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July 26, 2012

Australia’s Changing Budgeting Framework – Accrual or Cash?

Posted by Tim Youngberry[i]

There have been a number of articles on this blog that pose a question on whether the Australian Government has a cash-based budgeting framework or an accrual-based budgeting framework, or some sort of hybrid mix.  Hopefully, this contribution will provide a degree of clarification.

In the 1999-2000 Budget, the Australian Government moved to a full accrual accounting and budgeting framework.  The key features of the framework when implemented included:

  • A shift to an outcomes/outputs framework;
  • Introducing accrual concepts into the Budget, often referred to as accrual budgeting;
  • Applying a capital use charge on line ministries to reflect the cost of the use of “capital assets” and to provide an incentive for improved asset management;
  • Introducing devolved banking arrangements so that each agency had its own transactional banker and paying interest to agencies on accumulated cash balances to encourage better cash flow management; and
  • Funding agencies on the basis of full accrual expenses (including depreciation) – otherwise known as accrual appropriations.

Since its introduction, there have been a number of changes to the framework; however, fundamentally, the Australian Government still manages the budget under a full accrual budgeting and accounting framework. Many of the changes to the framework since 1999-2000 have been brought about by the practical experience of working under a full accrual budgeting and accounting system. 

There were two significant reviews that developed these changes.  Firstly, a review of accrual budgeting several years after the implementation of accrual budgeting identified that some elements of the framework were not delivering the benefits or improvements as expected.  The changes brought about by this review included:

  • Greater oversight by the Department of Finance of the models used to calculate expenditure/expense estimates;
  • Pursuing the development of an accounting standard that harmonised, to the greatest extent possible, the Government Finance Statistics (GFS) framework and Australian Accounting Standards;
  • Abolishing the capital use charge; and
  • Abolishing the interest incentive component of the devolved banking framework.

Importantly, this review did not make any changes to the basis on which agencies were funded, but instead provided for additional reporting and monitoring obligations on the part of the Department of Finance.

The second major impetus for change was brought about when the Rudd Government was elected in 2007.  The then Finance Minister, Lindsay Tanner MP, brought forward a package of reforms, commonly known as Operation Sunlight, to improve the operation of the financial framework.  Those reforms included:

  • The re-introduction of Program reporting rather than Output reporting into Australian Government financial documents;
  • The tightening of Outcome Statements to provide clearer indications of the purpose,  target group and expected results from the government’s intervention in that area;
  • Requiring the publication of non-financial key performance indicators to enable an assessment of Program and Outcome performance, including the inclusion or targets; and
  • Reforming the capital budgeting framework, by removing funding for depreciation and instead providing capital budgets in cash terms to agencies for asset acquisitions.

This last point has often been interpreted as the Australian Government moving away from accrual budgeting.  This is not the case.  This change only resulted in the way in which the amount of an agency’s appropriation was calculated (reflecting anticipated cash needs rather than accrual-based expenses). 

The reforms to the capital budgeting framework were focussed on several factors:

  • getting better asset planning in place;
  • providing more reliable capital expenditure estimates; and
  • removing the “overhang” of appropriations that could be drawn down, sometimes years after the appropriation was approved by Parliament. 

The ultimate goal was to improve the transparency and accountability of capital budgets and provide the Government with better financial information to inform decision-making.  The “overhang” issue was a major area of concern, as agencies were able to spend these appropriations without seeking any further parliamentary or in some cases, even ministerial approval.

Moving the calculation of appropriation amounts to what is closer to the actual cash needs in any given year, was seen as returning to Parliament the power to scrutinise and approve spending.   Under Australia’s constitutional arrangements, appropriations have always been considered a “cash” concept.

The Australian Government still produces a full accrual-based budget (including the mid-year review) each year. Costings for initiatives being considered by Government are also completed on a full accrual basis (which also includes the cash impact of the decision).

In published Budget documents and monthly and annual ex-post financial reports, the full suite of accrual-based financial reports is provided.  This encompasses an income statement, balance sheet and cash flow statement as well as numerous other tables of financial data – all based on full accrual information.  In addition, the Budget papers also include chapters on net capital investment, asset and liability management and a statement of risks. All published statements are produced on the same accounting standard that harmonises Australian Accounting Standards and GFS.

In summary, the Australian Government still budgets and reports on a full accrual basis.  From a funding point of view, it is only the appropriation arrangements for the calculation of capital budget amounts that have changed.  This change in particular ensures that Parliament can scrutinise and approve spending and that the spending through appropriations reflects the anticipated cash needed for payments in the Budget year.

[i] Tim Youngberry, FCPA FCA, is First Assistant Secretary and Program Director of the Central Budget System Redevelopment Project at the Australian Government Department of Finance and Deregulation. Tim is currently leading the project to redevelop the Australian Government’s central budgeting and financial reporting system.  He was previously head of whole of government financial reporting (including budget reporting), accounting policy and cash management and led the implementation of the Operation Sunlight reforms, mentioned in the text.

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. 


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