Output Budgeting and Accrual Accounting by Tarun Das
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Transcript of Output Budgeting and Accrual Accounting by Tarun Das
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Contents of thispresentation
1. Cash and accrual accounting
2. Experiences of OECD countries
3. Steps for successful movementto Accrual Accounting
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1.1 Cash and Accrual Accounting
In the case of cash accounting,expenditures are recorded when cashpayments are made.
On the contrary, in the case of AccrualAccounting, flows are recorded at thetime when liability is created,
transformed, exchanged, transferred, orextinguished.In other words, the effects of economic
events are recorded in the period inwhich they occur, irrespective of
whether cash is received or paid or dueto be received or paid.
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1.2 Accrual Accounting (AC)
In general, in the case of AC the time
attributed to events is the time: when ownership of goods changes, services are provided, obligation to pay any dues is created, liability to make payments is created, the claim to a social benefit payment is
established, or other unconditional claims are
established.
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1.3 An Example of AccrualAccounting
The following example considers aweek in the life of a smallgovernment.
The effects of the following fivetransactions are shown in thefinancial statements below:
a. Corporate taxpayers are required tomake tax payments of $100 millionto the government, but only $90million is received. At the end of theweek, $10 million is outstanding.
b. The government sells fixed assets for$100 million. The assets had beenvalued at $100 million.
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1.4 An Example of AccrualAccounting
c. Government salary payments are made duringthe week. In addition to paying employees $60million, government is obligated to contribute fortheir pensions employees earned $30 million aspension rights in the week.
d. The government settles a long-running legaldispute. It agrees to pay $30 million to the plaintiff
in 2 months time.e. All the governments external borrowings are heldin foreign exchange. The exchange rate declinedby 2% during the week.
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1.6 Cash Accounting-Cash Flow Statement
Receipts Taxes aAsset sales b
Total
90100190
PaymentsSalaries c -60
Cash surplus 130
Bank balanceOpeningClosing
50180
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1.8 An Example of AccrualAccounting
Cash accounting would report a$130 million surplus, while theaccrual operating statement showsa $30 million deficit.
The $160 million difference arises fromthe following fact:
Cash accounting ignores the pensionliability ($30 million), the asset alreadyhad a value equal to its sale price ($100million), the exchange rate change ($10million), the judgment liability ($30million), and the taxes to be received($10 million).
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1.9 Balance Sheet
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2.2 Status of Accrual Accounting inOECD
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3.1 Transition to AccrualAccounting IMF GFSM 2001 recognizes that, in a
developing country like Mongolia withconstraints in resources, technicalmanpower and IT,, transition to a fullaccrual accounting and budgeting
systems cannot be created overnight; and have to be evolved through variousstages over a number of years.
Stages span from a cash basis accounting
to cash-plus-accrual accounting (alsoknown as modified accounting or partialaccounting) to full accrual accounting.
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3.2 Transition to AccrualAccounting
Government of Mongolia already adopts
some amount of accrual data, particularlyfor govt commitments for terminal benefitsof govt staff.
It is also making an attempt to list andvalue physical assets.
Usually, the accounting of assets may notinclude common assets such asinfrastructure assets (e.g. roads, rails,ports, bridges and water supply).
So, it will be opportune to adopt a cash plus accruals strategy based on theavailability of accrual-based data.
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3.3 Stage-1: Restructure cashdata
Without the need of additional data, cash data may
be reorganized on the basis of new statementsrequired under IMF GFSM 2001.
In brief, taxes and other current revenues, wagesand salaries, purchases of goods and services,interests and other current payments are included
in a cash operating account.
Purchases of non-financial assets are classified toan investment account.
Changes in financial assets and liabilities are
shown in a separate financing account.
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3.4 Stage-1:Adopt simple recognitionrules For revenue recognition, adopt a rule that is very
close to cash realisation while recognizing taxrevenues on accrual basis.
