The relevance of this conversation can’t be ignored as governments try to better understand their financial positions and determine whether to pursue accrual-based accounting or cash-based accounting.
What does this mean for the public sector that is trying to plan ahead to fund public services and balance the government budget? Is Cash Still King?, talks about the benefits of an accrual-based accounting method. A virtual event organized by the Centre for financial Reporting Reform (CFRR) World Bank Vienna Country Office for officials from Ministries of Finance and Public Sector educators in Europe and Central Asia continued this conversation.In a recent paper published by the Association of Chartered Certified Accountants (ACCA) and the International Federation of Accountants,
The foundation of good decision making is having the right information, particularly financial information.
With cash-based accounting, transactions and revenue are recorded when cash is received and when cash is paid. Expenses are recorded when cash is paid to suppliers and employees providing a short-term snapshot of the cash flows alone. With accrual-based accounting method, income and expenses are recorded not based on actual movement of cash but based on substance of the transaction (for example, when income is considered as earned, or expense is treated as incurred irrespective of timing of cash receipt or payment) presenting a more fuller financial picture.
‘Cash’ retains the ‘royal’ status even in accrual accounting as Cash flow statement is one of the standard financial statements in accrual accounting also. Cash flow statement is accompanied by several other financial statements which present a complete and comprehensive picture of state of affairs in a country. According to the International Public Sector Financial Accountability Index (IFAC and CIPFA 2018), the number of governments reporting on accrual will rise from 25% in 2018 to 65% in 2023. This significant transition to accruals is set to primarily be led by countries in Africa, Asia, Latin America and the Caribbean.
The ongoing pandemic and economic consequences including the increase in government debt reinforces the value of correct accounting of ‘cash’ inflow and outflow into government coffers and also establishes the need for quicker migration to ‘accrual’ basis accounting irrespective of stage of economic development of the country. This will also help transition to accrual-based performance budgeting processes by governments, which switches the focus from ‘how much is spent’ to ‘what money is buying’.
Public finance professionals can achieve even more by engaging with colleagues from across the world to understand what systems, skills and planning will create an environment that maximizes the benefits derived from accrual accounting.