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

2. 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

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

4. 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

5. 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

6. 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

7. 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)

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

9. 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

10. 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

11. 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

12. 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.

13. 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).

14. 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

15. 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

16. 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,
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).

17. 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.

18. 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