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New Directions in PEM ~ the lure of accruals ~

New Directions in PEM ~ the lure of accruals ~. Jim Brumby FAD May 25,2004. Outline. Why is accrual accounting unstoppable What does accrual accounting provide What are the major controversies associated with accrual accounting What is a reasonable transition path to accruals from cash.

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New Directions in PEM ~ the lure of accruals ~

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  1. New Directions in PEM~the lure of accruals ~ Jim Brumby FAD May 25,2004

  2. Outline • Why is accrual accounting unstoppable • What does accrual accounting provide • What are the major controversies associated with accrual accounting • What is a reasonable transition path to accruals from cash

  3. Unstoppable and inexorable • Forms of ‘regulation’ • GFS • National accounting basis • Emerging fiscal frameworks, like SGP (ESA95) • IFAC • Logic • Individual organizations and consolidated view • Bottom up from accountants • Top down from economists • Substance over form of transaction or event • From ex post to ex ante • Link to accountability • Non-believers remain

  4. What do accruals give • Four core general purpose financial statements • Cash flow • Operating statement • Statement of other economic flows • Balance sheet • Reinforces consideration of the effects on each of these, e.g. • Capital investment & depreciation • Asset sales • Working capital movements • Difference between recognition and disclosure

  5. Key controversies • Conceptual controversies • Valuing heritage assets • When to recognize tax revenue • Expense is different from expenditure • Targeting an optimal balance sheet • Operational controversies • Systemic features needed prior to accruals • Leapfrogging doesn’t exist • ‘Sucks’ resources into general govt sector, placing stress on limited capacity • Interpretation

  6. Readiness • GFS view: • Group I countries – core systems cash based; but can make adjustments for fiscal statistics • Group II countries - accruals except consumption of fixed capital; balance sheet for financial assets and liabilities • Group III countries – complete

  7. Transition paths • Group 1: cash+; double entry; TSA; commitment controls and arrears reporting; upgrade manual systems; develop accounting skills. • Group II: govt commitment; COA accruals; formal commitment and arrears; contingent liabilities, on-lending and transactions-in-kind; GFMIS development; training. • Group III: full transition

  8. Summary • Accrual fiscal reporting is occurring • The rollout appears unstoppable • There remain numerous conceptual and operational issues • The gains will be debated for ever • No clear benefit versus cost • The costs of transition appear high for those with little capacity to afford them

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