Transition to Accrual - A Stepwise Approach

Posted by Bill Dorotinsky

As countries struggle with implementing accrual counting, more and more resources are emerging to assist with their efforts. In an October 15 blog, we posted an IMF FAD Technical Guidance Note on Transitioning to Accrual Accounting. A blog reader kindly brought to our attention another useful reference, "A Stepwise Approach to Transition from a Cash, Modified Cash, or Modified Accrual Basis of Accounting to a Full Accrual Basis for Developing Countries," published in the February 2007 issue of Public Fund Digest (available on-line at the link above). The Public Fund Digest is a publication of the International Consortium of Government Financial Management (ICGFM) -- a recent December 2-4, 2007 conference on which we also blogged about.

The article, written by Jesse Hughes, Professor Emeritus of Accounting at Old Dominion University, provides a succinct series of steps and issues to be addressed in transitioning to an accrual basis:

  1. Identifying and classifying government reporting entities -- not an easy task, as the  article notes, compounded by the wide variety of governmental and quasi-governmental bodies and varying degrees of government control.
  2. Accounting for Cash -  deemed relatively easy in the article, as many governments already have some procedures in place to start with. However, as the note points out, transfers between entities need to be netted out, which is far more challenging than might at first seem the case.
  3. Compiling asset and liability information for reporting entities - a challenge for any country, and an optional disclosure item under the Part 2 of Cash IPSAS.
  4. Other optional IPSAS Cash Basis Part 2 Disclosure Items -- really many elements, including disclosure of administered transactions, transactions of related parties, comparison of actual versus budgeted revenues and expenditures, disclosure of ownership interest in controlled entities, and joint ventures.

Two of the most useful aspects of the article appear as Appendices -- a decision-tree for determining the level of control of another entity for financial reporting purposes (Appendix 1) and a detailed spreadsheet action plan for implementing the transition (Appendix 3).

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