Posted by Sagé de Clerck
"Pensioners without pensions. Schools without students. Wells without water. These are just a few human consequences that can result – and do result – when governments don’t have the financial information necessary to make the best long-term decisions for their citizens."
With this eye-catching statement, the International Federation of Accountants (IFAC) and the Association of Chartered Certified Accountants (ACCA) released a thought-provoking report entitled “Is cash still king?”. The report which was based on consultations with a wide group of stakeholders, including finance professionals, public sector specialists and government officials, argues the case for adopting accrual accounting in the government sector. It makes recommendations on how the benefits of accrual accounting can lead to improvements in policy decisions.
In line with the findings of the IMF’s October 2018 Fiscal Monitor, the report argues that cash accounting neither presents an accurate picture of a government’s financial health nor enables decision-makers to adequately plan the delivery of key public services. Accrual accounting enables the value of public sector assets and liabilities to be recognized and be managed in the public interest with a tangible impact on human lives. The report follows on the findings of the 2018 International Public Sector Financial Accountability Index Status Report (compiled by IFAC and CIPFA) which indicated that 40% of the countries surveyed plan to implement accrual accounting by 2023.
Benefits of accrual accounting highlighted in the report include transparency, accountability, fiscal credibility, and the production of information useful for decision-making. Applying International Public Sector Accounting Standards (IPSAS) in a consistent manner also aligns private and public sector financial reporting practices. But the report warns that the added complexities of accrual accounting may create barriers to transparency unless the information is communicated effectively.
Another benefit of accrual accounting is managing assets well and accounting appropriately for their maintenance, issues that are not recognized in cash-based systems. The report argues that accrual-based information on the costs of investing in assets, as well as the returns on investment provide useful information to decision makers and ultimately leads to improvements in the availability and quality of public services.
On the other side of the balance sheet, not only are liabilities better managed over generations, but governments can structure the fiscal risks emanating from these liabilities and other contingencies without burdening future generations excessively.
Accrual accounting is also credited with reducing the perverse incentives for governments to move fiscal activities outside the scope of fiscal targets. Whole of government accounts, prepared on an accruals basis cover all activities and stocks, and ultimately show the impact of fiscal activities on the net wealth of the public sector as shown in the public sector balance sheet.
Accrual accounting eliminates fiscal illusions created by accounting devices such as “fire sales” of assets that are counted as revenue. Governments with accrual accounting tend to take a more holistic and longer view of their finances. Policy decisions are more focused on sustainability, taking into consideration emerging fiscal risks and the need to absorb fiscal shocks. Thus, accruals-based balance sheets provide the baseline for intergenerational fiscal sustainability reports.
The implementation of accrual accounting is admittedly complex, costly and time consuming, and also requires a “mindset of continuous improvement.” The authors highlight the importance of aspects such as planning, gap analysis, realism in setting milestones, and regular checks on progress during implementation. Stakeholder involvement, and in particular buy-in of senior leadership across political party lines are considered essential for the reform agenda to be successful. Furthermore, the pace of reform will often be determined by the capacity of a country’s underlying PFM systems, leadership by the finance ministry, and the capacity of professional staff.
In the report, accrual accounting is showcased not as an end in itself, but as one element in a wider reform of PFM systems, as a mechanism for improving fiscal decision making, better transparency and accountability in the public sector, and ultimately improved service delivery.
 Senior Economist, Fiscal Affairs Department, IMF.
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.