A report issued jointly by ACCA and IFAC, Is cash still king? Maximising the benefits of accrual information in the public sector, not only confirms that a complete public sector transition to accrual accounting will serve the public interest, but also contains 30 specific recommendations to improve accrual implementation. 

Good decision-making requires the right information. Given that most government decisions have financial implications, understanding the economic reality of a government’s activities improves the quality of decisions made. By 2023, the number of countries reporting their financial position on an accruals basis is expected to increase from 37 to 98, jumping from 25% to 65% among 150 countries surveyed in the International Public Sector Financial Accountability Index.

Cash accounting, which 75 per cent of governments around the world use in some form, does not present the most accurate picture of a government’s financial health, nor does it enable adequately planning for the development, delivery, and maintenance of the services, programmes, and infrastructure on which people rely.  And that, in turn, leads to a breakdown of trust in governments.

The report’s author, ACCA’s Head of Public Sector Policy, Alex Metcalfe, said: ‘Moving to accruals needs to be more than a compliance exercise, it should be about making the best use of financial information.  The range of benefits highlight in this report demonstrates the clear upside to implementing accruals in the public sector.  We need to ask whether cash is still king, when it comes to financial reporting and budgeting.’

‘The accounting profession’s public interest mandate is nowhere more apparent than in the public sector, where high-quality reporting and budgeting is a prerequisite for government transparency and effective delivery of public services,’ said Kevin Dancey, CEO of the International Federation of Accountants (IFAC). ‘To the finance professionals and public sector decision makers who are leading the transition from cash to accrual accounting, we commend you and support you.’

The benefits and complexity arising from accruals varies by types of adoption. The report notes that:

• Cash accounting and budgeting is the simplest basis but provides the least decision-useful information.
• Accrual accounting combined with cash budgeting is the most complex basis, but it generates information that helps achieve value for money, facilitates public scrutiny, and supports sustainable decision-making.
• Accrual accounting and accrual budgeting creates a ‘medium level of complexity’ and creates consistency. In addition to realising the benefits from implementing accrual accounting, this environment also puts finance right at the heart of decision making and allows governments to embed effective performance management.
• New, decision-useful information generated by accrual implementation promotes the achievement of value for money and facilitates effective public scrutiny.
• To produce decision-useful information, governments must set objectives; plan; engage stakeholders; create effective systems; and develop the right skills, including internal training beyond preparers.

This report recommends that governments implementing accruals should be:

• Directing independent fiscal policy institutions to assess contingent liabilities and produce recurring fiscal risk reports.
• Implementing accrual budgeting to put finance at the heart of decision-making, while embedding performance management across government.
• Planning to produce a fully consolidated balance sheet that provides a full financial picture of the resources and risks for the public sector. This must include State-owned Enterprises at the whole-of-government level.
• Building political challenges into the implementation roadmap from the beginning (e.g., through a sunset clause requiring the eventual recognition of employee pension liabilities).
• Including groups that provide a constructive challenge function to the reform, such as auditors and legislative committees (e.g. the UK’s Public Accounts Committee).
• Deploying experts centrally to control consulting costs and support implementation across government.

Kevin Dancey, CEO IFAC, added: ‘IFAC and ACCA are committed to supporting the adoption and implementation of International Public Sector Accounting Standards (IPSAS), which underpin public sector accrual accounting, and to developing a robust profession that implements and manages such systems. With 65 per cent of governments globally set to implement accrual accounting by 2023, we’re encouraged by the positive trend, and strongly support further adoption of accruals and IPSAS.’

- Ends -

For media enquiries, contact:

Nadia Manuelli
E: nadia.manuelli@accaglobal.com
T: +44 (0)20 7059 5661
M: +44 (0)7808 940139
Twitter @ACCANews 
www.accaglobal.com

Geena De Rose
E: geenaderose@ifac.org
T: +1 (646) 277 9390
Twitter @IFAC
www.ifac.org

Notes to editors:

The number of countries reporting on the accruals basis represents 40% of the 150 countries included in the 2018 International Public Sector Financial Accountability Report.  The research evidence was gathered in three ways. Roundtable discussions were held in three countries (UK, Canada and Australia).  Semi-structured expert phone interviews were held with 12 experts in seven countries: Austria, Canada, New Zealand, Slovakia, Switzerland, Tanzania and Zimbabwe.  The face-to-face and telephone evidence was supported by a desk-based literature review.

About ACCA

ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants, offering business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.

