Accrual Accounting – Key to Government Finance?
Government on all levels has a timeless mandate: provide services, protect the society and make the economy prosper. The challenges are ever growing: budget pressure and the growing demand for financial accountability for example require new solutions to improve transparency.
Citizens and businesses are demanding ever-higher levels of accountability and transparency from public sector organizations. Every Euro spent in tax needs to be justified and accounted for to maintain public confidence and create trust. This requires processes and systems to avoid errors and fraud, and provide detailed financial information in a timely and and accurate way.
To address this growing need for transparency and accountability, accounting regulations like International Public Sector Accounting Standards (IPSAS) require for accrual based accounting information to provide insight into financial information that can’t be provided by traditional cash based systems. Cash based accounting only recognizes revenues or expenses when money is received or paid. And: most public sector budgets are cash-based. When budgets and accounts are on the same basis they provide a consistent financial view. On the other hand accrual based accounting recognizes revenue and expenses already in a much earlier stage: when the organization is entitled to receive revenue or obliged to pay expenses. And it also accounts for transactions that have no impact on cash at all. Examples are accruals for write-offs on loss of value due to ageing (eg. for bridges) which will result in future cash needs for maintenance, or future liabilities like for public pensions or debt. But: accruals based accounts and cash based budgets are not telling the same story!
Public sector organizations will after all benefit from using accruals based information, get better insight into the financial situation, and be fully informed for sound decision making. But does it mean that cash based accounting is outdated and not needed any more? There is no either or. Why not use the best of both worlds? With the right systems in place public sector organizations can use both models at the same time – use the pros and mitigate the cons of each of the methods.
More comprehensive statements on revenue, expenditure, assets and liabilities for better accountability, comprehensive costing and management information on delivery of public services to better manage resources and assess performance together with relevant information on budget and cash will result to enhancement of financial transparency.
Therefore accrual accounting is key to government finance but also is cash based budget information. Use the best of both worlds and provide first-class accountability and transparency!”