Elements of Governmental Accrual Financial Accounting and Reporting

1
Reforming Central Government Accounting in
Europe With Special Reference to Cost Accounting
Klaus Lüder Emeritus Professor of Public
Financial Management University of Speyer, Germany
2
Agenda

• Budgeting and Accounting Reforms in European
  Central Governments Some Basic Considerations
• Accrual Financial Accounting
• 2.1 Accrual Accounting in European Central
  Governments
• 2.2 The Role of the IPSAS in Central
  Government Reforms
• Cost Accounting
• 3.1 Cost Accounting Approaches
• 3.2 The Case of Germany Cost Accounting in
  the Federal
• Government
• Concluding Remarks

3
Stimuli for Public Sector Accounting and
Budgeting Reforms
4
The need for changes in governmental accounting
and budgeting is best met by a Performance and
Resource (accrual based) Accounting and
Budgeting system (PRAB)
5
Components of a Performance and Accrual Based
Accounting and Budgeting System (PRAB)
Multi-Year-Planning Programs, Economic
Resources, Outcome
Planning and Budgeting
Accrual Budget including Output information
Accrual Financial Accounting
Accounting
Cost- (and Performance) Accounting
Multi-Year Impact Accounting Programs, Projects
6
Elements of Governmental Accrual Financial
Accounting and Reporting
Statement of Financial Position
Net Assets/Equity
Cash
Other Assets
Liabilities
Statement of Financial Performance
Cash Flow Statement
Cash Inflow
Cash Outflow
Expenses
Revenues
7
Variants of Accrual Accounting Approaches

• Substitution of accrual accounting and budgeting
  for traditional cash based accounting and
  budgeting
• Substitution of accrual accounting for
  traditional cash based accounting. Maintaining
  cash based budgeting and deriving actual cash
  data from the accrual system
• Adding an accruals based accounting system to the
  traditional cash based accounting and budgeting
  systems that remain unchanged
• Differences in recognition of assets and
  liabilities (e. g. exclusion of some
  assets/liabilities)
• Differences in valuation of assets and
  liabilities (historical cost vs. current cost)
• Differences in definition of the reporting entity
  (budget entity, legal entity, economic entity)

8
Accrual Accounting (and Budgeting) Start of
Reforms in Europe
9
Features of Accounting Budgeting in European
Central Governments
Cash ACCOUNTING
(Full) Accrual
Cash
BUDGETING
(Full) Accrual

NL I D
E EC
F FIN
S
AU CH UK
No operating statement
10
Accrual Accounting and Budgeting Systems in Place
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Findings I Accrual Accounting

• The direction of accounting reform in Europe is
  towards accrual accounting and financial
  reporting
• The focus of budgeting reform is on enhancing
  flexibility and including performance targets not
  primarily on shifting its basis to accrual
• There is a great diversity of approaches under
  the label accrual accounting
• As a result of reform activities without early
  international guidance, divergence between
  national governmental accounting systems is
  rather growing

12
The Role of the IPSAS in Accounting Reforms of
Selected European Countries I
13
Reasons for the Limited Impact of IPSAS on
Governmental Accounting in European Countries

• Reform started prior to availability of IPSAS
  (see chart 10)
• Authorized translations from English were not
  available
• Based on private sector accounting principles and
  rules and thus of limited use for the public
  sector
• If private sector accounting is used as reference
  model for the public sector, national private
  sector accounting regulations seem more
  appropriate than private sector-based
  international standards
• The tradition of setting accounting norms in
  Continental European countries is by law not by
  private international and national
  standard-setting bodies. Until recently, those
  national bodies were unknown
• The IPSAS do not comply with the norm setting
  process by law (too instable, frequent amendments
  of existent standards and production of new
  standards)

14
Findings II IPSAS

• No full adoption, but useful as reference and
  guideline for introducing accrual accounting in
  European Central governments
• The mere existence of accrual-based IPSAS
  provides a momentum for development and
  completion of accrual accounting and financial
  reporting systems in European central
  governments,
• but, does one set of standards fit the needs of
  all countries (worldwide)?

