1. Should Developing Countries Adopt Accrual Accounting?
Paul Boothe
Institute for Public Economics
University of Alberta

2. Institute for Public Economics
Outline
Motivation
Cash versus accrual accounting
Pros and cons of accrual
Accounting regimes and fiscal rules
Prerequisites for adoption
Checklist for policymakers
Insert a map of your country.
Institute for Public Economics
University of Alberta

3. Institute for Public Economics
Motivation
Two perspectives
Public versus private sector
Tale of two finance ministers
The goal: good governance
Insert a map of your country.
Institute for Public Economics
University of Alberta

4. Institute for Public Economics
Cash versus Accrual [1]
Cash
Traditionally used in public sector
Expenses and revenues recorded when they are paid or received
Accrual
Traditionally used in private sector
Expenses and revenues recorded when they are incurred or earned
Insert a map of your country.
Institute for Public Economics
University of Alberta

5. Institute for Public Economics
Cash versus Accrual [2]
When transactions are recorded is a key difference
Three examples
Purchase of a capital asset
Public sector pension liabilities
Corporate income tax arrears
Insert a map of your country.
Institute for Public Economics
University of Alberta

6. Institute for Public Economics
Cash versus Accrual [3]
Cash Accounting
Accrual Accounting
Operational requirements
Relatively simple
Relatively complex
Links to traditional budget and revenue systems
Relatively strong
Relatively weak
Coverage
Records only transactions that result in cash payments or receipts
Records estimated non-cash transactions as well
Timing
Records only transactions that occur within the accounting period
Records the estimated future effects of current transactions and policy changes
Audit and control
Relatively demanding
Insert a map of your country.
Institute for Public Economics
University of Alberta

7. Accrual Pros and Cons [1]
Pros (Athukorala & Reid, 2003)
Matches National Accounts
Recognizes transactions/events when they occur rather than when paid
Separates operating and capital spending
Better information on sustainability
Discloses pension liabilities
Identifies arrears
Insert a map of your country.
Institute for Public Economics
University of Alberta

8. Accrual Pros and Cons [2]
Cons (Wynne, 2003)
Ignores different aims of private and public sector
Not designed for legislative accountability
Requires sophisticated analysis and judgments
Exposes public servants to political pressure
Insert a map of your country.
Institute for Public Economics
University of Alberta

9. Institute for Public Economics
Fiscal Rules [1]
We know institutions affect fiscal rules (Alesina and Perotti, 1999, Poterba and von Hagen, 1999)
Not much attention yet to incentives flowing from accounting regimes
Boothe (2004)studies influence of accounting regimes on fiscal rules
Insert a map of your country.
Institute for Public Economics
University of Alberta

10. Institute for Public Economics
Fiscal Rules [2]
Boothe(2004) finds:
Fiscal circumstances may make either cash or accrual regimes more attractive to policymakers
Impacts of common fiscal rules change as regimes change
Regimes may influence the mix and volatility of spending
Insert a map of your country.
Institute for Public Economics
University of Alberta

11. Institute for Public Economics
Fiscal Rules [3]
Basic cash budgeting model:
Revenue is exogenous
Expenditures include:
transfers
services produced by public capital
gross capital investment
interest payments on public debt
Insert a map of your country.
Institute for Public Economics
University of Alberta

12. Institute for Public Economics
Fiscal Rules [4]
Basic accrual budgeting model
Revenue is exogenous
Modifies cash expenditures by subtracting gross capital investment and adding depreciation
Insert a map of your country.
Institute for Public Economics
University of Alberta

13. Institute for Public Economics
Fiscal Rules [5]
Cash is more attractive than accrual in fiscal consolidations
Balanced budget rules more ‘stringent’ under cash than accrual
Under accrual, capital investment can be financed by borrowing without affecting deficit in short run
Accrual + balance budget rules creates bias for capital spending
Insert a map of your country.
Institute for Public Economics
University of Alberta

14. Institute for Public Economics
Fiscal Rules [6]
Critical to recognize that regime changes nature of balanced budget rules
No Canadian gov’t changed fiscal rule after changing to accrual
Bias towards capital spending starting to appear in Canada
Net debt rule is invariant to regime
Insert a map of your country.
Institute for Public Economics
University of Alberta

15. Institute for Public Economics
Prerequisites [1]
Developing countries face different public sector environment and challenges (A&R, 2003)
Capacity constraints (HR and technology)
Governance/corruption issues
Many urgent priorities
Insert a map of your country.
Institute for Public Economics
University of Alberta

16. Institute for Public Economics
Prerequisites [2]
Capacity constraints
Accrual requires sophisticated professional judgments regarding physical assets, long-term social programs
Accrual generally requires more complex IT systems than cash systems
Insert a map of your country.
Institute for Public Economics
University of Alberta

17. Institute for Public Economics
Prerequisites [3]
Governance/Corruption issues
All accounting systems open to some manipulation
Revenue accruals particularly problematic when tax collection is an issue
Costs of long-term social programs very sensitive to assumptions
Insert a map of your country.
Institute for Public Economics
University of Alberta

18. Institute for Public Economics
Prerequisites [4]
When resources for public sector reforms are limited, must establish clear priorities
Develop new revenue systems
Reform budget processes
Implement accountability mechanisms
Transform state enterprises
Insert a map of your country.
Institute for Public Economics
University of Alberta

19. Policymakers’ Checklist [1]
Does accrual best meet needs in our public sector?
Is transition to accrual the best use of limited reform resources?
Do we have the HR and IT capacity to successful implement accrual
Insert a map of your country.
Institute for Public Economics
University of Alberta

20. Policymakers’ Checklist [2]
“Perfection is the enemy of the good…”
Voltaire
Insert a map of your country.
Institute for Public Economics
University of Alberta