5.

Governmentaccountingandtheuseoftheaccrualsbasis
5.1Governmentaccounting
Governmentaccountingistheprocessofrecording,analyzing,classifying,summarizing
communicatingandinterpretingfinancialinformationaboutgovernmentinaggregateand
indetailreflectingtransactionsandothereconomiceventsinvolvingthereceipt,
spending,transfer,usabilityanddispositionofassetsandliabilities.Thepurposesof
governmentaccountingare:

Tocarryoutthefinancialbusinessofgovernmentinatimely,efficientand
reliablemanner(e.g.tomakepayments,settleliabilities,collectsumsdue,
buyandsellassetsetc.)subjecttonecessaryfinancialcontrols.

Tokeepsystematic,easilyaccessibleaccountinganddocumentaryrecordsas
evidenceofpasttransactionsandcurrentfinancialstatus,sothatdetailed
transactionscanbeidentifiedandtracedandallaggregatescanbe
convenientlybrokendownintotheirconstituentparts.

Toprovideperiodicfinancialstatements,containingappropriatelyclassified
financialinformation,asabasisfor(a)stewardshipandaccountabilityand(b)
decisionmaking.

Tomaintainfinancialrecordssuitableforbudgetarycontrol,internalcontrol
andtheneedsofauditors.

Toprovidemeansforeffectivemanagementofgovernmentassets,liabilities,
expendituresandrevenues.

Ingovernment,theproducersofaccountinginformationarerarelyqualifiedaccountants.
Thereforefewhaveexperienceofaccrualaccounting.Buttheyusuallybelongtoa
separatecadreallowingfortrainingandtheacquisitionofspecialistaccountingskills.In
somecountries,thosewhosupervisetheaccountingprocessarenotthemselvestrainedin
accounting.Accountsarekeptforawidevarietyofadministrativeentities:ministries,
departments,taxingauthoritiesandspendingunits(includingforinstancehospitals,
researchcentres,colleges,schools,policestations,defenceestablishments).Accounting
entitiesarespreadthroughoutthecountry,fromthecapitalcitytotheremotestcorners.
Givensuchaspread,thecapacityofaccountingentitiesandoftheirstaffisboundtovary
considerably.Inordertoensureadequateaccountingfromsuchawiderangeofentities,
agovernmentaccountingsystemhastobe:

Relativelyuniform

Welldocumented

Simpletolearnandoperate

Easytoconsolidate

Oneofthechallengesofaccountingreform(forexampleintroductionofaccrual
accountingorofamoderntreasurysystem1)isdecidingwheretostop.Reformcannotbe
convenientlybroughttoallaccountingentitiesinonefellswoop,soaborderhastobe
definedwithinwhichthereformistotakeplace.Usuallyasmallnumberofentitiesis
responsibleforalargenumber/amountoftransactions.Themostlogicalchoiceforthe
purposesofreformistoaddresstheneedsoftheselargeentities.Atthesametimethe
accountingsystemsofentitiesnotsubjecttothereformprocesswillrequireadaptationto
allowthereformedsystemtoperformeffectively.Thecharacteristicsoftheaccounting
system(forinstancethebasisofaccounting;thenatureoffinancialstatements)haveto
suittheneedsandcapacityofusers.Anaccountingsystemcouldbeverygoodwhen
comparedwithinternationalaccountingstandards,butmightbeoflimitedvaluetothe
countryconcerned,iftherewerefewornopeopleacquaintedwiththesestandards.
Agovernmentaccountingsystemnormallyhaseightmaincomponents:

Documentsprovidingevidenceoftransactions

Bankaccountsthroughwhichpaymentsandreceiptsarehandled

Accountingrecords(cashbook,ledgersetc.)

Proceduresandcontrols

Ameansofaggregationofaccountingdata

Internalaccountingreports

Externalaccountingreports(financialstatements)

Staff

Subsystemsofagovernmentaccountingsystemareasfollows:

Generalledger(asystemofclassifiedledgeraccountsallowingallrevenues
andexpenditurestobesortedintoappropriatecategories)

Seepaperfourforafullerdiscussion)

Cashbook

Payroll

Payables

Receivables

Assetsandliabilitiesincludingcashmanagement

Theperformanceofgovernmentaccountingsystemsvariesfromextremelygood,down
toutterlyinadequate.ManyWorldBankborrowershaveinadequateaccountingsystems
implyingarangeofdifficultiesin:

carryingoutdaytodaytransactionsatacceptablestandards

providingauthenticandaccessiblerecords

pinningresponsibilityonthoseallegedtohavecarriedoutcorruptactivities

achievingbudgetaryandinternalcontrol

providingreliabletimeseriesdataonexpenditures,revenuesandtheir
components

Givensuchpossibilitiestheneedforaccountingreformisobvious.Itpresentsanumber
ofissues:

Basisofaccountingcash,accrualormixed?

