28-07-2014, 10:41 AM
ARGUMENTS FOR INTRODUCING ACCRUAL BASED ACCOUNTING IN THE PUBLIC SECTOR
ACCOUNTING IN THE PUBLIC.docx (Size: 26.45 KB / Downloads: 27)
Abstract
In public sector the cash basis of accounting has been traditionally used, but in the last period there have been discussions over the benefits of a change to the accrual basis.
There are a lot of important supporters of cash basis like IFAC,who issued 21 IPSAS, based on IAS/IFRS, EU commission and IMF.
Many organizations like SIGMA which work in transitional and developing countries, question the priority, for these countries at least, of moving from the cash to the accrual basis of accounting.
So, the move to the accrual basis for public sector financial reporting has not gained universal acceptance. In Europe, there are a lot of countries who refuse to make the exchange, or who have increased doubts.
Apart from this, From a long time, accounting for public entities has been on a cash basis, with no change until the '80s when it was considered appropriate that these should move closer to commercial accounting principles practiced in the private sector. Demands for better accountability by governments and by public sector managers are being heard around the world as the public realizes that living on credit is not sustainable for individuals and the same principle applies to governments. The paper highlights the main characteristics of accrual basis accounting and its importance over cash basis of accounting.
Introduction
Over the last decades, governance of the public sector has been affected by some transformation, like as deregulation, decentralization, replacement of input control by output control, management by results, assignment of responsibilities, and the introduction of private sector management techniques. These reforms are often referred to as New Public Management (NPM). Its main aim is to create an environment in whichthe public demand reforms the way governments manage their activities, and fulfil theirresponsibilities without leaving a huge burden on future generations. NPM is focused on
efficiency, as governments around the world are being asked to do more with less and to be fully accountable to the community for resources entrusted to them. Accountingplays a crucial role in NPM developmentsas the means by which measurements are made, achievements are documented, and negotiations take place. A number of European Union countries have adopted and developed new ways of working, which have changed how central and local governments serve their communities and have often resulted in improved performance. Accountability structures, accounting rules, reporting schemes, have seen significant changes. These changes have meant that
finance professionals have had to re-examine and modify their traditional ways of assessing achievement.
Cash versus accrual accounting
Under the cash method, income is not counted until cash is actually received, and expenses are not counted until actually paid. Under the cash basis, revenues and expenses are recognized when payment is made or received.
Like advantages of cash basis accounting we can mention: easiest to do, it is objective, with few choices to make. Like disadvantages of cash basis accounting we can mention: no attempt is made to match an expense with the revenue it generates. This means that the income statement and balance sheet may not be good pictures of recent activity and present activity conditions. Cash-based accounting can distort the true operations of the activity and incorrectly reflect income.
Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when are received the goods or services
Disadvantages associated with adopting Accrual Based Accounting
The main disadvantages are very high costs and increased complexity of the
financial statements produced. Costs are related to: identifying and valuing existing assets; developing accounting policies; establishing accounting systems, including the purchase of software and pilot testing them; developing necessary skills and providing financial information training for preparers and users. Other disadvantages: (a) it is designed to measure profit, a largely meaningless concept in the public sector; (b) maintenance of public assets is more important than providing information on their value; © it takes budgetary control away from finance staff, as they decide when cash is paid, but non-financial managers and suppliers decide when invoices are issued;
and (d) given its complexity, requires greater professional judgment by both the preparers and the auditors of government accounts. Comparatively, cash-based accounting is simpler and more objective.
Cash versus accrual accounting for public sector
In the field of the public sector accounting, there were two thinking trends, a traditional one based on cash accounting, and a modern one based on accrual accounting.
Under the traditional model, of public administration cash accounting or budget accounting, cash based system initially considered as being more appropriate for the public sector, the emphasis was on compliance with rules and regulations. One of the results of this system is the budget out-turn report looked upon as a basic part of the usual financial statements in the public sector.
According to the modern model the emphasis is on efficiency, so it is recommended that the public sector should introduce the set of financial statements applied in the private sector, which is made according to accrual accounting. Through accrual accounting we can maximize the effects of the process of competition enabling and public management efficiency so that this should be achieved with minimal costs for the society. The passing to the new system is not a purpose in itself but rather a change of mentality regarding the budgetary process, by passing from a rigid situation of cashed incomes and paid expenses to a situation where the emphasis is on achievements and forecasts hoping that this last system will lead to the increase of public management efficiency.
Nowadays Financial Statements must show the true and fair value of equity financial situation and profit and losses. Commission for Public Sector Accounting Principles and Standards has established a new conceptual framework. The developing of it brings us two kinds of P&L:
- Net income: Variation in equity as a result of its budgetary and non budgetary transactions
- Budgetary P&L: Difference between all the budgetary revenues and expenses realized during the accounting year, excluding those derived from financial liabilities.
International Public Sector Accounting Standards
The International Federation of Accountants (IFAC) by the Public Sector Committee developed International Public Sector Accounting Standards (IPSAS). The IFAC has been encouraging governments and other public sector entities to adopt the accrual basis of accounting for their general-purpose financial statements. In recent years, the IPSAS Board has made considerable progress in developing a set of standards for public sector financial reporting on the accrual basis of accounting and other guidance for public sector entities but IFAC- PSC has no power to require compliance with IPSAS. Comparison of IAS and IPSAS shows very little material differences (additional commentary, different terminology and definition)
As of February 2006, PSC had issued 21 IPSASs. However, these standards are not yet complete or comprehensive. IPSAS objectives are the improvement of quality (transparency and thus accountability) and comparability of financial information, assistance to national standard-setters.
The IFAC scope is the appliance of IPSAS in all public sector entities (national, regional and local governments and their component entities [departments, agencies, boards, commissions])
Conclusions
Public accounts provide information on budget management and proper and
appropriate use of public funds, ensuring for users the possibility of making the best economic decisions. In achieving this requirement is necessary to move from the traditional cash inputs approach, towards outputs and outcomes, respectively accrual based accounting. Arguments are the multiple advantages provided by the financial statements, transparency and accuracy, improved assets and liabilities management and budgeting process, reliable source for decision making, better assessment of programs and related
services costs. According to the EU requirements, the whole government accounts passed to accrual accounting system, by adopting new general accepted accounting principles. These principles had to be in compliance with the European rules, and adequate to our country’s circumstances and to its public sector.