1. Towards a New Era of Accounting and Budgeting Lessons Learned From Austrian Experience Santiago de Chile, 18 November 2014 Gerhard Steger, SAI Austria

2. Content  Accrual accounting and budgeting – the case of Austria  The change towards accruals  Benefits of accruals  Importance of standard setting  Conclusions Gerhard Steger Santiago de Chile, 18 November 2014 2

3. Austria: Introduction Facts & figures  8,5 million inhabitants  83.879 km 2  GDP 323 bn € = 38.000 € per capita  GDP per capita: No. 2 of EU 28 (129 % of EU 28-average) Gerhard Steger Santiago de Chile, 18 November 2014 3 Federation: 3 levels of government  Federal government  9 state governments (Länder)  2.354 local gov. = municipalities  Additional: social security authorities

4. Austrian Federal Budget Reform - Overview Result-oriented management of administrative units Performance Budgeting New budget structure: „lump-sum budgets“ Accrual budgeting and accounting  Budgetary discipline and planning: binding medium term expenditure framework  Flexibility for line ministries through full carry-forward of unused funds 2013 new budget principles: outcome-orientation; efficiency; transparency; true and fair view unanimous decisions in parliament 2007, 2009 2009 4 Gerhard Steger Santiago de Chile, 18 November 2014

5. Austrian Switch to Accruals: Facts, Figures  Application of accruals on central government level as of 2013  IPSAS as general orientation  Subnational governments start to follow  Pragmatic approach: Reduce administrative burden; safeguarding quality of information  Parliament votes on cash flow statement and operating statement  Financial statement (including balance sheet) audited by SAI  Parliament approved reform unanimously (2007, 2009)  Preparation took several years → design, decision, training  External costs of reform: 30 million € Gerhard Steger Santiago de Chile, 18 November 2014 5

6. Change Process Towards Accruals: Austrian Experience 1  Make change irreversible: Budget principle of true and fair view enshrined in Austrian constitution  Form powerful alliances to push reform - Parliament: informal budget reform committee - SAI: close cooperation with MoF to design reform - center of/government: backs reform - media, social partners and civil society: create public awareness - foreign stakeholders which might be helpful  Design pragmatically - IPSAS used to a great extent - deviations made if perceived necessary - change should be „digestible“ - learn from other countries Gerhard Steger Santiago de Chile, 18 November 2014 6

7. Change Process Towards Accruals: Austrian Experience 2  Staff as change agents - MoF led the reform, budget director in charge - staff designed the reform - staff trained staff trained staff - reform used to upgrade skills of staff  Training requirements for staff - thousands of staff visited training courses - e-learning program launched - on-the-job training provided - refreshment courses held after implementation  Awareness requirements for stakeholders: How to use new information? - Parliament - media - civil society Gerhard Steger Santiago de Chile, 18 November 2014 7

8. IT-Challenge: Austrian Experience 1  Accruals compatible software introduced a number of years before decision for implementing accruals  Software was adapted for cash only-requirements at that time  After decision for accruals software had to be adapted again  Austria went a long way round instead of making full use of IT- potential from the beginning Gerhard Steger Santiago de Chile, 18 November 2014 8

9. IT-Challenge: Austrian Experience 2  After decision for reform: Jour fixe between budget-, accounting- and IT-people  Jour fixe took place weekly or every second week  Budget director chaired the meetings to ensure relevance  Jour fixe existed several years: During design, implementation and even after implementation  Objective: Budget-, accounting- and IT-people should generate the same understanding of reform requirements → IT-applications should deliver according to needs of accounting/budgeting  Relevant for almost all aspects of reform  Difficult task and critical success factor! Gerhard Steger Santiago de Chile, 18 November 2014 9

10. Accruals versus cash?  Cash provides important fiscal information (liquidity)  Therefore, accurals do NOT abdicate cash... ... but provide ADDITIONAL perspectives:  USE of resources (operating statement)  Comparison of assets and liabilities (annual balance sheet) Gerhard Steger Santiago de Chile, 18 November 2014 10

11. Benefits of Accruals: Practical Examples 1  Provisions for contingent liabilities: Probability of event triggering the obligation >50 %.  Austrian central government balance sheet: Provisions: 4,1 bn € (e.g. guarantees; cost of pending litigation; staff: vacation entitlements; severance payments).  Special case: Pension liabilities provided in notes to annual financial statement (30-year projection of pension liability: 342,1 bn € as of 1.1.2013).  Doubtful receivables: Not shown in a cash perspective – ignores financial risk. Accruals reflect risk: Write downs (1,2 bn € per year) and adjustments of value (4,5 bn € 31.12.2013)  Benefit: Accruals disclose financial risks which are not identified in cash flow statement. Helps decision-makers to counteract in time. Gerhard Steger Santiago de Chile, 18 November 2014 11