For expenses, do not adopt category of use ofgoods and services .
Distinguish between current expenditure and
longer lasting materials assets acquisitions. For these assets, adopt a 100 percent first year
depreciation rule (as used in Canada).
Also do not adopt category of consumption offixed capital, a periodic depreciation of fixedassets.
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3.5 Stage-1:Adopt simple recognitionrules Article 26.3 of the Public Sector Management
and Finance Act (PSMFA, 27 June 2002) ofMongolia mandates that Cost of outputsshall be determined on the basis of fullaccrual cost of production,includingmanagement overheads and capitalcharges.
In our opinion, inclusion of capital chargemay not be necessary for Mongolia
as most of the surplus public assets havebeen privatized,
and most of the budgetary bodies do nothave their own resources and depend on thecentral government for investment.
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3.6 Stage-1:Adopt simple recognitionrules The issues on depreciation and capital
charges have earlier been examined byinternational consultants Jim Yardley andAndrew Hilton in November 2005.
They concluded that Capital chargesand current value accounting are
complicated, expensive, and may notprovide much benefit in return. Depreciation estimated on the basis of the
book value of capital investment mayprovide reliable and inexpensive
approximations of capital charge for five orten years. We agree with their conclusions..
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3.7 Stage two: Use partial accrualdataAccommodate some elements ofstatement of economic flows
Most flows under this category involverevaluation of fixed and financial assetsand liabilities at market prices.
At the early period, only some flows may
be recognized such as: (a) write-off ofassets; (b) revaluation of financial assets/liabilities due to exchange ratefluctuations; (c) windfall gains/ losses dueto natural disasters; (d) unforeseenaccretion to wealth due to discovery ofnew mineral assets; (e) privatisation ofcorporations with unremunerative assets(reclassification).
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3.8 Stage two: Use partial accrualdata
Progressive recognition of existingfinancial and nonfinancial assets.
First priority is financial assets includingon-lending, and
Then easily quantifiable non-financialassets such as govt buildings and lands.
The most difficult assets like publicinfrastructure assets (e.g. roads, rails,telecom, air ports, sea ports, water andpower supply etc.) would follow, but can
be avoided for an indefinite period, andcan be assumed to be sunk capitalstock.
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3.9 Stage two: Use partial accrualdataProgressive recognition of existing
financial and nonfinancial assets. Only at the last stage, a developing
country like Mongolia may make anattempt to include mineral resources and
other hard-to-define assets like forestwealth, national parks, and heritageassets.
It may be mentioned here that even thedeveloped countries have not yetdeveloped methodologies for valuation ofheritage assets.
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3.10 Stage two: Use partial accrualdataBegin to replace cash transactions in theoperating account by the corresponding
accrual transactions. All liabilities, including contingent liabilities
(like placed orders for supply), be recognizedas soon as they arise by opening accountheads to capture accounts receivable in
revenues and accounts payable in expenses.The depreciation cost could also be included
as an expense for these assets. For this stage, it is necessary to prepare
GFSM 2001 compatible chart of accounts andto generate new fiscal reports consistent withpartial accrual accounting.
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3.11 Stage three: A progressive moveto full accrual data.
GFSM 2001 recognizes that since GFS
is a reporting system, it can differ inmany respects from the budgetingaccounting systems of a country.
It is possible for a country (e.g.Australia) operating an accrualaccounting system with nationalaccounting standards and coding
structures, which are different fromthose of GFSM 2001.
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3.12 Stage three: A progressive moveto full accrual data.
Alternatively, it is possible to adopt GFSM
2001 accrual based system but withsignificant dilutions of accrual conceptse.g.
depreciating new buildings 100 percent in
the first year so as to reflect the entirecapital cost as an expenditure in the samefiscal year (as Canada);
eliminating difference between expenseand expenditure by assuming immediateconsumption of stocks, or valuing heritageassets by a token value etc.
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Thank you
Have a Good Day