side expenses to account
for too. The prices can cover all expenses included depreciation and in that case, the
department has freedom to keep depreciation allowances on its side and to decide on
replacement. The parliament (or any other political assembly) loses a big part of its power (on
the other hand it has to spend more time on bargaining programs and prices).
Bureaucratic like management is still the prevailing public sector management in the world.
In that case, accounting is often limited to account for what is decided in the budget.
Results oriented management is the choice of the new public sector management: a lot of
nations want to implement this management. It means setting programs, outputs, outcomes
and in a way or another, accounting has to adapt to those devices. Financial reporting
statements must report on the 3 E, mainly of course on efficiency. For a business entity,
nothing of that kind is necessary since the net income is sufficient.
The management principle could be that principle requiring to give in the financial reporting
statements the results of the public spending. It probably implies that financial accounting has
an intake of some features of managerial accounting. Care must be given to certain misleading
spelling; one of the financial statements in the IPSAS is called “statement of financial
performance” but it is only a statement of costs.
These seven possible new principles for PSA could be something looking like a research
program for academics. They are too far from the to-day situation to be considered worthy,
tractable, or potentially promising by practitioners. Before starting, a lot of thoughtful debate
is probably required.

4 Conclusion
Is a public sector accounting framework necessary? The answer is yes if we want a real
public accounting autonomous from budgeting principles, i.e. with its own objectives,
principles, standards and rules. This idea prevails in most of the countries and at the
international level. But, what kind of public accounting framework is the most relevant? The
first idea is to start from existing accounting framework, then private business accounting
framework, and to adapt them to the public sector specificities. It was the way taken by
France as well as by other countries before. A priori, this way is the easiest because private
accounting framework is already set up and there is by now a large agreement on purpose,
principles and definition included in it. Nevertheless, this way a posteriori is not so easy
because it leads to focus on principles or definitions irrelevant for public sector accounting
such as the matching principle or capital definition, and it do not permit to imagine new
concepts or principles specific to a public sector accounting framework such as the public

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sector management principle or commitment principle may be more appropriate than the too
used accrual principles without real meaning in practice (or with very different interpretations
from country to country).
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