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March 29, 2017

Harnessing the Power of Accrual in Managing Public Finances


Posted by Guohua Huang[1]

On March 6, 2017 the International Monetary Fund (IMF), the World Bank Group (WBG) and the International Public Sector Accounting Standards Board (IPSASB) co-organized a seminar on Transparency and Beyond: Harnessing the Power of Accrual in Managing Public Finances, in Washington DC. Christopher Towe, Deputy Director of the IMF’s Fiscal Affairs Department, noted that the seminar brought together key stakeholders, including standard setters, producers, and users of government financial statements. It facilitated a debate on various perspectives, opportunities, and challenges in the adoption of accrual accounting by governments, and the way forward.

Why accrual-based fiscal reporting?

Compared with the cash basis of fiscal reporting, accrual-based reporting helps to strengthen government transparency, accountability, and financial management. Accrual-based data can present a more comprehensive view of the government’s financial position and performance, the cost of government activities, and the management of government balance sheets.

Gabriel Quiros, Deputy Director of the IMF’s Statistics Department discussed the evolution of the Government Finance Statistics (GFS) framework. Because the complexity of fiscal activities had increased, and traditional fiscal reports became too limiting, the IMF updated the Government Finance Statistics Manual from a cash basis to an accrual basis in 2001, and made a further update in 2014. The evolution of—and complementarities between—accrual-based statistical methodology and accounting standards for the public sector (IPSAS) will help countries enhance the sustainability of fiscal operations.

Manal Fouad, Division Chief of the IMF’s Fiscal Affairs Department discussed the implications of the Fund’s new Fiscal Transparency Code. The Code was revised in 2014 to reflect the lessons of the global financial crisis and to incorporate the developments in international standards. The advanced practices under the new Code’s first pillar (on fiscal reporting) require fiscal reports to cover not only cash flows, but also accrued revenues and expenses, and all assets and liabilities.

Where does the accrual reform stand?

Over the past two decades, a growing number of governments have implemented accrual accounting and financial reporting. A few countries – mainly advanced economies but also some emerging markets and low-income countries - have even gone further by adopting an accrual basis in their budgeting processes. A recent study[2] shows that by 2015, 41 out of 199 countries (21 percent) had implemented accrual accounting, while a further 16 countries (8 percent) had adopted accruals in a modified form. According to another survey[3], 73 percent of OECD countries had implemented accrual accounting by 2016, up from 24 percent in 2003. The chair of the IPSAS board, Ian Carruthers, observed that many other governments are currently moving toward accrual-based accounting and financial reporting.

What are the challenges?

While accrual information has tremendous potential to support better public financial management, some governments have yet to realize its full benefits, particularly in using accrual information for decision making. Countries also encounter many challenges in adopting international accounting standards. These challenges include data limitations, and capacity constraints.

Delphine Moretti, from the OECD’s Public Governance and Territorial Development Directorate, observed that OECD countries had experienced a number of common challenges in implementing accrual reforms. These challenges include the identification and valuation of assets and liabilities, the design and implementation of IT systems, adaptation of the legal framework, and the consolidation of accounts. Although there is consensus on the potential benefits of accrual accounting with regards to transparency and accountability, most reforms have not yet had a significant impact on fiscal policy decision-making. Public understanding of accrual-based financial information is also insufficient in most countries.

How do we move forward?

To solve these difficulties and better harness the power of accrual in managing public finances, more effort from stakeholders is required. International organizations should continue to bridge the remaining differences among international standards (such as GFSM2014 and IPSAS) and help their member countries to implement these standards, said Carolina Renteria, Division Chief of the IMF’s Fiscal Affairs Department.

Christopher Towe observed that the IMF has been providing technical assistance to help countries build their capacity in the required areas. Some countries have made progress and produced better quality fiscal reports. Both Jennifer Thomson, Director of the World Bank’s Operations Policy and Country Services, and Jim Brumby, Director of the World Bank’s Governance Global Practice confirmed that the World Bank Group supports and promotes the use of accrual-based accounting standards, and remains ready to assist member countries to adopt international accounting standards.

At the seminar, delegates from the IMF and World Bank also presented their work on using accrual information to better manage public finances, such as the recognition of financial sustainability, public investment management, and fiscal risk management. These efforts will help to boost the demand for accrual information, and improve the use of such information for decision making.

Ian Carruthers concluded that the seminar was the fruit of collaboration by the various stakeholders represented. With further application of three “Cs” - cooperation, coordination, and commitment – a huge impact can be made going forward.

[1] Senior Economist, Public Financial Management II Division, Fiscal Affairs Department, IMF.

[2] J. Cavanagh, S. Flynn, and D. Moretti. 2016. “Implementing Accrual Accounting in the Public Sector”, IMF Technical Notes and Manuals, TNM/16/06.

[3] OECD and IFAC 2017. “Accrual Practices and Reform Experiences in OECD Countries”.

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.


My experience is that accrual accounting, as with many PFM reforms is regarded as a matter for the Ministry of Finance and the accountant and is not seen as anything to do with management. All the effort is directed at the technical accounting aspects and the managerial implications are completely ignored - or at least seem to be. Developing countries in particular, have very weak management structures and often the only managers are the politicians. Politicians are difficult to train (their timescales in office can be far too short) and anyway they are not appointed for their managerial skills.
In my view the PSASB ought to spend much more time addressing the managerial issues than they presently appear to do.
As the IMF have frequently pointed out (but apparently not in this seminar) you cannot make a silk purse out of a sow's ear. If the basic managerial structures do not exist then how can you improve the quality of decision making using a sophisticated accounting tool. Change is also required to budgeting and financial control arrangements and simply to think about the technicalities of accrual accounting is nowhere near enough.

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