Posted by Abdul Khan
The Federal Government adopted the accrual basis for budgeting and financial reporting with effect from the 2007 budget. Known as the New Accounting Model, this framework emphasizes two main objectives, also referred to as the dual perspectives of NAM: fiscal policy management at the macro level and a focus on performance of government departments and offices. Enhancing transparency of the public finances through the adoption of internationally recognized accounting concepts and standards is also stated to be an objective of the NAM.
The fiscal policy objective is focused on controlling aggregate cash expenditure. It is expressed through the debt brake rule that requires revenue and expenditure to be balanced over the business cycle. This is essentially a cash concept and the financing and cash flow statement of the budgetary central government, derived from the income statement and balance sheet in accordance with internationally accepted accounting practice, is the reporting tool used to monitor compliance with the debt brake rule.
At the level of departments and offices, the performance objective requires a focus on cost of government activities regardless of the timing of the related cash flows. Budget appropriations are for accrual based expenses including non-cash items such as depreciation and accrued liabilities. In addition investment expenditures are separately appropriated. Appropriations are at a reasonably detailed line item level and distinguishes, through the chart of accounts, cash, non-cash, and intra-government items or charges. For this purpose, as mentioned above, depreciation and accrued liabilities are considered non-cash, while accounts payable are posted in the accounts denominated as “cash.” The usual timing difference where liabilities incurred in one year may be settled in cash in another year is not considered to present any difficulties with control over aggregate cash expenditure for the purposes of debt brake rule.
Departments and offices are effectively subject to ex ante limits on both accrual and cash basis. Appropriation controls are exercised at the detailed levels for each appropriation line item. The system ensures that any appropriation for a non-cash item, e.g. depreciation, cannot be spent in cash. Furthermore, departments and offices may not change their expenditure mix in such away as to, e.g. reduce accrued liabilities (which is non-cash) and increase cash expenditure. For departments and offices the budget comprises a budgeted income statement (accrual based) and an investment statement. No separate cash flow budgets for departments and agencies are included in the published budget document although this information is available. Unutilized appropriations lapse at the year-end, although in exceptional circumstances departments may request the approval of the department of finance to carry forward specific amounts. For legal purposes appropriations authorize, and are considered utilized by, commitment or the incurrence of accrual based expenses and capital expenditure.
An SAP based system is used by all the departments and offices to prepare and execute the budget, and carry out accounting and reporting functions. The system automatically controls the level of expense or expenditure against the annual budgets at the level of detailed line items. The annual financial statements of the budgetary federal government include, for each department and agency, an income statement and investment statement showing actual expenditure and comparison with the budget.
