Move over to accrual system

It is said that the only situation when one does not care about how much one spends or on what it is being spent is when we spend someone else's money on someone else. This is normally cited in a lighter vein to illustrate how a Government spends its money. The Statement of Affairs of the Government of India reflects high leverage with well over 98 per cent of its Liabilities comprising Public Debt while no indicators of Surplus in the foreseeable future can be expected from the Income Statement.

The cash basis of accounting used and a focus on social causes can probably justify the financial results. The Comptroller and Auditor General of India (CAG) and the Government Accounting Standards Board (GASAB) have been taking steps to encourage the Government to move over to the Accrual System of Accounting.

GASAB has till date issued 7 Indian Government Accounting Standards (IGAS) out of which 6 are awaiting a Notification from the Government for some time now.

One standard notified

Only IGAS-1 on disclosure requirements for Guarantees given by the Government has been notified in the Official Gazette. The IFRS fever appears to have caught on with GASAB too since its first standard on the accrual basis of accounting is titled IGFRS-2 and deals with Property, Plant and Equipment. An Exposure Draft on Contingent Liabilities and Contingent Assets completes the list of accounting standards from GASAB.

The Government provides guarantees for various purposes. These Sovereign Guarantees are presumably as good as cash. Details of guarantees given by the Government were disclosed separately as part of the Expenditure Budget documents but appear to have been merged with other grants-in-aid a few years back. When last provided, the guarantees issued totalled Rs 1,74,000 crore and the value which could be monetised was in excess of Rs 90,000 crore. Present value could exceed Rs 1,00,000 crore. Though IGAS-1 is effective for periods beginning on or after April 1, 2010, information on compliance with the Standard does not appear to be in the public domain.

IGAS-1 mandates Union Government, State Governments and Union Territories to disclose tons of information on class or sector of guarantees issued — the maximum amount for which guarantees have been given during the year, additions and deletions, guarantees outstanding at the beginning of the year, amount of guarantees invoked and discharged during the year, details of guarantee fee or commission and its realisation, time limits, a reconciliation between opening and closing Guarantee Redemption or Reserve Fund, subsisting external foreign currency guarantees, details of automatic debit mechanism and structured payment arrangements etc.

Further disclosure details are required regarding the class and sector of guarantees — with class meaning guarantees given to RBI, other banks and financial institutions, repayment of share capital etc, in pursuance of agreements with international financial institutions, counter-guarantees given to banks, guarantees to railways and electricity board and performance guarantees etc.

Role of CAG

The CAG became a household name last year after its 2G report. Its Performance Audit reports are more in the nature of proprietary audits as its recent audit report on ONGC Videsh illustrates - a loss of Rs 1,182 crore on its joint venture in Russia due to production issues and evaluation inadequacies. Internationally, Government and public sector accounting standards have all tread the IFRS path and are streets ahead.

Being in pole position now, the CAG should take the lead in getting GASAB to re-enact what the Institute of Chartered Accountants (ICAI) did — frame the remaining accounting standards quickly and playing the coordinator role to enable accrual accounting in the Government. A pilot project undertaken in Andhra Pradesh highlighted the advantages and benefits of moving over to the accrual basis of accounting.

(The author is a Bangalore-based chartered accountant.)

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