ACCA supports its 219,000 members and 527,000 students (including affiliates) in 179 countries, helping them to develop successful careers in accounting and business, with the skills required by employers. ACCA works through a network of 110 offices and centres and 7,571 Approved Employers worldwide, and 328 approved learning providers who provide high standards of learning and development. Through its public interest remit, ACCA promotes appropriate regulation of accounting and conducts relevant research to ensure accountancy continues to grow in reputation and influence.

ACCA has introduced major innovations to its flagship qualification to ensure its members and future members continue to be the most valued, up to date and sought-after accountancy professionals globally. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. More information is here: www.accaglobal.com

About IFAC

The International Federation of Accountants (IFAC) is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of more than 175 members and associates in more than 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry, and commerce.

The foundation of good decision making is having the right information, especially financial information. There is a global transition underway, where governments are moving from a cash to an accrual basis for their financial reporting. This report offers lessons learned from jurisdictions that have implemented accruals, with the intention that this global transition to accruals creates real value and is more than a compliance exercise.

Corresponding with IPSASB Exposure Draft 70, Revenue with Performance Obligations, this table of concordance compares paragraphs in IFRS 15, Revenue from Contracts with Customers with ED 70.

The International Public Sector Accounting Standards Board^® (IPSASB^®) has released Exposure Draft (ED) 70, Revenue with Performance Obligations, ED 71, Revenue without Performance Obligations, and ED 72, Transfer Expenses. The three exposure drafts are published together to highlight for respondents the linkages between the accounting for revenue and transfer expenses. The three EDs pioneer new approaches for some of the most significant transactions of public sector entities, including inter-governmental transfers and grants for the delivery of key government services to the community by introducing:

• A more straight-forward approach to classifying revenue transactions;
• A new model for the recognition and measurement of revenue; and
• Guidance on transfer expenses, which currently does not exist in IPSAS.

“Sound accounting for revenue is crucial for all governments and other public sector bodies. We are confident that the proposed use of the performance obligation approach in ED 70, together with the updates to IPSAS 23 in ED 71, will improve financial reporting for both users and preparers of public sector financial statements,” said IPSASB Chair Ian Carruthers. “ED 72 complements the other two EDs by proposing guidance for the first time on transfer expenses, which are a major area of government expenditure, often recognized as revenue by other public sector bodies.”

ED 70 is aligned with IFRS 15, Revenue from Contracts with Customers, while extending the income recognition approach in that standard to address common public sector transactions which include performance obligations, including those where the ultimate beneficiary is a third party. It is intended to supersede IPSAS 9, Revenue from Exchange Transactions, and IPSAS 11, Construction Contracts.

ED 71 is an update of IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers) that addresses some of the issues encountered in its application. Unlike the current revenue standards, which classify revenue based on an exchange or non-exchange distinction, ED 70 and ED 71 differentiate revenue transactions based on whether or not the transaction has a performance obligation, which is defined as a promise to transfer goods or services to a purchaser or a third-party beneficiary. ED 71 also provides public sector-specific guidance on capital transfers for the first time.

ED 72 proposes guidance for transfer expenses, where a transfer provider provides resources to another entity without receiving anything directly in return. In providing guidance for the first time on the expense side of transactions that may be accounted under the revenue EDs by other public sector organizations, ED 72 includes proposals for transactions with and without performance obligations.

The IPSASB welcomes the views of respondents on the proposed standards and the other matters raised for comment in the three EDs.

How to Comment
To access the Exposure Drafts and their summary At-a-Glance documents, or to submit a comment, visit the IPSASB website, www.ipsasb.org. Comments on the Exposure Drafts are requested by November 1, 2020. The IPSASB encourages IFAC members, associates, and regional accountancy organizations to promote the availability of this Exposure Draft to their members and employees. 

About the IPSASB
The International Public Sector Accounting Standards Board (IPSASB) works to strengthen public financial management globally through developing and maintaining accrual-based International Public Sector Accounting Standards® (IPSAS®) and other high-quality financial reporting guidance for use by governments and other public sector entities. It also raises awareness of IPSAS and the benefits of accrual adoption. The Board receives support from the Asian Development Bank, the Chartered Professional Accountants of Canada, the New Zealand External Reporting Board, and the governments of Canada and New Zealand. The structures and processes that support the operations of the IPSASB are facilitated by the International Federation of Accountants (IFAC). For copyright, trademark, and permissions information, please go to permissions or contact permissions@ifac.org. 

About the Public Interest Committee
The governance and standard-setting activities of the IPSASB are overseen by the Public Interest Committee (PIC), to ensure that they follow due process and reflect the public interest. The PIC is comprised of individuals with expertise in public sector or financial reporting, and professional engagement in organizations that have an interest in promoting high-quality and internationally comparable financial information.