GTZ Report on Accrual Accounting Status Quo - LGCDP

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Cash Accounting vs. Accrual Accounting 5 transparency by not being able to tell relevant stakeholders like tax payers the source and application of specific resources e.g. taxes. In the context of Nepalese Municipalities, most of the public properties are not accounted in the books of accounts and inventories of such valuable public assets (land, public parks and other important historical monuments) are ignored due to the application of cash accounting. A comprehensive strategic financial management plan of municipal bodies is impossible to be developed and implemented on base of cash accounting systems. Advantages of Accrual Accounting Most of all accrual accounting allows displaying information on non-monetary resources, assets, true costs, future liabilities, receivables, payables and therefore provides important knowledge for the development of a financial strategy, a transparent, effective and efficient revenue and expenditure management as well as decision making processes of a municipality. Moreover, the financial statements and information produced according to accrual accounting provide local and central government agencies, creditors, donors, foreign investors, rating agencies, tax payers and other stakeholders with reliable information about the financial and economic situation of a municipality (SAFA, 2006, p.2). Furthermore, it enhances transparency by disclosing current and future liabilities (e.g. outstanding reinvestments into assets), resource consumption, true costs and the source and applications of funds according to cost centres (IMF, 2007, p.6, p.17; Champoux, 2006, p.14-15). Therefore it also provides the necessary information to hold the administration and different cost centres accountable and responsive for their actions. This is especially important in Nepal since a well developed tax culture does not exist. With accrual accounting it is possible to show the tax payers what was achieved with their money. Additionally, it also empowers cost centres, a slaughter house for instance, by giving them the freedom to self manage their resources in an efficient way because they can see their expenses that are matched to their revenues. For the reason that accrual accounting always affects the debtors and the credits side and that it recognizes economic events when they occur, an accountant can draw a linkage between the taxes already received and the total amount of taxes to be paid. On the other hand depreciations and the allocation of reserves for crucial assets and future liabilities provide a sustainable accounting approach for debt management, strategic planning as well as asset management including the maintenance of and reinvestment into assets. Accrual information also allows a proper evaluation to be made on quality, feasibility, efficiency and effectiveness of investments (Athukorala & Reid, 2003, p.17, p.28). This is possible because accrual accounting can connect the source with the application of funds. Therefore it allows a better allocation of scare resources in the long run. Furthermore that evaluation also provides a municipality with important implications for budgeting, reporting and auditing. Additionally, accrual accounting is also able to compare services and costs across organizations.
Cash Accounting vs. Accrual Accounting 6 Disadvantages of Accrual Accounting Most of the criticism related to accrual accounting arises from the relative complexity of the system, compared to cash accounting as well as high implementation costs (e.g. regarding the valuation of assets, training and information technology) (Athukorala & Reid, 2003, p.24). As a result of that, the implementation of accrual accounting is challenging especially for smaller municipalities. Without external support most of those municipalities are not able to adopt accrual accounting caused by a limited number of human resources and adequately trained personnel as well as low financial capabilities. In addition criticism arises about the so called vague estimations about the values of the assets of a municipality, which are used for depreciations and maintenance later on. However, wrong valuation will be recognized in accrual accounting after some time, since an engineer will see if depreciation and connected reserve allocation for maintenance and reinvestment are picturing the reality. Moreover the operation of such a system is supposed to be more difficult, skill-intensive and expensive since it requires additional education of human resources (HR) and, at some stage, the use of Information Technology (IT) (Boothe, 2007, p.196; Athukorala & Reid, 2003, p.25; Wynne, 2003; Wynne, 2004, p.9-11). This certainly is correct but one has also to take into account the long term benefits accrual accounting can provide in revenue mobilization through tax management, asset management and debt management for instance. However, in some cases the acknowledgement of receivables creates big expectations regarding the upcoming revenues, which are being rarely achieved by the local governments in the short term. Some of the criticism holds especially true for developing countries (IMF, 2007, p.17). Not only because of the mentioned difficulties which all countries experience, but also because of problems like corruption, unclear property rights, capacity and resource constraints, informal economies, informality etc. (Schick, 2006). These problems however will affect both cash accounting but also accrual accounting. Still, the mentioned problems and difficulties are the reason why accrual accounting implementation in developing countries requires a carefully planned, comprehensive and long term approach, including the necessary technical, financial and political support and commitment by the relevant stakeholders. This is needed to overcome obstacles like capacity constraints, corruption, manipulation, lack of resources, the lack of formal accounting regulations, policies, fiscal rules, standards and manuals etc. (Athukorala & Reid, 2003, p.53-61; Boothe, 2007, p.195-199). All in all just a few minor steps, starting with the booking of cash transactions based on an accrual accounting system (this would include taxes, fees etc.), can improve the financial management of resource constraint local governments in Nepal.
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 7: 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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