BUDGET EXECUTION COURSE SYSTEMS OF ACCOUNTING 16 January, 2003 David Shand OPCFM

A BRIEF TECHNICAL OUTLINE ! Each “system” may apply to budgeting and/or accounting Points of control or transactions Obligations - e.g. placing an order (engagement) Liability (creditor) - receipt of an order Payment for the order – cash Using the order – cost

A brief technical outline Cont’d In practice a control system is needed at each of these points 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 – obviously the amounts need to be mutually compatible Cash payments (above the line) +/- change in creditors + depreciation charge for fixed assets = cost

Cash Budgeting And Accounting Budget results can be manipulated through delaying paying creditors etc Needs to be supplemented by controls over commitments Need to distinguish between above and below the line transactions (operating versus financing transactions – e.g. borrowing repayments or borrowing receipts) Is simple and effective if done with integrity

Accrual accounting and budgeting - Outline Recognizes 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

Accrual accounting and budgeting – Issues Does the accruals concept apply to both budgeting and accounting – in some countries the latter only The issue is not just fiscal reporting and transparency but of management That is not just managing cash flows, but managing all resource flows - costs, revenues, assets and liabilities (and therefore net worth) – “managing on an accruals basis” Australia moved to full accrual accounting for autonomous bodies in 1980, but this 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 operating statement result on an accruals basis In some countries accrual basis is used only at organizational unit level, reflecting this management focus How are capital purchases handled under accrual budgeting ? – technically the budget cost is the depreciation charge, not the outlay for the asset

Advantages of the accruals approach Improving cost measurement. But there are other ways of doing this – charging under a cash system for otherwise free goods e.g. accommodation, asset usage Improving asset management – avoiding lazy assets and improving maintenance 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 and liability changes are reflected in costs

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 – shown as a note. 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 In particular we need to fund all liabilities to avoid a deficit in the operating statement Showing all assets ? How to value heritage assets, national parks etc Some countries may 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)