China's Massive Shift to Accrual Accounting in the Public Sector

Every day it is becoming clearer that in a world where governments face mounting fiscal pressures and citizens demand greater transparency, the management of public finances has never been more critical. For emerging markets and developing economies, robust Public Financial Management (PFM) is the bedrock of sustainable development. In this global context, we believe China's decade-long effort to shift its vast public sector, comprising well over 600,000 government entities, to accrual-basis accounting, stands as a noteworthy large-scale and complex PFM reform undertaking. 

Given China’s impact on global economic development, this blog shares the insights we have gathered on the implementation of Government Accrual Financial Reporting Reform. We are focusing on three key components: the adoption of accrual-based accounting; the rollout of a new Integrated Financial Management Information System (IFMIS); and the consolidation of financial reports.

A Pragmatic Approach to Accrual Accounting

The reform was launched in 2014 with one clear goal: to provide a comprehensive picture of the government's true financial position and performance. A major lesson we can learn from China's experience is the pragmatic approach to such reforms. Instead of replacing the long-standing cash-basis accounting system, it established a "dual-basis, dual-reporting" model. The traditional cash-based final accounts remained in place, while accrual-based government financial reporting was introduced to provide a more holistic view of the government's assets, liabilities, and long-term fiscal performance. This dual approach allowed for continuity in PFM practices while gradually introducing the benefits of accrual-based financial information.

China’s approach to standard-setting is also something we found particularly interesting. They did not directly adopt the International Public Sector Accounting Standards (IPSAS). Instead, they developed a national public sector accounting framework which fits into their own country context while drawing on IPSAS. This framework is structured in layers and includes: (i) a foundational basic standard; (ii) 10 specific standards; (iii) two applicable guidelines; and (iv) two sets of detailed operational government accounting rules. The development of this framework took into consideration the Chinese version of Generally Accepted Accounting Principles (GAAP), which are called Accounting Standards for Business Enterprises, as well as IPSAS.

The IFMIS: A Technological Backbone for Reform

The sheer data intensity of this reform meant technology was key. Hence, it is worth underscoring China’s new, in-house developed IFMIS. The IFMIS development commenced in 2019, with piloting first conducted at subnational level and then at central government level, followed by formal nationwide rollout starting in 2023. It covers four levels of governments: central, provincial, municipal and county (there are a total of 37 provincial governments and over 3,700 municipal and county governments). This system was designed to unify PFM processes, data standards, and technical and functional specifications across the country, while taking into consideration needs and priorities of users at all governmental levels. The IFMIS aimed at integrating: (i) the main PFM functions such as budget preparation, execution, accounting, asset management, debt management, and performance management; and (ii) multiple existing FMIS used at both national and subnational levels. 

The IFMIS ensures that every transaction of all the covered entities is recorded end-to-end according to predefined rules and classifications. This, in turn, ensures that all fiscal data are generated from a single and reliable source. What also impressed us is how this unified system breaks down those "data silos" and mitigates the risk of manual processing errors by consolidating previously fragmented systems.  All this helps to guarantee the integrity and accuracy of fiscal data, which is known to be crucial for real-time decision making, transparency, and accountability.

Consolidation of financial reports at different levels of government and next steps

The scale of implementation is staggering. Guided by detailed manuals from the Ministry of Finance (MoF), the process is being phased in annually across four current levels: central, province, municipal, and county. Each level consolidates the financial reports of its constituent entities in a horizontal fashion. Building on this, the provincial finance department of each province consolidates the reports from all government levels within its jurisdiction vertically to produce a single financial report for the entire province. Currently, the central government produces its own consolidated report covering central-level entities but does not yet consolidate the provincial reports.

To facilitate the analysis and interpretation of public sector financial statements, the MoF has developed two sets of financial analysis indicators: one set for assessing the fiscal position and performance of the government as a whole; the other for the analysis at the entity level, including 26 ratios, such as Liability-to-Asset Ratio, Revenue-to-Expense Ratio, and Fixed Asset Condition Ratio, among others. This tells us that they are not just focused on producing the data, but also on trying to use the data for improving public financial management performance.

Conclusion

Going forward, China is still facing some major challenges in implementing accrual-based financial reporting, including further alignment with good international practices, such as IPSAS, stocktaking and valuation of infrastructure and other non-financial assets, implementation of consolidation protocols and timely oversight of the consolidated financial statements, while addressing capacity building constraints at different levels of government. 

However, it is clear that the reform process is in full swing and that we will continue to learn about China’s PFM reform journey going forward. Thus far it has combined extraordinary ambition, practical development choices, and disciplined implementation.