AA and IAS benefits within the context of PSA reforms

As reasons to support the transition from cash basis accounting to AA, IPSASB presents the fact that financial reporting prepared on accrual basis allows users to ‘(a) assess the accountability for all resources the entity controls and the deployment of those resources; (b) assess the financial position, financial performance, and cash flows of the entity; and (c) make decisions about providing resources to, or doing business with, the entity’ (IFAC, 2011, p.12). IPSASB also highlights that reporting under accrual basis ‘shows how an entity financed its activities and met its cash requirements; allows users to evaluate an entity’s ongoing ability to finance its activities and to meet its liabilities and commitments; shows the financial position of an entity and changes on it; provides an entity with the opportunity to demonstrate successful management of its resources; and is useful in evaluating an entity’s performance in terms of its service costs, efficiency, and accomplishments’ (IFAC,

2011, p.12).

IPSASB also highlights some of the disadvantages of cash basis accounting that would limit its use for decision-making purposes. An example is that it ‘ignores resource flows other than cash that may impact in the ability of governments to provide goods and services’ and that it ‘does not show the impact of current consumption on the stock of net assets held by the governments’ (IFAC, 2000, p.24).

Finally, cash accounting guides governments to be accountable solely for the use of cash, and not for the use of resources (IFAC, 2000).

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Kahn and Meyes (2009) highlight that AA is important at a macroeconomic level as all assets and liabilities that reflect on fiscal policy and sustainability will be measured, which does not happen with cash basis accounting. Therefore, while cash accounting would measure only conventional debt, AA measures the ‘quasi-debt liabilities’, such as civil servants pensions and accounts payable to suppliers of service and goods. AA would provide a more reliable basis for recognizing, measuring and disclosing the government financial commitments when compared to the cash basis of accounting. They also advocate that AA helps to better plan fiscal management. An example is a different interpretation of the ‘golden rule’ (rule that prohibits borrowing to pay for current expenses) based on AA: that the borrowings would be used to support only the net costs of the assets, which according to the authors mean that costs such as depreciation should not be met from borrowing. Finally, they suggest the possibility to determine the full costs of a governmental service as one of the advantages of AA that can lead to better decision-making.

Other claimed benefits of AA adoption in the public sector are the improved accountability, a better management of assets and liabilities, and an increased efficiency in financial management (Wynne, 2004; Bunea-Bontas and Petre, 2009). Wynne also lists some presumed advantages of AA: more comprehensive financial information; more information in regards the full costs of services; a focus on outputs rather than just inputs; a better decision-making process for resources allocation; and a greater comparability of management techniques that are not limited to cash management (that includes information about fixed and current assets and liabilities).

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Some academic studies also present expected advantages of AA. Grossi and Sorvechia (2011) advocate that AA provides more useful information to evaluate financial sustainability of long-term public policies, having a direct effect on governments’ transparency, performance evaluation and accountability. Cash accounting would not fit for management purposes as it does not link consumed resources with achieved results. Chan (2006, p.6) adds that the ‘lack of complete, reliable, and timely information on payables weakens the governments’ incentives to discharge its responsibilities’. In addition, ‘the lack of reliable and timely information on non-cash financial resources (receivables) reduces the governments’ ability to convert these resources into cash to pay off the liabilities’.

The sovereign debt crisis from 2008 is another issue that has raised the importance of AA adoption in the public sector. Ball and Pflugrath (2012) state that the possibility that one country may not be able to roll over its debt – the rollover risk – may significantly increase with poor accounting practices. This was particularly observed within this crisis context, in which several governments took actions to stem financial meltdown without being fully aware of the implications of their decisions. Ball and Pflugrath (2012) say that once governments issue bonds, they have to be accountable to the capital markets and present a clear picture of their financial situation. Cash accounting does not present non-debt liabilities and is insufficient to make governments accountable to the public. They point out that the solution goes through the adoption of a robust accrual-based financial accounting framework, which in their opinion would be IPSAS.

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Berger (2012) points to the interventions undertaken by several governments and institutions to respond to the 2008 sovereign financial crisis typically included financial support, takeover of private sector institutions, recapitalisation/investments in the finance sector and industries, fiscal support to other governments and the provision of financial guarantees. In many situations, the public sector institutions have taken risks from the private sector, and sometimes have become shareholders of these private entities. Therefore, the governments should account for it in a transparent basis, and IPSAS would be the most suitable accounting framework as it addresses particularities of the public sector that are not observed by any other IAS.

