Accrual based Accounting has taken over
Governments have started to increase public scrutiny, position finance as the centre of decision making and are surpassing the value of money with the help of the accrual based accounting system.
The first thing to figure out is how one is supposed to ensure that the public segment’s accounts capture the value of liabilities and assets with their actual value. The answer is simple; accrual based accounting.
Let’s discuss as an example for this; if you are constructing a bell for a rural area, you will have a cash account showing the costs of the first year. However, any traces of the well’s accounting view disappear all of a sudden. There is no information on funds or records of transactions made; moreover, there is no data on development of more wells in the future.
If you acquire accrual accounting, then this situation would never arise in the first place. In this system, the well is given a value according to its operating condition. An accrual account gives the user helpful data for decision making. This helps them understand where and how resources are to be allocated, so that it can finance the vital assets’ replacement.
The scenario about the well is an actual incident from Tanzania, which was found in a report by ACCA and by IFAC. This report was titled, ‘Is cash still King?’ and discussed the advantages of accrual data especially for the public sector, as it draws on research; roundtables and interviews. This was done with experts of the field, who had experience in implementing the system.
In 2018, 75% of governments applied the cash accounting in some way. However, the report while discussing the benefits of it, also mentions a warning. Cash accounts do not show accurate values of the government’s health in finance and it does not assist decision makers for good planning, maintenance of infrastructure, programs and delivery. All this leads to an issue with trust.
However, accrual accounting does not have such weaknesses. It provides useful information for decision makers, like about assets, highlights liabilities, for example, pension schemes. But if loopholes start to show, then at least accrual accounts make it visible. One needs to be aware of a problem in order to handle it. It helps governments make decisions that will support their future generations as well.
The International Public Sector Financial Accountability Index in 2018 shows that 65% of governments will use accrual accounting by 2023.
Governments transitioning can look forward to enjoying benefits like; accommodating public scrutiny, providing the real value of money and making finance the centre of decision making.
Accrual accounts get rid of fiscal illusions as well. Though the end result is compelling, shifting from one accounting system to another is a long process. The report shows recommendations for officials who plan on introducing accrual accounting. This addresses how to avail maximum benefits and cover important points like; developing skills, creating efficient systems, involving stakeholders, planning and setting objectives.
Talking about skills, the finance team needs to generate analysis that is based on information from accrual accounting. Therefore, the government will have to upgrade their number of skilled accountants and might need to introduce programmes for training.
Internal training will require auditors, procurement officials and members of Parliament to join in as well. The policy makers will need to remain focused while applying accrual accounting. Governments that adapt to accrual accounting have a wider view of finances than the cash basis. The powerful balance sheet managing helps low costs of borrowing, which gives government countermeasures to respond to pressures.