Title: BUDGET EXECUTION COURSE SYSTEMS OF ACCOUNTING
1BUDGET EXECUTION COURSESYSTEMS OF ACCOUNTING
- 8 April, 2003
- David Shand
- OPCFM
2A 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)
3A 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)
4Cash 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
5Accrual 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
6Accrual 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
7Accrual 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
8Advantages 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
9Applying 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)
10Applying 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
11The 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)