Another typical response to crisis is the investment in infrastructure assets to stimulate the economy (‘Keynesian model’). According to Berger (2012), the framework to account for infrastructure assets is also covered by IPSAS but not by any other set of IAS.

The IMF (2012) presents that fiscal transparency within the context of this crisis works as a predictor of a government’s credibility and performance. IMF states that one key factor to improve fiscal transparency worldwide is the development of a global architecture of fiscal norms and accounting standards, respectively, the

Government Finance Statistics Manual (GFSM) and the accrual basis IPSAS. This last one would be particularly important as it would ‘capture arrears and other net payables that were not captured in initial cash-based forecasts of revenue and expenditure’ (IMF, 2012, p.11). Consequently, it would permit a better understanding

of the governments’ fiscal position. Finally, they highlight the importance of strengthening the monitoring of compliance with GFSM and IPSAS.

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Berger (2012) suggests that IAS (particularly IPSAS) are especially important to developing countries. They have programs funded by international multilateral organisations, such as the World Bank, the Asian Development Bank, the Inter- American Development Bank and the IMF, that ask for transparency in financial reporting. Therefore, IAS adoption could provide an accounting framework suitable to account for these resources and favour the achievement of further financial aid. He also argues that IPSAS are important for the developed part of the world as they bring comparability among the various process of collection and reallocation of resources used by different countries.

Many international organisations already use accrual based IPSAS, such as the European Commission (EC), Organisation for Economic Co-Operation and Development (OECD), North Atlantic Treaty Organisation (NATO) and the United Nations (UN) and all its institutions (European Commission, 2008; Berger, 2012). Some expected benefits are a greater transparency, a strengthened accountability, the improvement of management and planning, the support for a framework based on results and harmonisation across the different offices (United Nations Office for Project Services (UNOPS), 2009). Grossi and Sorvechia (2011) report that the EC has decided to introduce accrual based IPSAS and to use these standards as guidelines to consolidate financial statements for its agencies.

Christiaens et al. (2010) lists reasons presented by governments for linking the AA legislation to IPSAS. These are: enhancing international comparability of financial information; avoiding resource wasting in developing accounting standards as they already exist; facilitating the process of the consolidation of financial statements;

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improving public/private comparability; using a set of accounting standards that are developed by qualified accountants; and conforming with financial organisations. Sutcliffe (2003) adds that IPSAS were developed with the idea of establishing appropriate financial reporting practices that could be consistently applied within a country/jurisdiction and between countries, and also with the potential of harmonizing financial reporting between economic and accounting bases. Sutcliffe (2003) believes this would promote auditing, increased efficiency and effectiveness of the public sector institutions and facilitate the analysis of economic and financial results. All these aspects would enhance accountability and transparency. Additionally, IPSAS might provide a consistent basis for the emergence of accounting professionals with expertise in IAS, making public sector standards easier to be disseminated in the future.

Another possible benefit of IPSAS is that, just like AA, it would favour decision- making processes. Navarro Galera and Rodriguez Bolívar (2007), suggest that under IPSAS assets would be recognized at fair value rather than historical costs traditionally used by governments. Under fair value, ‘the calculation of assets depreciation would be more closely related to their consumption in the delivery of public services’ (Navarro Galera and Rodriguez Bolívar, 2007, p.417), making it easier to manage the public services and making it possible to create a benchmark to compare different management techniques.

A summary of the alleged benefits of the PSA reforms according to the prior literature is presented in Table 3:

Table 3: Summary of the alleged benefits of AA and accrual-based IAS adoption

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Based IAS Enhances the accountability process, adding transparency to the financial

statements  

Enhances the cash flow management 

Improves the overall financial management  

Provides an adequate framework to reflect governments’ financial position 

Enhances the decision-making process  

Provides/enhances links between the resources (inputs) and results (outputs)   Provides a consistent basis to evaluate the entities efficiency to achieve its goals 

Discloses all public sector assets providing a consistent basis to manage them more

efficiently 

Provides a consistent accounting framework to identify obligations that are liabilities 

Increases efficiency in financial management 

Provides more comprehensive financial information 

Harmonizes financial reporting between economic and accounting basis 

Favours auditing 

Enhances comparability in management techniques 

Improves asset management 

Provides a long term view approach to the public finances  Enhances transparency in financial reporting and management procedures 

Leads to a better management of liabilities and thus prevent financial crisis  

Improvement of financial planning  

Favours accounting knowledge exchange 

Enhances the process of accounts consolidation 

Enhances financial reporting comparability 

Turns financial reports in conformity with international organisations requirements 