New Directions in PEM ~ the lure of accruals ~ Jim Brumby FAD May 25,2004

Outline Why is accrual accounting unstoppable Why is accrual accounting unstoppable What does accrual accounting provide What does accrual accounting provide What are the major controversies associated with accrual accounting What are the major controversies associated with accrual accounting What is a reasonable transition path to accruals from cash What is a reasonable transition path to accruals from cash

Unstoppable and inexorable Forms of ‘regulation’ Forms of ‘regulation’ –GFS –National accounting basis –Emerging fiscal frameworks, like SGP (ESA95) –IFAC Logic Logic –Individual organizations and consolidated view  Bottom up from accountants  Top down from economists –Substance over form of transaction or event –From ex post to ex ante  Link to accountability Non-believers remain Non-believers remain

What do accruals give Four core general purpose financial statements Four core general purpose financial statements –Cash flow –Operating statement –Statement of other economic flows –Balance sheet Reinforces consideration of the effects on each of these, e.g. Reinforces consideration of the effects on each of these, e.g. –Capital investment & depreciation –Asset sales –Working capital movements Difference between recognition and disclosure Difference between recognition and disclosure

Key controversies Conceptual controversies Conceptual controversies –Valuing heritage assets –When to recognize tax revenue –Expense is different from expenditure –Targeting an optimal balance sheet Operational controversies Operational controversies –Systemic features needed prior to accruals  Leapfrogging doesn’t exist –‘Sucks’ resources into general govt sector, placing stress on limited capacity –Interpretation

Readiness GFS view: GFS view: –Group I countries – core systems cash based; but can make adjustments for fiscal statistics –Group II countries - accruals except consumption of fixed capital; balance sheet for financial assets and liabilities –Group III countries – complete

Transition paths Group 1: cash+; double entry; TSA; commitment controls and arrears reporting; upgrade manual systems; develop accounting skills. Group 1: cash+; double entry; TSA; commitment controls and arrears reporting; upgrade manual systems; develop accounting skills. Group II: govt commitment; COA accruals; formal commitment and arrears; contingent liabilities, on-lending and transactions-in-kind; GFMIS development; training. Group II: govt commitment; COA accruals; formal commitment and arrears; contingent liabilities, on-lending and transactions-in-kind; GFMIS development; training. Group III: full transition Group III: full transition

Summary Accrual fiscal reporting is occurring Accrual fiscal reporting is occurring The rollout appears unstoppable The rollout appears unstoppable There remain numerous conceptual and operational issues There remain numerous conceptual and operational issues The gains will be debated for ever The gains will be debated for ever –No clear benefit versus cost The costs of transition appear high for those with little capacity to afford them The costs of transition appear high for those with little capacity to afford them