GTZ Report on Accrual Accounting Status Quo - LGCDP

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Cash Accounting vs. Accrual Accounting 9 All in all modified cash accounting would be a first step to match cash transactions related to an economic event to the same fiscal year. For this reason the planning and operation of next year’s budget is not that much affected by the past fiscal year arrears. The modified accrual basis of accounting uses the same accounting framework as full accrual accounting. However, it is bound to a single fiscal period and therefore short term focused by merely recognizing economic transactions as revenues if they are available or measurable to liquidate liabilities in the current fiscal period or soon thereafter. Similarly, expenditures are only recognized if they are expected to draw on the currently spendable revenues in the fiscal period rather than long term resources. Although modified accrual accounting recognizes the total amounts in the different accounts on the debits and credits side, e.g. through receivables or payables, it only operates with the measurable or spendable funds and values. This has the advantage that there are no big expectations regarding the upcoming revenues since only the available funds matter. For example even though an accountant knows receivables in tax he does not book them as revenue until they are actually received and spendable. For this reason, long term revenues or long term expenses are excluded in modified accrual accounting. The same holds true for assets that are of long term use. Under modified accrual accounting they are written off immediately when acquired. Therefore no systematic asset management exists in modified accrual accounting. This is also the reason why modified accrual accounting does not use the term “expenses” and uses merely “expenditure” instead. Compared to the two mentioned forms of cash accounting, the modified accrual accounting has the advantage of being able to link the source and the application of available or spendable funds as explained before. Therefore it recognizes if payments have been used according to their purpose. Moreover it ensures fund availability and fund flows for expenditure purposes. All in all modified accrual accounting is a good first step for incremental accrual accounting implementation since it uses the same principles like full accrual accounting. 2.5. Which accounting approach for which level of government Regarding accounting systems for the public sector one has to take into consideration that there is a functional difference between the national and sub-national level of government. This difference is mainly due to the different scope of their actions towards the citizens as well as their public goods and services they provide. That is why it is not necessarily compulsory to use one accounting system throughout all administrative levels of government even though an integrated approach of accounting would be very useful and easier to handle in terms of budgeting, reporting and auditing.
Cash Accounting vs. Accrual Accounting 10 In order to reflect at least outstanding receivables (e.g. in tax management) and payables, the crucial linkage between the source and application of funds, to create more transparency, accountability and responsiveness according to cost centres (e.g. a bus park), some degree of accrual accounting seems necessary (Chu, 2008, p.9). The question is how extensive this accrual accounting approach has to be in order to be appropriate and efficient for the national or subnational government level. At the national level it is not a priority to implement a full fledged accrual accounting system since central government normally does not own many assets or at least does not have to rely on them as much as the sub national level. Moreover national government usually redistributes monetary values and funds only. Therefore the first step of reform would be to improve the existing cash accounting system according to international cash accounting standards for the public sector (e.g. the IPSASB Cash Standards) (IPSASB, 2008b; World Bank, 2007, p. 5). As a second step of reform one can focus on the implementation of a modified accrual accounting system that dominantly focuses on revenues that are available to liquidate expenditures. In other words monetary values and central government funds but with the important difference, compared to cash accounting, of knowing the connection between the source and the application of these funds. Besides that, one would also know receivables and payables. 1 As a result the central government would be able to evaluate the outcome of their funding as well as revenue and expenditure arrears. Of course that would also affect national budgeting, reporting and auditing in the long run. At the municipal level a totally different picture appears since a municipality usually owns more capital assets (e.g. roads, bridges but also transport service providers and other infrastructure) and floating assets. In addition it has to deal with resource consumption, reserve allocation, critical debt levels etc. and the allocation of usually scare resources in general. Therefore a sustainable asset and debt management is very crucial at a municipal level. In order to achieve these aims, a full accrual accounting system for the municipality including its public companies (e.g. transport providers and facilities) would be of major concern in the long run. However, in order to consolidate accrual accounting implementation a modified accrual accounting should be the first major step for municipalities towards full accrual accounting implementation since it uses the same accounting framework and usually the same software. In developing countries it should be an option of choice if the municipalities start with a modified or full accrual accounting according to their current status and capacity. Both accrual accounting systems can enhance transparency by displaying what public goods have been produced with tax money, e.g. Integrated Property Tax (IPT) in Nepal, or other taxes and fees. However, a full financial overview including asset management is only possible with a full fledged accrual accounting. The financial statements an accrual accounting can provide are an important basis to achieve credibility towards stakeholders like donors, banks, foreign investors, tax payers or the general public. Moreover, these information are useful for the management level of the municipality in order to improve the efficiency, effectiveness, feasibility, sustainability and quality of their investments and their financial management in more general terms. 1 In this regard, Nepal has already conducted a study on the improvements of the existing government accounting system under the technical support of ADB – the outcomes and suggestions are under discussion.
Page 1 and 2: Urban Development through Local Eff
Page 3 and 4: Contents 01. Executive Summary (p.1
Page 5 and 6: Cash Accounting vs. Accrual Account
Page 11: Cash Accounting vs. Accrual Account
Page 17 and 18: Findings and observations in the Ne
Page 25 and 26: How to implement Accrual Accounting
Page 33 and 34: Annex 30 05. Annex Annex 1 IPSAS Li
Page 35 and 36: References 32 06. References ADB (2
Page 37: References 34 Schiavo-Campo, S. & T

GTZ Report on Accrual Accounting Status Quo - LGCDP

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