Orientation:control,analysisorstrategicchoice(orallthree)?

Scope:ministries,majoraccountingunits,comprehensive?

Humandimension:determinantofsuccessormajorconstraint?

Mediumofaccounting:manual,partiallyorfullycomputerized?

Users:generalorspecific?

Financialstatements:wholeofgovernment,agency,ormorespecific?

5.2Basesofaccounting
Therearefourmainbasesofaccounting:

cashbasis

modifiedcashbasis

fullaccrualsbasis

modifiedaccrualsbasis

Thecashbasismeasurescashflowsatthetimethoseflowsactuallytakeplace.The
modifiedcashbasisallowsashortperiodoftimeaftertheyearendforsettlingliabilities
oftheyearjustended(andtreatsthisexpenditureasoccurringintheyearjustended).
Thefullaccrualbasisrecordsexpendituresandrevenueswhentheybecomedue(i.e.in
manycasesbeforetheassociatedcashflowstakeplace).Itrecordsassetsandliabilities
andisthereforeassociatedwiththeproductionofbalancesheets.Itisalsoassociated
withprovidingdepreciationonassetswithfinitelives.Themodifiedaccrualsissimilar
tothefullaccrualsbasis,butitissimplerbecauseitdoesnotinvolvethecapitalisationof
fixedassets(northeprovisionofdepreciationoffixedassets).
Thebasisofaccountingdeterminestheextentofinformationthatanaccountingsystem
cancollectandthereforereport.Apure,cashbasedsystemcanonlyreportoncash
balancesandcashflows(inwardandoutward).Butcashpaymentorreceiptisusually
onlyasmallelementinthehistoryofatransaction.Forinstanceapurchasetransaction
mightgothroughthefollowingstages,eachofwhichcouldgenerateaccounting
information:

Commitmentoffunds

Issueofpurchaseorderforthesupplyofgoods

Receiptofthegoodsandoftheinvoiceclaimingpayment

Paymentofinvoice

Decommitmentofexcessfundscommitted

Purecashaccountingdoesnotprovideusefulinformationformanagingpayablesand
receivables.Intheaboveexample,anaccrualsystemwouldshowtheamountowingto
thesupplier.Thenwhenfullpaymentoccurred,theamountowingwouldbe
extinguished.Ofmorepracticalimportanceisthelackofanaccountingsubsystemfor
receivablesinapurecashbasedsystem.Withoutthis,managingrevenuesisfarless
4

efficient.Forinstanceifsumsduearenotedonlyinfiles,andnotenteredintoadouble
entryaccountingsystem,theycaneasilyescapeattention.Moreoverthefilesmaybe
displacedorlost.Anaccrualaccountingsystemprovidesasystematicmethodof
recordingandmanagingsumsdue,somethingwhichmanygovernmentsbadlylack.
5.3Argumentsforthecashbasis
Whythenisthecashbasisthepredominantbasisofaccountingforgovernments?The
answeristhatthecashbasisis:

Easytolearnandcarryout.Itrequirescare,butnospecialaccountingskills.

Welladaptedtotheneedsofbudgetarycontrol.Paymentisdefinite.Strict
budgetcontrolcanbeexercisedbycomparingsumsauthorizedwiththose
actuallyspent.

Easytounderstandandverify.

Astatutoryrequirementinmanycountries.

Inmostgovernmentsthecashbasisisusedinconjunctionwiththecommitmentbasisfor
budgetarycontrolpurposes.Underthecommitmentbasis,expectedexpendituresarefirst
enteredintotheaccountingsystemascommitments(sometimescalledobligations).
Authorizedexpenditure(theavailablebudget)isreducedbycommitmentswhichhave
notbeenliquidated(i.e.notbeenfollowedbyacashpayment).However,whenthecash
paymentoccurs,thesumcommittedisextinguished.
5.4Argumentsfortheaccrualsbasis
Theargumentsforaccrualaccountingareasfollows:

Cashaccountingdoesnotgenerateenoughusefulinformatione.g.about
payablesandreceivables.

Onlyaccrualaccounting,providesadequateinformationonthefullcostsof
operation,thussupportingdecisionmakinge.g.decisionseithertoplacesub
contractswithprivatesectorcontractorsortocarryouttheworkinhouse.

Onlyaccrualaccountinggeneratesreliableinformationonthefullrangeof
assetsandliabilities.

