Accrual accounting on the rise among governments worldwide

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The number of countries reporting their financial positions on an accrual basis is expected to increase from 37 to 98 by 2023, jumping from 25 percent to 65 percent, according to a new report.

The report, released Wednesday by the Association of Chartered Certified Accountants and the International Federation of Accountants, found that accrual accounting would provide greater financial transparency for citizens of these countries and includes 30 recommendations for implementing the accrual basis as opposed to cash basis accounting.

Cash accounting is used in some form by 75 percent of governments around the world, the report acknowledges, but argues it doesn’t provide the most accurate picture of a government’s fiscal health, nor allow it to adequately plan for the development, delivery and maintenance of the necessary services, programs and infrastructure on which citizens rely, thus leading to a breakdown of trust in government financial information.

"Moving to accruals needs to be more than a compliance exercise, it should be about making the best use of financial information,” said Alex Metcalfe, ACCA head of public sector policy and the author of the report, in a statement. “The range of benefits highlighted in this report demonstrates the clear upside to implementing accruals in the public sector. We need to ask whether cash is still king, when it comes to financial reporting and budgeting.”

Nevertheless, there is something to be said for why so many governments continue to use the cash basis of accounting. The report points out that cash accounting and budgeting are the simplest basis, although they provide the least decision-useful information. Accrual accounting combined with cash budgeting offer the most complex basis, but they generate information that facilitates public scrutiny and supports better decision-making. To produce decision-useful information, governments need to set objectives, plan, engage stakeholders, create effective systems, and develop the right skills, including internal training beyond preparers. Accrual accounting and accrual budgeting produce a “medium level of complexity” and offer more consistency so governments can leverage more effective performance management.

The report recommends that governments that implement accrual accounting and budgeting should direct their independent fiscal policy institutions to assess the contingent liabilities and produce recurring fiscal risk reports. They should also plan to produce a fully consolidated balance sheet that offers a complete financial picture of the resources and risks for the public sector, including any state-owned enterprises. They should also take into account any political challenges into the implementation roadmap from the beginning, such as a sunset clause requiring the eventual recognition of employee pension liabilities. Governments should also include groups that can offer constructive criticism about the reforms, such as auditors and legislative committees. Experts should be deployed centrally to reduce consulting costs and support implementation across the government.

“The accounting profession’s public interest mandate is nowhere more apparent than in the public sector, where high-quality reporting and budgeting is a prerequisite for government transparency and effective delivery of public services,” said IFAC CEO Kevin Dancey in a statement. “To the finance professionals and public sector decision makers who are leading the transition from cash to accrual accounting, we commend you and support you.”

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