Governments have historically adopted the “cash basis” of accounting, which recognises a transaction through actual cash flows, rather than the time of transaction. This is because of its simplicity and the governments’ need for cash to fund public schemes.

Public financial management has evolved significantly in recent years, after many countries began reviewing how governments function, manage resources and disclose operations.

Policymakers have realised that reliance on cash-based accounting makes it harder to resolve complex financial challenges. In particular, cash basis does not provide a complete picture of the government’s liabilities, assets, cost of holding assets and their consumption. Also, it gives room for financial opportunism, and results may be changed by collecting advance taxes and/ or delaying payment of expense. The problem is compounded by a lack of disclosures in the financial report.

The Indian scenario

To overcome shortcomings and address concerns about lack of transparency, many countries are looking at a transition from cash- to accrual-basis of accounting. In India, the Government has already accepted the need for financial reporting reforms, and many States have agreed in principle. However, lack of data and other practical issues may prove to be challenges in the application of accrual basis. Hence, a gradual shift is recommended. The operational framework issued in February 2007 envisages 10–12 years for the transition.

To facilitate the transition and issue accounting standards for the Government, the Comptroller and Auditor General, with Government support, has constituted the Government Accounting Standards Advisory Board (GASAB). To improve disclosures under cash basis, the board issues standards known as ‘IGASs’, and for accrual basis, ‘IGFRSs’. The board has formulated six IGASs, three of which have been notified. It has formulated two IGFRSs. To assess gaps and transition requirements, there are pilot studies covering a few ministries and State governments.

The Global scenario

Ernst & Young recently studied governments in 33 countries to understand the current state of accounting reforms.

Many countries in Europe, Oceania and the Americas have already moved toward accrual accounting. Cash-basis is still very common, especially in Asia and Africa. However, these regions have dynamic reform plans.

The government and parliament are typically seen as the main users of government financial statements. This indicates that accounting reforms may not address the information requirements of taxpayers and private users.

Majority (nearly 61 per cent) of the countries use their own accounting system. The remainder use cash-basis International Public Sector Accounting Standards (IPSAS), accrual-basis IPSAS, or IPSAS-like standards. Hence, comparisons between governments may be difficult.

The government budget is published in nearly all countries, which also compare budgets and actual amounts. Seventy per cent of countries follow the same basis for budget and financial reporting. However, this may change as budgets remain on cash basis in many countries even after financial reporting moves to accrual basis following accounting reforms.

Some concepts such as steam, electricity, and the digital revolution are far superior to what preceded them, so the debate on their adoption centres more on ‘how to do it’ than ‘why’. Accrual accounting for the government sector appears to be one such idea. The Government’s decision to adopt accrual accounting is welcome. However, to address the attendant challenges, experience gleaned in other parts of the world can prove useful.

Vishal Bansal is senior professional in a member firm of Ernst & Young Global

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