Accruals - Jon Blöndal, OECD

Accruals

10th Annual OECD Asian Senior Budget Officials Meeting Bangkok, 18-18 December 2014

Jón Ragnar Blöndal Head, Budgeting and Public Expenditures

Public Governance and Territorial Development Directorate

Presenter

Presentation Notes

2

Agenda

• Cash vs. Accruals –Concepts and Definitions

•Accruals in OECD countries

•Implementation Issues

•IPSASB

3

Cash vs. Accruals

•Basic Definition –Cash = When money changes hands –Accruals = When the underlying transaction takes place

•Example –Contract signed on 31 December 2014 –Payment made on 1 January 2015

–Accruals = recognized in 2014 –Cash = recognized in 2015

Cash vs. Accruals

Accruals Cash

Operating Statement YES NO Balance Sheet YES NO Cash-flow Statement YES YES

Accruals adds information to cash. It does not replace cash.

Cash vs. Accruals

•Key “bottom-line” differences –Employee pensions and retirement health benefits –Interest on debt –Capital expenditure and depreciation

Accounting vs. Budgeting

•Accrual Accounting –Applied to financial statements, but not necessarily the budget –Based on private sector accounting

•Accrual Budgeting

–Replaces cash as the measure to allocate scarce resources –Little or no similarity to the private sector

Accrual budgeting requires accrual accounting; Accrual accounting does not require accrual

budgeting

Agenda

•Cash vs. Accruals



•IPSASB

Overview •In 1989, New Zealand implements full accrual accounting and budgeting

•Very controversial topic in the 1990’s –Strong proponents and strong detractors

•Growing consensus in early 2000’s

–Many countries have implemented accrual accounting and most are considering it –Only New Zealand, Australia, and the UK adopted full accrual budgeting –Australia is moving back to cash appropriations –Need for great care in interpreting some countries’ claim to be using accrual budgeting

Accrual Accounting Reasons for Adopting

•Improved cost information to decision-makers

–Total costs; not just immediate cash outlays

•Improved discipline and accountability in budget execution

–No possibility to “defer” reported costs

•Illuminate long-term fiscal sustainability through a comprehensive balance sheet (assets and liabilities)

–But taxes and social security pensions

Accrual Budgeting Reasons for Not Adopting

•Difficult for politicians (and the public) to understand

–The 3 countries that apply it all share the Westminster tradition of governance where parliament has little if any influence on the budget

•Easy to manipulate –Non-cash items — such as depreciation—can be manipulated as much as or more than the timing transactions –New “matching principle” required –Manipulation inherent in accrual budgeting could undermine fiscal discipline rules

•Accrual budgeting for specific transactions can address some of the weaknesses of cash budgeting

–Civil service pensions –Interest on debt

Agenda




•IPSASB

Implementation Issues

•Recognition criteria •Valuation issues •Setting accounting standards •Asset registers •Opening balance sheet values •Appropriations for non-cash items •Cash management •Control of capital asset acquisitions •Upgrading accounting skills

Recognition Criteria

•Heritage Assets •Military Systems •Infrastructure Assets •Social Insurance Programs

Valuation Issues

•Historical cost •Current market value

Accounting Standards-Setting

•A degree of independence is essential

•Two models: –Single standard setter for both private and public sectors –A separate advisory group to the Ministry of Finance

•International Public Sector Accounting Standards Board (IPSASB)

─OECD – first entity in the world to adopt IPSAS ─Used as a basis for national standard-setters ─See next section

Asset registers

•Countries did not have up-to-date asset registers

–Property, plant and equipment

•A key obstacle in adopting accruals –Very time-consuming

•…and a key benefit of having adopted accruals

Opening Balance Sheet Values

•Important to optimize them when switch to accruals is made since they tend to get “locked in”

•“Asset-rich” agencies get excess appropriations in the form of depreciation

•“Asset-poor” agencies have continual funding problems

Appropriations for Non-Cash Items

Model A - Appropriate Cash • Cash appropriations for full costs • Empowers agencies • Fosters ¨culture change¨

Model B – Do Not Appropriate Cash • Cash for cash costs; notional “receivables” for

non-cash costs • Avoids control risks • No “culture change”

Cash Management

Key issue when cash appropriations are made for non-cash items (Model A).

Two options:

1.Only allocate cash to agencies when they require it. In effect, translates Model A into Model B.

2.Agencies receive cash “in their account” for non-cash items as well

- Control systems required

Control of Capital Asset Acquisitions

•Conceptual issue – Does accumulated depreciation gives agencies the “right” to future capital spending in that amount?

