IFAC Recommends Adoption of Accrual-based Accounting for the Public Sector

Sanjay Vani

June 25, 2010

Posted by Sanjay Vani 

The International Federation of Accountants (IFAC) has recently issued a  letter to G-20 participants, who are meeting on June 26‐27, 2010 in Toronto, Canada. This letter is a follow-up to their previous submissions to the G‐20 in 2009 addressing the global financial crisis. In this letter, IFAC is recommending adoption of accrual-based accounting for governments and public sector entities. The full text of the recommendation is as follows:

"The G-20 should strongly encourage all governments to provide greater transparency and accountability in public sector finances.

As a result of the financial crisis, establishing greater trust between governments and their constituents should be one of the highest priorities for national leaders and public officials. Investors in government securities, taxpayers, and citizens in all nations should be provided with accurate and appropriate financial information regarding the balance sheets, public expenditures, and transactions for all governments and government-controlled entities. By providing accurate and complete information on such expenditures and transactions, governments demonstrate accountability and stewardship, reinforcing their own credibility and safeguarding their democratic legitimacy. We urge governments and public sector entities throughout the world to provide clear and comprehensive information regarding the financial consequences of economic, political, and social decisions. Such information should disclose the full, long-term economic impact of decisions, not just the immediate cash flows. Such information should also provide a clear understanding of the relationship between the market and non-market activities of the government, and between financial statements and statistical bases of financial reporting. In addition, such information should be broad enough in scope to provide insights about the past, present, and future, and should include prospective financial information about future expenditures.

Acknowledging that many governments adhere to the cash basis of accounting, IFAC and the International Public Sector Accounting Standards Board (IPSASB) encourage the adoption of accrual-based accounting as it reinforces the principles of transparency and accountability. Under the accrual basis of accounting, transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, transactions and events are recognized and reported in the financial statements of the periods to which they relate. This is consistent with what is required of private sector, publically listed companies to ensure that investors receive fully transparent financial information. Under accrual accounting there is reporting of assets, liabilities, net assets/equity, revenue, and expenses, and not just cash flows and cash balances.

Most significantly, the accrual basis for accounting records and reports assets and liabilities that are relevant to fiscal policy and long-term fiscal sustainability, but which are not necessarily reported under cash accounting. When items are not recorded, it is likely that they are also not well managed or are more susceptible to being manipulated. The accrual basis offers a more complete picture of a government’s financial performance and position since it provides information not just on debt but also on governments’ other liabilities, contingent liabilities, and guarantees. Accrual accounting practices improve not only the quality of financial information for all stakeholders (investors, taxpayers, ratepayers, public officials, suppliers, creditors, employees, the media, etc.), but also improve the quality of financial management, and they reduce the risk of financial reporting fraud."

This is a significant recommendation to a very influential group coming from an important body. Although many of us in the PFM field hold very strong and differing views on the applicability of accrual-based accounting for government, especially in developing countries, most of us would agree that governments must first at least have the capacity to prepare reliable and timely cash-based financial reports before attempting highly complex reforms such as implementation of accrual-based accounting.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.