Onlyaccrualaccountingcangeneratecomprehensivefinancialinformation
aboutgovernmente.g.aloanwhichiswrittenoffhasnoimpactonacash
basedstatement,butunderaccrualaccountingitdiminishesnetworth.
5

Thesearestrongandvalidarguments.However,thepossibilityremainsthataccrual
featurescouldbeaddedtoacashbasedaccountingsystem.TheBankfundsseveral
treasurymodernizationprojects.Theyaimtoimprovebudgeting,accountingandcash
management.Theyallusethecashbasisandinallcasesaccrualbasedsubsystemsare
addedtocoverpayablesandreceivablesandsometimesassetmanagement(inventoryand
fixedassets).Moreover,liabilitiesarisingfromgovernmentborrowingaretrackedand
accountedforoutsidethetreasurysystem.Isthisasatisfactoryhalfwayhouse?
5.5Specialneedsofdevelopingandtransitionalcountries
Whatisasatisfactoryhalfwayhousedependsoncircumstances.Itwouldnotbe
satisfactoryforthosecountriesthathaveadopted,orareaimingtoadoptfullaccrual
accounting.Thesearewithoutexceptionrichcountries.2Thefollowingconsiderations
arerelevanttoadecisionbyadevelopingortransitionalcountrytoadoptfullaccrual
accounting:

Accrualaccountinginformationismoredifficultandmorecostlytoproduce
andtouse,thancashbasedaccountinginformation.

Partofthecostofusingaccrualbaseddataisthecostofunderstandingit.
Accrualbaseddatacannotbeeasilyunderstoodbynonaccountants.

Theadoptionoffullaccrualaccountingismorecomplexandmorecostlythan
thesimplecashbasis.Assetvaluationisanexampleofcomplexityandcost.

Modifyingcashbasedsystemstoproducesomeaccrualtypedatamaymake
sense.

Poorcountriesusuallylackaccountingskills,andthereforehavefewtrained
peoplewhocaneitherproducecomplexaccountinginformationoruseit.

Theaccountingsystemsofmanydevelopingcountriessufferfromarangeof
seriousdefectseventhoughtheyemploythesimplestaccountingbasis(cash).
Theremaybehigherprioritiesfortheusescarceaccountingresources.

Technicalassistancecouldbeusedtosupplementnationalaccountingskills.
Thismightpermittheintroductionofaccrualaccounting,buthowfarwould
suchassistancegoinproducingaworking,accrualaccountingsystemforthe
nationasawhole?

5.6InternationalPublicSectorAccountingStandards(IPSAS)
2

ThecaseofMongoliaseemstobeanexception.Ithasbeenattemptingtoadoptfullaccrualaccounting.
Noassessmenthasyetbeenmadeofthedegreeofsuccess.

ThePublicSectorCommittee(PSC)oftheInternationalFederationofAccountants
formulatesIPSAS.TheprefacetoIPSASexplains:

IPSASareintendedfornational,regionalandlocalgovernmentsandrelated
governmententitiessuchasagencies,boardsandcommissions.

Atpresentsuchentitieshavediversereportingpracticesandthereareno
authoritativeinternationalstandards.

IPSASareauthoritativerequirementsestablishedbyPSCtoimprovethe
qualityoffinancialreportinginthepublicsectoraroundtheworld.

PSCaddressesgovernmentalneedsbyissuingandpromotingbenchmark
guidancesupportedbyeducation,researchanddissemination.

PSCsprimaryfocusisensuringthatitspronouncementsareconsistentwith
thoseoftheInternationalAccountingStandardsCommittee.

PSCisconcernedwithgeneralpurposefinancialstatements.

IPSASapplytothepublishedfinancialstatementsofpublicsectorentities
exceptforgovernmentbusinessentitieswhicharetofollowInternational
AccountingStandards(IASs).

IPSASdonotoverridestatutoryorotherofficialnationalrequirements,but
PSCencouragesgovernmentsandnationalstandardsetterstoadoptIPSAS.

PSCstartedworkonthebasisoffouralternativeaccountingbases:cashbasis;modified
cashbasis;modifiedaccrualbasis;andaccrualsbasis.Thecashandmodifiedcashbases
weredefinedasbeingpracticallythesame(theonlydifferencebeingthatunderthe
modifiedbasisthebookswereleftopenforaperiodofmonthsaftertheyearendforthe
settlementofbills).Themodifiedaccrualandaccrualbasisdifferprincipallyinthatthe
latterrequiresthecapitalizationoffixedassetsandtheirdepreciation.PSCassumedthat
countrieswouldevolvealongacontinuumbetweencashandfullaccruals.
However,supportforthetwomodifiedbaseswasjudgedtobeinadequate(despite
vociferousoppositionfromCanada)andthefocuswasshiftedtotwobases:cashandfull
accruals.ThustocomplywithIPSASagovernmentmusteitherusethecashorthefull
accrualsbasisforitsprincipalgeneralpurposefinancialstatements.Usingthefull
accrualsbasisimpliesfinancialstatementssimilartothoseproducedbylarge
corporations.