•Control issue – roles of agency, Ministry of Finance, and parliament

•Depreciation as pool of funds when an agency´s mission changes

Upgrading Accounting Skills

•Accruals requires professional judgements to be made

–Higher level of accountancy skills required

•In-house training and external recruitment

•Over-investment in accounting skills?

Agenda




•IPSASB

IPSASB In Brief • Independent Accounting Standard Setter • Part of IFAC – the accountancy professional body

–Different from IFRS institutional arrangements

• Sets standards for public sector entities, except state-owned enterprises (SOEs)

• 18 members, including currently 3 public members –Most now with a government background

• IMF, World Bank, OECD as permanent observers

• Less than 10 staff 23

IPSASB Standards

• 1 Cash-basis standard • 32 Accrual-basis standards • 28 Standards derived from IFRS

– Includes all relevant IFRS – “Improvements” programme

• 4 “Original” Standards – Disclosure of Information about the GGS (Financial Statistics) – Revenues from Non-Exchange Transactions (Transfers and

Taxes) – Presentation of Budget Information – Service Concession Arrangements (PPPs)

• Important standards still outstanding

IPSASB's Strategy

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IPSASB Strategic Themes 2010-2012

Derived from IFRS

IPSAS (Public Sector)

IFRS (Private Sector)

• Terminology

• Public sector guidance

• Public sector issues

• Public sector examples

Presenter

Presentation Notes

Firstly, IPSAS are based on IFRSs issued by IASB where the requirements of those standards are applicable to the public sector. Secondly: They also deal with public sector specific financial reporting issues that are not dealt with in IFRSs. A question would be asked as to why develop public sector accounting standards and not follow private sector accrual based standards. Firstly, the purpose or use made of financial statement in public sector is different from that in private sector. In public sector the aim is to reflect accountability of use of public funds for the service delivery, while in private sector, the financial reports is mainly to reflect the profit/ loss made for shareholders which have implication on shareholders wealth. The stakeholders are also different. In private sector shareholders are more interested in financial reporting by the entity while us in public sector the main stakeholders would be the members of Parliament, the Public Accounts Committee (SCOPA) and public whose focus is to ensure efficient service delivery and utilization of public funds. There is also more focus on ensuring actual expenditure are in line with budget in public sector.(Erna 2006, Patrick 2006) Secondly, public sector has specific transactions not entered into by private sector entities. Such transaction include (i) recognition of non-exchange revenue - e.g. taxes – where the public entity (SARS/Government) receives revenue (tax) without giving similar consideration in return; (ii) accounting for social policies of government – e.g. providing free education, social grants etc – where there recipient (members of public) do not pay equivalent consideration for the service benefits received from the public sector entity; and (iii) Heritage assets among others. In reference to one example in private sector; revenue is generated through sale or provision of a service where there is provision of an equal consideration by the private sector entity for the revenue received. It is also important to note that most of public sector entities rely on transfers – allocation of funds – from the national government exchequer. Thirdly, the assets held in public sector are more for service delivery hence have service potential while those in private sector are for generating future economic benefit to the entity. Therefore, the terminologies in some of items in public sector would be different from private sector. This necessitates public sector standards to be changed to include such terminology. For example, the definition of an asset in public sector is ‘assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential re expected to flow to the entity’. The term ‘service potential’ is added to the private sector definition. (Patrick 2006)

Convergence with IFRSs

• Increased Liaison with IASB – Updating IPSASs if IFRS change in order to avoid unintended

divergence

– Close day-to-day co-operation on staff level in areas of common interest, namely the conceptual framework

– Regular meetings on chairman and board level

Cash-Basis Standard

• Part I – Mandatory Requirements – It defines the cash basis of accounting, establishes

requirements for the disclosure of information in the financial statements and supporting notes, and deals with a number of specific reporting issues.

• Part II – “Encouraged” Disclosures

– It identifies additional accounting policies and disclosures that an entity is encouraged to adopt to enhance its financial accountability and the transparency of its financial statements. It includes explanations of alternative methods of presenting certain information.

Conclusions •Make the introduction of accruals part of an overall public administration reform that concentrates on abolishing input controls and giving more operational freedom to managers

–Put another way, allow managers the ability to use the accrual information they produce

For further information

• OECD Journal on Budgeting

• www.oecd.org/gov/budget

• [email protected]

Government & Nonprofit

Accruals - Jon Blöndal, OECD