New Directions in New Directions in PEMPEM

~~the lure of accruals ~the lure of accruals ~

Jim BrumbyJim BrumbyFAD FAD

May 25,2004May 25,2004

OutlineOutline

Why is accrual accounting Why is accrual accounting unstoppableunstoppable

What does accrual accounting What does accrual accounting provideprovide

What are the major controversies What are the major controversies associated with accrual accountingassociated with accrual accounting

What is a reasonable transition path What is a reasonable transition path to accruals from cashto accruals from cash

Unstoppable and inexorableUnstoppable and inexorable Forms of ‘regulation’Forms of ‘regulation’

– GFSGFS– National accounting basisNational accounting basis– Emerging fiscal frameworks, like SGP (ESA95)Emerging fiscal frameworks, like SGP (ESA95)– IFACIFAC

LogicLogic– Individual organizations and consolidated viewIndividual organizations and consolidated view

Bottom up from accountantsBottom up from accountants Top down from economistsTop down from economists

– Substance over form of transaction or eventSubstance over form of transaction or event– From ex post to ex anteFrom ex post to ex ante

Link to accountabilityLink to accountability Non-believers remainNon-believers remain

What do accruals giveWhat do accruals give Four core general purpose financial Four core general purpose financial

statementsstatements– Cash flowCash flow– Operating statementOperating statement– Statement of other economic flowsStatement of other economic flows– Balance sheetBalance sheet

Reinforces consideration of the effects on Reinforces consideration of the effects on each of these, e.g.each of these, e.g.– Capital investment & depreciationCapital investment & depreciation– Asset salesAsset sales– Working capital movementsWorking capital movements

Difference between recognition and Difference between recognition and disclosuredisclosure

Key controversiesKey controversies Conceptual controversiesConceptual controversies

– Valuing heritage assetsValuing heritage assets– When to recognize tax revenueWhen to recognize tax revenue– Expense is different from expenditureExpense is different from expenditure– Targeting an optimal balance sheetTargeting an optimal balance sheet

Operational controversiesOperational controversies– Systemic features needed prior to accrualsSystemic features needed prior to accruals

Leapfrogging doesn’t existLeapfrogging doesn’t exist

– ‘‘Sucks’ resources into general govt sector, Sucks’ resources into general govt sector, placing stress on limited capacityplacing stress on limited capacity

– InterpretationInterpretation

ReadinessReadiness

GFS view:GFS view:– Group I countries – core systems cash Group I countries – core systems cash

based; but can make adjustments for based; but can make adjustments for fiscal statisticsfiscal statistics

– Group II countries - accruals except Group II countries - accruals except consumption of fixed capital; balance consumption of fixed capital; balance sheet for financial assets and liabilitiessheet for financial assets and liabilities

– Group III countries – completeGroup III countries – complete

Transition pathsTransition paths

Group 1: cash+; double entry; TSA; Group 1: cash+; double entry; TSA; commitment controls and arrears commitment controls and arrears reporting; upgrade manual systems; reporting; upgrade manual systems; develop accounting skills.develop accounting skills.

Group II: govt commitment; COA accruals; Group II: govt commitment; COA accruals; formal commitment and arrears; formal commitment and arrears; contingent liabilities, on-lending and contingent liabilities, on-lending and transactions-in-kind; GFMIS development; transactions-in-kind; GFMIS development; training.training.

Group III: full transitionGroup III: full transition

SummarySummary

Accrual fiscal reporting is occurringAccrual fiscal reporting is occurring The rollout appears unstoppableThe rollout appears unstoppable There remain numerous conceptual There remain numerous conceptual

and operational issuesand operational issues The gains will be debated for everThe gains will be debated for ever

– No clear benefit versus costNo clear benefit versus cost The costs of transition appear high for The costs of transition appear high for

those with little capacity to afford them those with little capacity to afford them