PSChasproducedonestandardforthecashbasisandisincourseofproducingaseries
ofstandardssimilartothoseofIASfortheaccrualsbasis.Foragovernmententitytobe
incompliancewithIPSASitsgeneralpurposefinancialstatementsmustnotmixbasesof
accounting(i.e.mustbeproducedeitheronthecashoronthefullaccrualsbasis),and
theymustconsolidatealltheentitiescontrolledbythatentity.Inotherwordsanational
governmentmustproducefullyconsolidatedfinancialstatementsforalltheentities
whichitcontrols.Thisisanelegantsolutiontotheshenanigansfollowingthecoming
intoforceoftheMaastrichtTreaty.Governmentschangedthedefinitionofthereporting
entityatwillinordertofallinsidetheMaastrichtcriteria(generalgovernmentbudget
deficitnomorethan3%,andgovernmentborrowingnomorethan60%ofGross
DomesticProduct).Howeverelegantthesolution,veryfewgovernmentsofdeveloping
countriesconsolidateaccountinginformationtothislevel,veryfewareabletodosoand
evenfewerarelikelytowishtodoso.
OtherissuesfacingtheIPSASprogramareasfollows:

ThevirtuallyendlessprocessofproducingIASlookalikestandards.

LackofauthorityonthepartofIFACinsecuringadoptionofIPSASanda
possiblevestedinterestinrecommendingaccrualbasedaccounts(asIFAC
membershipismadeupofprofessionalinstitutesofaccountingprimarily
concernedwithprivatesectorissues).

Cateringtotheneedsofasmallnumberofdevelopedcountrieswhileignoring
theneedsofalargenumberofdevelopingcountries.

Excessiveenthusiasmforanaccountingmodelsuitableforasophisticated
economywithoutclearindicationsofitslimitationsinlessdeveloped
environments.

Underestimationofthelikelydifficultieswhichgovernmentswillfacein
adoptingIPSAS,especiallytherequirementforfullyconsolidatedfinancial
statementsonasingleaccountingbasis.

DespitesuchissuesthereisstrongsupportforIPSASincludingvirtualIMFendorsement
initsnewapproachtoGovernmentFinanceStatistics.
5.7Discussiontopics
Aretheredifferencesbetweentheaccountabilitymodelswhichshouldbeappliedto
governmentsandtocompanies?Shouldgovernmentsfinancialstatementsreflect
conceptswhichapplytocommercialentities(profitability,keepingcapitalintact)?

Cangovernmentsbemanagedproperlywithoutthefullrangeofaccountinginformation
thatonlyanaccrualbasedsystemcansupply?
Whatadvantagesanddisadvantagesarethereingovernmentsvaluingtheirfixedassets
anddepreciatingthem?
WhataretheimplicationsofPSC/IFACrequirementsthatinordertoclaimcompliance
withIPSASallgovernmentcontrolledentitiesshouldbeconsolidatedforthepurposeof
producingfinancialstatementsand(b)thatonlyoneaccountingbasisshouldbeusedin
thosestatements?
Why,givenitsobviousdefects,hasthecashbasissurvivedsolongingovernment
accounting?
WhydotheBankstreasurymodernizationprojectsusethecashbasissupplementedby
systemsforpayables,receivablesandcommitments?
Isthereacontinuumbetweencashandaccrualsalongwhichcountriesarelikelyto
progressandifsohowimportantisthemodifiedaccrualsbasisasaconvenientstaging
post?
Sources
BritishGovernment(1994)Betteraccountingfortaxpayersmoney:resourceaccounting
andbudgetingingovernment,HerMajestysStationeryOffice,London.
InternationalFederationofAccountants(2000),Financialreportingunderthecash
basisofaccounting,Exposuredraft9,PublicSectorCommittee,NewYork.
InternationalFederationofAccountants(variousdates),InternationalPublicSector
AccountingStandards,PublicSectorCommittee,NewYork.
InternationalFederationofAccountants(2002),TransitiontotheAccrualBasisof
Accounting,PublicSectorCommittee,NewYork.
OrganisationforEconomicCooperationandDevelopment(1993),Accountingforwhat?
Thevalueofaccrualaccountingtothepublicsector,PUMA,Paris.
OrganisationforeconomicCooperationandDevelopment(1997),Accrualaccountingin
theNetherlandsandtheUnitedKingdom,PUMA,Paris.