BUDGET EXECUTION COURSE SYSTEMS OF ACCOUNTING

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BUDGET EXECUTION COURSESYSTEMS OF ACCOUNTING

• 8 April, 2003
• David Shand
• OPCFM

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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)

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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)

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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

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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

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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

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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

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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

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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)

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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

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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)