12. Benefits of Accruals: Practical Examples 2  Order now, pay later: Considerable part of Austrian current railway infrastructure investment is paid over the next 30-50 years.  Complete budget burden not shown in cash, but flagged in accrual: Annual financial statement 2013 for railway infrastructure: - cash flow statement: 1,6 bn € - operating statement: 2,9 bn €  Benefit: Full budget burden disclosed transparently. Gerhard Steger Santiago de Chile, 18 November 2014 12

13. Benefits of Accruals: Practical Examples 3  Cash allocates budget burden to one single year instead of useful economic life.  Accruals allocate costs realistically (depreciation); Austrian budget comprises both perspectives: Liquidity and use of ressources: - investment: disclosed in cash flow statement - depreciation: accounted for in operating statement  Sale of assets: Cash shows revenue but not loss of assets – creates fiscal illusion.  Accruals disclose loss of assets.  Benefit: Fiscal illusions avoided. Gerhard Steger Santiago de Chile, 18 November 2014 13

14. Benefits of Accruals: Practical Examples 4 Is a country poorer or richer than a year ago? Cash does not provide an answer. Accruals do. Gerhard Steger Santiago de Chile, 18 November 2014 14

15. Austrian Balance Sheet 31.12.2013 (Central Government) ASSETSIn Mio EUR A Non-current assets 73.667 A.I Intangible assets 452 A.II Property, plant and equipment 39.469 A.III Securities and other investments 2.400 A.IV Equity investments 24.544 A.V Long-term receivables 6.802 B Current assets 16.521 B.I Short-term financial assets0 B.II Short-term receivables 11.654 B.III Inventories 701 B.IV Cash and cash equivalents 4.166 Total assets 90.188 NET ASSETS AND LIABILITIESin EUR C Net assets (balancing item) -140.585 D Non-current liabilities 188.051 D.I Long-term financial liabilities, net 169.905 D.II Long-term payables 14.666 D.III Long-term provisions 3.480 E Current liabilities 42.722 E.I Short-term financial liabilities, net 24.037 E.II Short-term payables 17.995 E.III Short-term provisions 690 Total net assets and liabilities 90.188 Gerhard Steger Santiago de Chile, 18 November 2014 11  1.1.2013: -134.167

16. Merits of Accruals  Enhances transparency of public finances including risks  Reduces scope for fiscal illusions  Harder for stakeholders to ignore fiscal reality and upcoming budget challenges  Fosters accountability of decision-makers to steer pulic finances in a sustainable manner Gerhard Steger Santiago de Chile, 18 November 2014 16

17. Importance of Standard Setting  Comparability: Crucial element of transparency  Common standards: The basis of comparability  Existing standard for public accounting: IPSAS  IPSAS serves as lighthouse for accounting reforms around the globe Gerhard Steger Santiago de Chile, 18 November 2014 17

18. Standard Setting in Austria  32 IPSAS- standards  20 fully applied (next page: green)  7 not relevant in Austria (next page: grey)  5 applied with deviations (next page: red) Gerhard Steger Santiago de Chile, 18 November 2014 18

19. List of IPSAS Standards and their application in Austria Gerhard Steger Santiago de Chile, 18 November 2014 19

20. Pragmatic standard setting approach  Necessary to compile Austrian opening balance sheet as of 1 January 2013  Full disclosure of federal assets and liabilities while minimizing necessay time, effort and expenses  „Austrian opening balance sheet regulation“ provides a number of exceptions and simplifications to reduce administrative burden without considerably affecting quality of information - flate-rate and comparative parameters used - measurement alternatives permitted - subsidiaries: valued at equity  Building up accrual expertise within administration Gerhard Steger Santiago de Chile, 18 November 2014 20

21. Challenges of Accrual Accounting and Budgeting  Commitment of political and senior administrative level is key (even after implementation of accruals)  Extensive information and training required for different stakeholders  Complexity threatens transparency - Relevance and accurateness need to be balanced - Less can be more  Use accrual information  Standard setting: Comparability (on national and international level) is crucial  Closely link technical and IT-issues to assure technical performance Gerhard Steger Santiago de Chile, 18 November 2014 21

22. Chances of Accrual Accounting and Budgeting  Realistic picture of public finances  Risks disclosed  Fiscal illusions much more difficult  Need for action flagged  Fiscal sustainability endorsed Gerhard Steger Santiago de Chile, November 2014 22

23. Conclusions 1  Accruals is not just a technical exercise, it‘s a change of perspective and culture  Communicate the merits of accruals and the deficiencies of „cash only“ to different stakeholders  Form powerful alliances to support accruals  Apply international standards  Implement them pragmatically without hampering comparability  Build capacity to deal with accruals inside your administration  Learn from reform experiences of other countries Gerhard Steger Santiago de Chile, 18 November 2014 23

24. Conclusions 2 Success in public finances requires clarity about financial consequences of decisions. Pure cash can‘t provide that. Accruals can. Gerhard Steger Santiago de Chile, 18 November 2014 24

25. 25 Thank you for your attention! Gerhard Steger Austrian Court of Audit Tel: +43 1 711 71-8625 steger@rechnungshof.gv.at www.rechnungshof.gv.at Gerhard Steger Santiago de Chile, 18 November 2014