Government accounting — accrual is the way to go

Globally, government accounting systems have some common objectives and peculiarities in measuring and accounting receipts, expenditure, and budgetary control. Countries began moving from traditional cash-based system to accrual system of accounting to keep pace with the non-public sector. There were no uniform practices in the absence of global principles and standards.

To strengthen the accountancy profession worldwide, the International Federation of Accountants (IFAC) was founded on October 7, 1977, in Munich, Germany. Its responsibilities include developing high-quality international standards in auditing and assurance, public sector accounting, ethics and education for professional accountants, and supporting their adoption and use. The International Public Sector Accounting Standards (IPSAS) are meant to be used by public sector entities worldwide to prepare financial statements. The IPSAS Board is an independent body, facilitated by IFAC. It is supported by the World Bank, the Asian Development Bank, and the governments of Canada, New Zealand, and Switzerland.

Applicability of IPSAS

IPSAS are meant for national, regional (State/ provincial/ territorial) and local (city/ town) governments, and governmental entities (agencies, boards, commissions and so on). The Board develops accrual IPSAS for reporting issues not addressed by International Financial Reporting Standards (IFRS) — that is, those applicable to public sector accounting. The Board has also issued a comprehensive ‘Cash Basis IPSAS’ that includes mandatory and encouraged disclosures.

Move to accrual system

Developed countries such as the UK, the US, Canada, Australia, and New Zealand have consciously attempted to move to the accrual system. However, very few governments have actually adopted the full accrual basis for the financial statements of their ministries. According to the International Monetary Fund (IMF), in September 2009, New Zealand, Australia, the US, the UK, Canada, Colombia and France adopted the full accrual basis of accounting (source: wikipedia).

Adapting to change

In India, the Twelfth Finance Commission recommended the introduction of accrual accounting in government. The Government accepted the recommendation in principle and, accordingly, the Government Accounting Standards Advisory Board (GASAB) framed the roadmap for transition from cash to accrual accounting system. So far, 21 State governments have agreed in principle to introduce accrual accounting.

The accrual basis standards are initially issued as recommendatory for pilot studies and will become mandatory after notification. The Indian Government Financial Reporting Standards (IGFRS), approved by GASAB, are:

IGFRS 2: Property, Plant and Equipment;

IGFRS 3: Revenue from Government Exchange Transactions;

IGFRS 4: Inventories;

IGFRS 5: Contingent Liabilities (other than guarantees) and Contingent Assets: Disclosure Requirements

ICAI Initiative

The Institute of Chartered Accountants of India (ICAI) has issued seven accounting standards for local bodies such as municipal corporation, municipality, and panchayat . The authority which approves the financial statements should ensure compliance with the standards.

With economies becoming more interdependent and global, the move to the accrual system of accounting will help governments measure assets and liabilities more objectively. The Indian Government has identified this need, and the focus should now be on bringing more on board. However, it is a long journey in terms of the issue of standards, and adoption and implementation.

The author is Partner, Deloitte Haskins & Sells.

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