BUDGET EXECUTION COURSE SYSTEMS OF ACCOUNTING AND BUDGETING 5 November, 2003 David Shand OPCFM

A BRIEF TECHNICAL OUTLINE ! Each “system” may apply to budgeting and/or accounting Points of control or measurement Obligations - e.g. placing an order (engagement or commitment) Liability (creditor) - receipt of an order (modified accrual) Payment for the order – cash (but checks may be written but not issued) Using the order – cost/expense (full accrual)

A brief technical outline Cont’d In practice a control system is needed at each of these points – not one or the other Cash monitoring and management is always required For example budgeting for or controlling only cash payments does not provide any control over obligations Possibly leading to over commitment and payment arrears (insufficient cash to pay creditors on time) Some countries’ budget appropriations cover both obligation and cash payment authority – the amounts need to be mutually consistent Cash payments (above the line) +/- change in liabilities +/- changes in inventories + depreciation charge for fixed assets = expense (cost)

Cash Budgeting And Accounting Budget results can be manipulated through delaying paying creditors etc Needs to be supplemented by controls over commitments – to avoid payment arrears Distinguish between above and below-the-line transactions (operating statement versus financing transactions – e.g. borrowing repayments or borrowing receipts, but not asset sales and purchases) Is simple and effective if done with integrity

Accrual accounting and budgeting - Outline Recognizes all resource flows - revenues and expenses, reflecting changes in assets and liabilities Modified accrual recognizes changes only in debtors and creditors (Full) accrual encompasses all assets and liabilities. But how are these concepts defined and how might some be measured ? Depreciation of fixed assets is an expense in the operating statement Operating statement balance articulates/is reflected in changes in net assets (assets minus liabilities) in the balance sheet – showing government “net worth”

Accrual accounting and budgeting – Issues Is the accruals concept applied to both budgeting and accounting – in some countries the latter only. Budgeting is seen as managing “real money” i.e. cash The issue is not just fiscal reporting and transparency but of managing on an accruals basis That is not just managing cash flows, but managing all resource flows – expenses, revenues, assets and liabilities (and therefore net worth) – Australia’s full accrual accounting for autonomous bodies in 1980, did not change the way they managed. Accrual financial statements were not used for decision making

Accrual accounting and budgeting – Issues Cont’d The operating statement and the balance sheet are the two sides of the same coin, But in some countries there is more interest in the statement of assets and liabilities, rather than the accruals based operating statement In some countries accrual basis is used only at organizational unit level, reflecting a management focus Treatment of capital purchases under accrual budgeting ? – the budget cost is the depreciation charge, the funding for the asset purchase is a capital transaction, outside the operating statement

Advantages of the accruals approach Improving cost measurement as all changes in liabilities are recognized. But charging under a cash system for otherwise free goods e.g. accommodation, asset usage may also do this Improving asset management – avoiding lazy assets (through depreciation charge) and (through identifying and reporting assets) making managers conscious of the existence of assets and the need to maintain them (or collect them e.g. debtors) But other ways of doing this too – e.g. reporting requirements on debtors, budgetary incentives for asset sales Improving debt and liability management – reporting them helps make managers accountable; liability changes are reflected in costs, which must be managed

Applying the accruals approach What is a liability ? future civil service salaries ? civil service pension schemes ? national pension schemes ? deferred maintenance of infrastructure assets ? environmental clean up costs ? Distinguish liabilities from commitments And from contingent liabilities (possible future liabilities) – shown as a note in financial statements. How estimated ? Need for long-term cash forecasting to establish fiscal sustainability c.f. US social security scheme (its “deficit/surplus” is cash based)

Applying the accruals approach Accrual budgeting and accounting and the bottom line may affect observance of fiscal rules/achievement of fiscal targets For budget or grant dependent entities all liabilities must be fully funded to avoid a deficit in the operating statement (same issue as pay as you go pension schemes) Showing all assets ? How to value heritage assets, national parks etc Some countries focus on financial assets and liabilities, and exclude fixed assets

The appropriateness of accrual accounting and budgeting to developing countries We will discuss this issue further in the session on fiscal reporting and transparency in looking at IPSASs (international public sector accounting standards)