In search of a Kautilya

Ramakrishnan V Sivabalan S | Updated on February 16, 2011 Published on February 16, 2011

Little progress has been made in efforts towards migration to accrual accounting by governmentagencies.

As a fall-out of the last economic slowdown, accounting policies and reporting transparency by sovereign governments gathered prominence. Economists and accounting authorities, who attribute the sovereign debt crisis including the ‘Greece Effect' to opaque government accounting, are re-emphasising the need for quick migration to clear, efficient and timely accrual accounting and reporting by States. The migration to accrual accounting by governmental agencies in India gathered momentum with the formation of the Government Accounting Standards Advisory Board (GASAB) in 2002 under the Ministry of Finance. The Twelfth Finance Commission reiterated the need to move to accrual accounting in December 2004. The objective of GASAB is to provide an operational framework and suggest a road map for transition from cash-based accounting. GASAB rolls out the Indian Government Accounting Standards (IGAS) and the Indian Government Financial Reporting Standards (IGFRS).

8 standards issued

As yet, seven IGAS and one IGFRS have been issued by GASAB pending notification by the Government . In contrast, the International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) has rolled out 31 standards. IFAC had strongly encouraged the adoption of accrual accounting to the G-20 countries in June 2010 to vindicate the principles of transparency and accountability. Albeit India had a head-start in economic, strategic and civil administration through ‘ Arthashastra' by Kautilya in c. 350 BC, it appears to have lost focus over time.

A topical review of the possible areas to address in governmental accounting would include provision for depreciation, impairment and diminution of assets, and, accounting for employee benefits. Moreover, interest on long-term sovereign bonds, which constitute over 30 per cent of non-Plan expenditure and are hitherto accounted on cash-basis, would be required to be provided on accrual basis. The impacts of these transitions in fiscal and revenue deficits require altogether separate exercises and the overall impact is expected to be depressing.

Though India had its Fiscal Responsibility and Budget Management Act from 2003 onwards, it appears to lag in accounting reforms. The prominence of accounting reforms vis-à-vis financial reforms cannot be understated.

Having said that, various pilot studies do conclude that the Indian government accounting is robust and information database for a smooth transition is available. GASAB-released operational framework on accrual accounting recently had a successful trail implementation in Andhra Pradesh.

The fly in the ointment seems to be the lack of political will due to the stark disconnect between the Indian States and the Centre in enabling reforms. It also remains to be seen whether the recommendation of Finance Commission to set up the National Institute of Public Financial Accountants as a capacity building measure for training and preparedness is on track.

Sovereign governments in developed economies such as the United States of America, the United Kingdom, New Zealand and Canada have adopted accrual accounting for some years now.

Attractive destination

With key drivers for accounting reforms ideally including transparency and better management of fiscal deficit, the alluring effects of accrual accounting should not be missed since India remains an attractive investment destination.

Further, the overall comfort which would be gauged by international financial agencies, investment communities, banks and the citizens of India on transparent accounting is noteworthy.

The irony in this scheme of things is that corporates are being pressured by regulators for clean accounting and detailed presentation such as IFRS compliance beginning FY 2011 in a phased manner; on the contrary, the Indian government does not seem to practise what it preaches.

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Published on February 16, 2011
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