Accrual accounting: A game-changer for fiscal management

In an era of increasing fiscal pressures, governments worldwide are seeking better tools to manage public finances effectively. One of the most significant shifts in public financial management has been the adoption of accrual accounting—a method that goes beyond cash-based accounting to provide a comprehensive view of a government’s financial position and obligations.

The 2024 Global Report on the Use of Accrual Accounting for Fiscal Management, explores how accrual accounting is transforming fiscal management by improving financial decision-making, strengthening transparency, and enhancing long-term sustainability.

Why Accrual Accounting Matters for Fiscal Management

Traditionally, many governments have relied on cash accounting, which only records transactions when cash is received or spent. While simple, this method does not capture financial obligations such as unpaid bills, infrastructure depreciation, or future pension liabilities. Accrual accounting, on the other hand, records transactions when they occur, regardless of cash flow, providing a more accurate picture of a government’s financial health. The International Public Sector Accounting Standards (IPSAS) provides a full suite of accrual basis accounting standards for governments. 

We share four fiscal management functions that governments are able to strengthen with this shift:

1.      Strengthening budgeting and fiscal planning

• Accrual accounting helps governments understand their full financial commitments, leading to more accurate budget forecasts and better fiscal discipline.
• By recognizing long-term liabilities such as pensions and public debt, as well as assets such as infrastructure and land, policymakers can make informed decisions that balance short-term needs with long-term sustainability.

2.      Improving debt and asset management

• Many governments struggle with hidden liabilities that do not appear in cash-based financial reports. Accrual accounting ensures that these obligations—such as loan guarantees, lease obligations, and future payments—are fully accounted for in fiscal planning.
• By tracking assets like roads, buildings, and equipment more accurately, governments can plan for maintenance costs and avoid costly last-minute repairs that strain budgets.

3.      Addressing pension liabilities and intergenerational equity

• One of the most pressing challenges in fiscal management is the rising cost of pension liabilities due to aging populations. In many countries, pension obligations are recorded only when payments are made, leaving future liabilities hidden from policymakers and the public. Shifting to accrual accounting allows the government to quantify the long-term costs of pension obligations, leading to better fiscal planning and reforms aimed at ensuring sustainability for future generations.
• Applying accrual-based reporting may reveal significant unfunded pension liabilities, prompting necessary policy discussions on retirement age, contribution rates, and pension system sustainability. By accounting for future obligations today, governments can make more equitable fiscal decisions that do not unfairly burden future generations with unsustainable debt.

4.      Enhancing fiscal transparency and accountability

• Accrual-based financial statements provide a clearer picture of government finances, making it easier for oversight bodies, investors, and the public to assess the true fiscal position of a country.
• Transparency strengthens public trust and investor confidence, particularly in countries seeking external funding or participating in international financial markets.

Real-world Applications

Our recent report highlights how governments worldwide are using accrual accounting to improve fiscal management. Here are three such examples:

• New Zealand uses accrual accounting to assess the full cost of government policies and make evidence-based fiscal decisions.
• Chile has enhanced long-term infrastructure planning and public investment efficiency by integrating accrual-based financial reporting into its budgeting process.
• Vietnam, although a partial adapter of accrual basis accounting, generated a national wide report on public assessment management.

Overcoming implementation challenges

While the benefits of accrual accounting are clear, the transition can be complex. To mitigate that, governments can consider investing in three things:

• Training personnel to interpret and use accrual-based financial data effectively.
• Upgrading financial management systems to support accrual reporting.
• Phased implementation strategies to ensure a smooth transition without disrupting existing fiscal processes.

The future of fiscal management

As governments face growing fiscal challenges, the shift to accrual accounting is essential to assist policymakers in enhancing financial planning, reducing fiscal risks, and improving economic resilience.

We stand ready to support public finance professionals, policymakers, and stakeholders on how accrual accounting can transform fiscal management for the better.