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BUDGET EXECUTION COURSE SYSTEMS OF ACCOUNTING

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Each 'system' may apply to budgeting and/or accounting. Points of control or measurement ... In practice a control system is needed at each of these points ... – PowerPoint PPT presentation

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Title: BUDGET EXECUTION COURSE SYSTEMS OF ACCOUNTING


1
BUDGET EXECUTION COURSESYSTEMS OF ACCOUNTING
  • 8 April, 2003
  • David Shand
  • OPCFM

2
A BRIEF TECHNICAL OUTLINE !
  • Each system may apply to budgeting and/or
    accounting
  • Points of control or measurement
  • Obligations - e.g. placing an order
    (engagement or commitment)
  • Liability (creditor) - receipt of an order
    (modified accrual)
  • Payment for the order cash
  • Using the order cost/expense(full accrual)

3
A brief technical outline Contd
  • In practice a control system is needed at each of
    these points
  • For example budgeting for or controlling only
    cash payments does not provide any control over
    obligations
  • Possibly leading to over commitment and payment
    arrears (insufficient cash to pay creditors on
    time)
  • Some countries budget appropriations cover both
    obligation and cash payment authority the
    amounts need to be mutually consistent
  • Cash payments (above the line) /- change in
    liabilities /- changes in inventories
    depreciation charge for fixed assets expense
    (cost)

4
Cash Budgeting And Accounting
  • Budget results can be manipulated through
    delaying paying creditors etc
  • Needs to be supplemented by controls over
    commitments to avoid payment arrears
  • Distinguish between above and below the line
    transactions (operating statement versus
    financing transactions e.g. borrowing
    repayments or borrowing receipts, but not asset
    sales and purchases)
  • Is simple and effective if done with integrity

5
Accrual accounting and budgeting - Outline
  • Recognizes all resource flows - revenues and
    expenses, reflecting changes in assets and
    liabilities
  • Modified accrual recognizes changes only in
    debtors and creditors
  • (Full) accrual encompasses all assets and
    liabilities. But how are these concepts defined
    and how might some be measured ?
  • Depreciation of fixed assets is an expense in the
    operating statement
  • Operating statement balance articulates/is
    reflected in changes in net assets (assets minus
    liabilities) in the balance sheet government
    net worth

6
Accrual accounting and budgeting Issues
  • Is the accruals concept applied to both budgeting
    and accounting in some countries the latter
    only. Budgeting is seen as managing real money
    i.e. cash
  • The issue is not just fiscal reporting and
    transparency but of management
  • That is not just managing cash flows, but
    managing all resource flows expenses, revenues,
    assets and liabilities (and therefore net worth)
    managing on an accruals basis
  • Australias full accrual accounting for
    autonomous bodies in 1980, did not change the way
    they managed. Accrual financial statements were
    not used for decision making

7
Accrual accounting and budgeting Issues Contd
  • The operating statement and the balance sheet are
    the two sides of the same coin,
  • But in some countries there is more interest in
    the statement of assets and liabilities, rather
    than the accruals based operating statement
  • In some countries accrual basis is used only at
    organizational unit level, reflecting this
    management focus
  • Treatment of capital purchases under accrual
    budgeting ? the budget cost is the depreciation
    charge, the funding for the asset purchase is a
    capital transaction

8
Advantages of the accruals approach
  • Improving cost measurement as all changes in
    liabilities are recognized. But charging under a
    cash system for otherwise free goods e.g.
    accommodation, asset usage may also do this
  • Improving asset management avoiding lazy assets
    (through depreciation charge) and (through
    identifying and reporting assets) making managers
    conscious of the existence of assets and the need
    to maintain them (or collect them e.g. debtors)
  • But other ways of doing this too e.g. reporting
    requirements on debtors, budgetary incentives for
    asset sales
  • Improving debt and liability management
    reporting them helps make managers accountable
    liability changes are reflected in costs, which
    must be managed

9
Applying the accruals approach
  • What is a liability ?
  • future civil service salaries ?
  • civil service pension schemes ?
  • national pension schemes ?
  • deferred maintenance of infrastructure assets ?
  • environmental clean up costs ?
  • Distinguish liabilities from commitments
  • And from contingent liabilities (possible future
    liabilities) shown as a note in the financial
    statements. How estimated
  • Need for long-term cash forecasting to establish
    fiscal sustainability c.f. US social security
    scheme (its deficit/surplus is cash based)

10
Applying the accruals approach
  • Accrual budgeting and accounting and the bottom
    line may affect observance of fiscal
    rules/achievement of fiscal targets
  • For budget or grant dependent entities all
    liabilities must be fully funded to avoid a
    deficit in the operating statement ( same issue
    as pay as you go pension schemes)
  • Showing all assets ? How to value heritage
    assets, national parks etc
  • Some countries focus on financial assets and
    liabilities, and exclude fixed assets

11
The appropriateness of accrual accounting and
budgeting to developing countries
  • We will discuss this issue further in the session
    on fiscal reporting and transparency in looking
    at IPSASs (international public sector accounting
    standards)
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