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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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)

10. 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

11. 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)