15
Cost Accounting Cost accounting as an Appendix
to Cash Financial Accounting

• Features
• Often the first step of governmental accounting
  reform
• For appropriate areas only (e. g. agencies and
  other governmental subunits)
• Stand-alone management tool, i. e. no linkage
  with budgeting
• Full-cost accounting for products and projects
  prevail
• Need for collecting costs ? expenditures
• Experiences High risk of failure and producing
  unused information due to
• lacking integration into budgeting
• lacking incentives for managers to use cost
  information
• unreliable data base

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Cost Accounting Cost Accounting as a Module of
an Accrual Accounting System

• Features
• Quasi (automatically and) simultaneously
  introduced with accrual financial accounting
  (slide 17)
• Directly linked to the statement of financial
  performance Can be seen as more detailed expense
  accounting cost center accounting
• Implemented across government
• Integrated into the budget process Cost-based
  appropriation decisions
• Experiences
• All governments that implemented accrual
  financial accounting also implemented cost
  accounting
• Proved as useful supplement to accrual financial
  accounting
• Full benefit requires accrual-based budgeting
• Incentive for managers to use cost information
  due to its importance for budget decisions

17
Linkage beetween Accrual Financial Accounting and
Cost Accounting
Statement of Financial Performance
Ordinary Expenses
Revenues
Extraordinary Expenses
- Expenses ? Costs .
Costs ? Expenses
Costs Cost Accounting
Ord. Expenses Costs
18
The Case of Germany I Reformpaths

Outputbudgeting
Increased Budget Flexibility
Cost Accounting
NPM
Accrual Financial Accounting
Accrual Budgeting
19
The Case of Germany II The Federal
Governments Cost Accounting System 1998

• From 1998 Successive implementation of cost
  accounting in the federal government
• Neither accrual financial accounting nor
  budgeting
• Introduction only in appropriate areas of
  government
• Ministry of Finance only provided guidance,
  however, the decision if and in which subunits
  cost accounting was to be introduced remained
  with the line ministries
• Unequal implementation in the different branches
  of government
• Result in a nutshell Production of a load of
  unused information

20
The Case of Germany III The Federal
Governments New Cost Accounting System

• 2009 Decision to modernise accounting and
  budgeting by shifting the basis of financial
  accounting to modified accrual, reshaping
  structure and content of the budget and replacing
  the 1998 cost accounting system with a revised
  one.
• Differences compared to the 1998 system
• Government-wide introduction
• Tied to the budget
• However, still a system separately kept from
  financial accounting since the new financial
  accounting system is not intended to contain a
  statement of financial performance

21
Findings III Cost Accounting

• Different from accrual financial accounting the
  need for cost accounting in governments seems
  obvious and therefore is undisputed
• Accrual financial accounting is not a necessary
  condition for introducing cost accounting,
  however it seems clear that financial accounting
  standards and cost accounting concepts should be
  addressed concurrently and differences should be
  minimized (IFAC-PSC, Study 12, Sept. 2000, para.
  0131)
• Introduction of cost accounting as stand-alone
  system in a cash-based accounting and budgeting
  environment bears a high risk of failure

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Concluding Remarks I

• Experience shows
• Modernising governmental accounting and
  budgeting requires a comprehensive approach
  (PRAB). This of course does not mean that all
  modules have to be implemented at the same time
• However, reforms keeping the traditional system
  and just adding new elements to it run an
  increased risk of failure

23
Concluding Remarks II

• Implementing a comprehensive approach means
  among other things
• No cost accounting without accrual-based
  financial accounting
• No accrual-based financial accounting/cost
  accounting just for (selected) subunits of
  government
• No performance budgeting without cost accounting
  and performance accounting
• No accrual financial accounting without accrual
  budgeting