In the aftermath of the global crisis, and the ongoing sovereign debt crisis, accountability, transparency and sustainability have become the top political agenda of most governments. There has been a paradigm shift from identifying resources for public-scheme funding to efficiency and transparency in public spending and fiscal prudence. Citizens have invested a great deal of their resources in governments, and they want to know the costs of the services provided and whether the financial health of their governments has improved or deteriorated. This is why countries like the US, the UK, Canada, Australia, New Zealand, Spain, Italy and Finland are in various stages of migration to accrual accounting.

The cash basis of accounting is based on inputs and outputs as against what was budgeted by the government. Liabilities, such as accrued interest or pension obligations, remain unaccounted for. Current assets or fixed assets are not accounted for and not tracked; tax revenues collected in one period could be followed by a high incidence of refunds in following years. Consequently, neither the financial position of the government is transparent nor is the full cost of government services known.

Better management

The accrual system facilitates better management of assets and liabilities, better maintenance and replacement policies, identification and disposal of surplus assets and fraud prevention and detection. The recognition of depreciation forces departmental managers to consider alternative ways of managing costs and delivering services. Identification of all liabilities (for example, pension obligations or hidden subsidies) would indicate to the government the real deficit. Accrual accounting provides information on revenues and expenses. Information on revenues helps the government to assess whether current revenues are sufficient to cover the costs of current programs and services. Information on expenses helps the government to assess revenue requirements, sustainability of existing programs and the likely cost of proposed activities and services.

The Government of India established the Government Accounting Standards Advisory Board (GASAB) in 2002 under the Comptroller and Auditor General (CAG) to suggest reforms in the Government cash-accounting system. Later, the Government accepted the 12th Finance Commission's recommendation to move to accrual accounting for the Union and the State Governments, and the roadmap and operational framework for transition to accrual accounting prepared by GASAB. The Fiscal Responsibility and Budget Management Act at the Centre and State levels now prescribe maintenance of asset registers (systems have yet to be put in place for detailing and tracking these assets). Two Indian Government Accounting Standards proposed by GASAB have already been notified by the Government and work on some other standards is underway. In 2001, the Supreme Court opined that accounts of the local bodies should be in the accrual format. Based on that, several municipal corporations have adopted the accrual system. Various Central Government organisations, like the Railways, the Department of Posts, etc., are conducting pilot studies to move to accrual accounting. Pilot studies have also been conducted under the aegis of GASAB, in various States like Madhya Pradesh, Andhra Pradesh, Haryana, Gujarat and Rajasthan.

Herculean task

Nevertheless, in India, the Government accounting is predominantly on cash basis — a legacy of the British rule. The CAG, in a recent speech, said, “Over the last few years, over 48 urban local bodies in 17 states have switched over to accrual-based accounting. Four states — Gujarat, Karnataka, Kerala and WB (West Bengal) — have adopted accrual accounting for Panchayati Raj institution. Given the progress made at the local bodies level, it is time the Central and State Governments take concrete step to shift to accrual accounting.”

A comprehensive double-entry accounting framework would help the Government to integrate its accounting system and thereby avoid duplication and reconciliation of various island systems.

This would save a lot of time and costs and inject efficiency into the system. But transition to accrual accounting is no easy task, and may take more than six years. Identification of assets and liabilities and creation of asset registers is a Herculean task.

A robust IT infrastructure involving an investment of more than Rs 600 crore would be required. Significant training would be required for capacity-building and managing transition to and implementation of accrual system and then manage that system. Even though efforts are considerable, the benefits of accrual accounting are immense, and hence, India should adopt accrual accounting at all Government levels.

(The author is Partner and National IFRS Leader, Ernst & Young. )

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