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Cash to Accrual Accounting: One Nation's Dilemma

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Cash to Accrual Accounting: One Nation's Dilemma International Business & Economics Research Journal – November 2010 Volume 9, Number 11 Cash To Accrual Accounting: One Nation’s Dilemma Geoffrey Tickell, Indiana University of Pennsylvania, USA ABSTRACT Over the past three decades, there has been a slow but steady global movement undertaken by most governments to move from cash-based accounting to accrual-based accounting. This migration is the result of calls for greater accountability, increased transparency and more informed decision-making from the public sector. Questions remain regarding the implementation of accrual accounting within public sector organisations. This paper reports on an investigation into Fiji's attempt to use accrual accounting as its financial reporting format. Findings suggest that, due to the nation’s low-skilled public service, high labor turnover and insufficient investment in capital equipment, undertaking the move to accrual accounting for this and similar developing nations require a different approach to that used by developing economies. This paper concludes with recommendations on how to effectively introduce accrual accounting in the public sector of developing nations. Keywords: Government accounting, Accrual accounting, Fiji INTRODUCTION ver the past two decades, there has been a slow but steady global movement undertaken by most federal, state, and local governments to move from cash-basis accounting to accrual-basis accounting O (see Boxall, 1998; Carlin, 2003). The governments of New Zealand and Australia led this process with European countries following soon after (e.g., Spain, Sweden and the United Kingdom). This migration from cash- basis accounting to accrual-basis accounting is the result of calls for greater accountability and transparency in the public sector (Dickinson, 2000). To this end, it is anticipated that over the next few years, all countries, including countries with developing economies, will change their accounting system to incorporate accrual accounting reports. The Public Service Committee (PSC) of the International Federation of Accountants (IFAC) believes that accrual-based financial statements, rather than cash-based financial statements, provide the most relevant, reliable, comparable and useful information for users of financial information (Public Sector Committee, 2002). The PSC is encouraging all governments at all levels to move to accrual accounting and adopt International Public Sector Accounting Standards (IPSASs). The importance of governments improving their financial reporting has also been recognised by international and regional financial institutions such as the World Bank, the International Monetary Fund, the Asian Development Bank and the United Nations Development Program (Hepworth, 2003). These institutions also strongly encourage developing nations to make the migration. Often, the financial aid stemming from these financial institutions is contingent upon these countries improving their accounting information systems and adopting accrual accounting. Given that this migration involves extensive work for governments, it is anticipated that developing nations with a relatively low-skilled civil service and insufficient infrastructure will experience difficulties implementing accrual accounting in the same way as their more highly skilled counterparts (e.g., Australia and New Zealand). Processes that are effective for countries with high-skilled laborforces might not be appropriate for those with low- skilled labor forces. Alternative methods need to be explored. 71 International Business & Economics Research Journal – November 2010 Volume 9, Number 11 This paper reports on an investigation undertaken within the public service of Fiji. This nation has attempted the move from cash to accrual accounting on two previous occasions (i.e., 1994 and 1998) and has put aside the project on each occasion. Once again, in 2005, this nation attempted the migration. On this attempt, however, the nation adopted a different approach to that used for the previous two unsuccessful attempts. The present investigator undertook field research in 1994, 2004 and 2008 to determine the strategies adopted and the apparent success of each attempt. On the most recent visit, the public service of Fiji, despite many years of attempts, was still in its infancy stage in adopting accrual accounting. Regular military coups and general instability within the government were detrimental to progress in accrual accounting. However, despite unstable government, the civil service of Fiji is taking small steps towards accrual accounting. Their planned strategy could be used as a template for other similar nations wanting to undertake such a migration but find the task too daunting. LITERATURE REVIEW Traditionally, the public sector has used cash accounting to present its financial transactions. Government financial reports, including annual budgets, were modified cash-based reports (Robinson, 2002). In contrast, the private sector has used accrual accounting to provide financial information to its stakeholders. Accrual accounting is regarded as providing more useful information for decision-making than cash accounting. The key difference between the two types of accounting (i.e., accrual and cash) lies in the timing as to when the transaction is recognised. With cash accounting, the transaction is recognised on the date the cash is received or disbursed. Under accrual accounting, the transaction is recognised on the date the income is earned or the expense is incurred. Thus, cash accounting focuses on cash receipts, cash payments and cash surpluses or deficits, while accrual accounting focuses on revenues, expenses and profits or losses. Therefore, net income reported by each method will not be the same amount. Proponents of the move to accrual accounting by governments are certain that accrual accounting will help people understand their government’s finances better (Chase & Triggs, 2001). For the past twenty-to-thirty years, the public sector, encouraged by politicians with private enterprise backgrounds, have been moving to accrual accounting as its basis of financial reporting. Once the domain of macro- economists, public sector accounting is now adhering to accounting standards (first implemented in the private sector). Today, accountants are far more involved in preparing the accounts and budgets of governments. Accrual accounting rather than cash accounting reports are being presented. The rationale for this change includes the corporatization of government departments and calls for greater accountability and transparency in the public sector (Guthrie, 1998). The change to accrual accounting within a public sector organization rarely occurs in isolation. Often, the introduction of accrual accounting will be a relatively small component of a much largely reform project, and the nature of these wider reforms can often have an impact on the speed and the style of the transition to accrual accounting (Hepworth, 2003). According to the Public Sector Committee of the International Federation of Accountants, the information contained in financial statements prepared on an accrual basis is useful both for accountability and decision-making (Public Sector Committee, 2002). Furthermore, accrual accounting provides information about the financial performance and position of public resources that cash accounting cannot (Rowles, 2004). Accrual accounting provides information on revenues and expenses, including the impact of transactions where cash has not yet been received or paid (Public Sector Committee, 2002). Accrual accounting standards compel governments to acknowledge and plan for the payment of all recognized liabilities, not just borrowings. For example, all employee-related costs, including future retirement outlays, future annual leave payments, and probable sick-leave commitments are required to be recognised as long-term liabilities. Also, capital expenditure is treated differently. For example, in the case of a government purchasing a jet for their airforce, under cash accounting, the whole cost of the jet would be regarded as an expense in the year of purchase. However, accrual accounting concepts would apportion the cost of the jet over the expected life of the jet (e.g., 20 years). This concept of 72 International Business & Economics Research Journal – November 2010 Volume 9, Number 11 apportionment is called depreciation. Accrual accounting also requires infrastructure items such as roads and bridges to be valued and included as assets in government balance sheets. Arguably, accrual accounting allows governments to take a more long-term view of their commitments and responsibilities than does cash accounting. Accrual accounting enables more informed decision making. Accrual budgeting, for example, enables the move away from cash inputs towards outputs and outcomes and provides additional information for governments to make decisions about resource allocations. As noted, accrual accounting has long been the primary focus of private sector financial reports. To enable consistency and comparability among these private sector income statements and balance sheets, accounting standards have been developed and mandated. Once the jurisdiction of individual countries, these accounting standards are now becoming consistent internationally. From January 2001, Australia, New Zealand and the European Economic Community (EEC) produce financial statements using the same accounting standards (i.e., International Financial Reporting
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