Accounting and Accounting Standards Core PFM Training Program Sanjay Vani Lead Financial Management Specialist

Overview of the Presentation Basis of Accounting Government Accounting Standards Accounting Reports and Budget Reports Book-keeping/Recording System Organizational Arrangements for Accounting Statistical reporting of financial information Transition from Cash-basis to Accrual-basis

Basis of Accounting Two main bases of accounting are: Cash-basis of accounting, and Accrual-basis of accounting

Cash-basis of accounting Income is recorded when cash is received Expenses are recorded when cash is paid out. Totals of cash receipts and cash expenditures are shown in the financial statements whether or not they relate to that period Shortcomings: no matching of revenue against expenditure, assets and liabilities are not recorded

Accrual-basis of accounting Income is recorded when earned Expenses are recorded when incurred Totals of revenues and expenses are shown in the financial statements whether or not cash was received or paid out in that period Shortcomings: complex, requires estimation and thus may not be precise

Other Bases of Accounting Main variant is the modified accrual-basis or modified cash-basis of accounting revenues are recorded on cash-basis and expenditures are recorded on accrual-basis

Developments in Government Accounting Most governments until early 1990s followed cash-basis of accounting New Zealand introduced accrual-basis of accounting in mid-1980 A number of countries have since then moved to accrual-based financial reporting (e.g. Australia, Canada, Finland, France, Greece, New Zealand, Spain, Sweden, Switzerland, Turkey, the UK, and the US)

Government Accounting Standards Global financial reporting standards - International Public Sector Accounting Standards (IPSAS)  Both cash-basis and accrual-basis IPSAS.

IPSAS Cash-basis Accrual-basis IPSAS Two parts Mandatory establishes requirements for the disclosure of information in the financial statements and supporting notes, and deals with a number of specific reporting issues Part 2 Not mandatory Encourages additional disclosures Accrual-basis IPSAS Based on the International Financial Reporting Standards (IFRS) 31 IPSAS

Budget System and Accounting System Budget: central component of the process that provides for legislative oversight Budget reports: At the start of the financial year (aka annual bduget) At the end of the financial year (aka budget execution report) In many countries, budget execution report is the financial statement as no separate financial statements are prepared

Accounting-basis for Budget Reports Most governments prepare their budget reports on cash-basis A few have begun to prepare their budget reports either on modified accrual-basis or accrual-basis. For example, Canada, Finland, Iceland, and Italy prepare budget reports on modified accrual-basis (no depreciation of assets), while only Australia, New Zealand, Switzerland, and the UK prepare accrual- basis budget reports

Reconciliation Budget and Accounting Reports When budgetary basis and accounting basis differs – it needs reconciling  In most countries, the accounting and budgetary bases share the same transaction data.

Book-keeping/Recording System Records of government operations are dispersed and maintained by a wide variety of agencies and entities. The most important accounting record (in most countries) is maintained by the country’s treasury department. The other agencies/entities maintaining accounting records are Debt Management Unit (internal and external debt), line ministries (record of contracts, unpaid invoices, assets, budget allocation and utilization), and tax administration (record of tax receipts and dues).

IFMIS A typical manual system resulted in duplication of records – line ministries and treasury. Several countries have begun implementing automated Integrated Financial Management Information System (IFMIS), which shares the same central database

Organizational Arrangements for Accounting Vary across the globe The US - 24 key agencies (such as Department of Agriculture) prepare their audited financial statements. The Department of Treasury prepares consolidated US Government financial statements. France - Department of Budget and Public Accounts (MoF) prepares consolidated financial statement. Accounting within ministries/entities is performed by individual Accounts and Budget Controllers, who are seconded by the Department of Budget and Public Accounts

Financial Statistical Reporting The primary purpose of statistical reporting is to provide comprehensive information for economic and fiscal analysis, and policy making. The overarching model for macroeconomic statistics is the System of National Accounts, 1993. For government finance statistics, the statistical model is the IMF’s Government Finance Statistics Manual 2001 (GFSM 2001). This model is to a large extent harmonized with the 1993 SNA and is based on accrual principles (compared to the cash-based GFS Manual of 1986).

Transition – Cash to Accrual Process is lengthy and costly Several approaches Restrict initially to certain types of agencies Recognize assets and liabilities in stages with recognition of short-term assets and liabilities such as debtors and creditors first followed by recognition of property, plant and equipment Accrual accounting does not have to be accompanied by the adoption of accrual budgeting.

Transition – Cash to Accrual No “best” or “one-size-fits-all” solution Key success factors: Clear mandate Political commitment Commitment of key officials Adequate resources (human and financial) Effective project management structure Adequate technological capacity and information systems