## _tnm0902

## Source details

**Canonical URL:** [_tnm0902](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2009/_tnm0902.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2009/_tnm0902.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2009/_tnm0902.pdf.json)

---

### Accounting basis for annual financial statements
- Full Cash Basis:
  - Australia X
- Combination of Cash and Accrual basis:
  - Austria X; Belgium X; Cambodia X; Canada X; Colombia X; Czech Republic X; Finland X; France X; Germany X; Greece X; Hungary X; Iceland X; Indonesia X; Ireland X; Israel X; Jordan X; Kenya X; Mexico X; Morocco X; Netherlands X; New Zealand X; Norway X; Slovak Republic X; Slovenia X; Suriname X; Sweden X; Turkey X; United Kingdom X
- Full Accrual Basis:
  - United States X
- Source of data: Data selected from OECD/World Bank Budget Practices and Procedures Database, updated by current information where available.
- Note: “Full accrual basis” means financial statements are prepared on the basis of accrual-based national or international accounting standards, also sometimes referred to as generally accepted accounting principles (GA A P).

### What is accrual accounting
- Definition and contrast:
  - Accrual accounting recognizes transactions as the underlying economic events occur, regardless of the timing of related cash receipts and payments.
  - Revenues are recognized when income is earned; expenses are recognized when liabilities are incurred or resources consumed.
  - Contrasts with cash-accounting where revenues and expenditures are recognized when cash is received and paid respectively.
- Public sector implications:
  - Recording transactions on an accrual basis and preparing accrual-based financial statements for the government as a whole.
  - Individual ministries may prepare audited financial statements annually and unaudited reports more frequently.
  - Some advanced countries have implemented accrual budgeting.
- Scope:
  - Unless otherwise indicated, the paper discusses accrual accounting including financial reporting, but not accrual budgeting.

### Rationale for moving to accrual accounting
- Macrofiscal relevance:
  - Measures assets and liabilities relevant to fiscal policy and fiscal sustainability not captured by cash accounting (e.g., accounts payable for goods and services, employee liabilities such as civil service pensions).
- Broader measurement:
  - Provides a broader measure of the burden of government financial commitments than cash accounting.
- Golden rule interpretation:
  - If “expenses” are measured on an accrual basis, the golden rule can be articulated as requiring the budget to be balanced in accrual terms over the business cycle; depreciation should be met from revenue rather than borrowing.
- Full cost information and performance management:
  - Essential to determine full costs (including noncash costs such as depreciation and accrued civil service pensions) for assessing efficiency, outsourcing, cost recovery, and international benchmarking.
  - Specialized management costing systems would use accrual-based data from the main accounting system.
- Asset and liability management:
  - Preparation of government balance sheets requires identification, measurement, and periodic reporting of assets and liabilities, encouraging asset registers and better planning and management.
- Behavioral effects:
  - Accrual information may prompt different legislative and managerial questions about fiscal policy and long-term liabilities; empirical evidence pending.
- Link to accrual budgeting:
  - Benefits may be limited unless accrual reforms encompass accrual budgeting; discussed later in the document.

### Consolidated financial reporting on an accrual basis (selected international experience)
- United States:
  - Produces audited consolidated financial statements for mainly the budget entities; excludes entities such as Army Force Exchange Service, Board of Governors of the Federal Reserve System, and USA Education Inc. (Sallie Mae).
- United Kingdom:
  - Working on a project to produce consolidated financial statements of the central government.
- Australia:
  - Produces audited financial statements for the federal government as a whole, including analysis of key aggregates related to general government entities, public nonfinancial corporations, and public financial corporations controlled by the federal government.
- New Zealand:
  - Produces audited financial statements for the government as a whole.

### Illustrative cases demonstrating accrual impact
- “Costless” civil service pay increase:
  - Under cash accounting, pension entitlement increases with no immediate cash impact can leave increased future liabilities hidden; under full accrual accounting, increased pension costs are reflected in the budget bottom line in the year costs are incurred.
- “Amazingly inexpensive” police vans:
  - Purchases paid in installments may show only a portion of cost in the cash budget while the full liability is not transparent; under accrual accounting, the full liability for purchased assets is reflected in the accounts.

### Issues associated with the transition to accruals
- Formulating accounting policies:
  - Accrual accounting requires recording flows and stocks within an integrated framework.
  - Recognition and measurement of complex transactions (finance leases, PPPs, financial instruments, intangible assets) require judgment and technical skill, with attendant risks of errors and misstatements.
  - National and international accounting standards guide acceptable treatments and define minimum requirements; where standards do not exist, judgment is required.
- Gaps in current International Accounting Standards:
  - IPSASB issues International Public Sector Accounting Standards (IPSAS).
  - Currently there are some twenty IPSASs applicable to accrual-based accounting, and one IPSAS applicable to cash-based accounting.
  - Gaps remain for non-exchange revenue (e.g., taxes and transfers), accounting for social policies of government, heritage assets, and PPPs.
  - IPSASB consultative documents issued for possible standards on the first three issues; work starting on an exposure draft on accounting for PPPs.
  - Governments need interim standards or guidelines until international standards are finalized.
  - IPSAS requirements are broadly comparable to GFSM 2001; work underway to harmonize these standards.
- Cash information in an accrual framework:
  - Moving to accrual accounting does not abandon cash accounting; cash management is integral.
  - IPSAS and GFSM 2001 require production of a full statement of cash flows identifying cash receipts and payments associated with operating, investing, and financing activities.
  - Modern accrual-based systems can support cash-based accounting and reporting.
  - Design question: required level of information on cash receipts, payments, and cash holdings:
    - Macrolevel cash information may suffice for high-level treasury purposes; configuring systems for macro-cash reporting is relatively simple.
    - Detailed tracking by entities, programs, functions, products, or cost elements increases system complexity.
- Alignment of accrual accounting and budgeting:
  - Debate over aligning accounting and budgeting: critics say accounting-only moves without accrual budgeting may fail to change culture and incentives.
  - Governments may adopt accrual accounting first and accrual budgeting later, creating temporary incongruity between ex ante budgets and ex post financial statements.
  - Accumulation of accrual experience and data can smooth future transition to accrual budgeting.
  - During timing differences, capacity must be maintained to generate suitable cash-based reports.
  - Accrual-based budgets:
    - Show full resource implications of planned activities.
    - Budgeted financial statements show accrual-based budgeted revenues and expenses, budgeted cash receipts and payments, and estimated impact on assets and liabilities.
    - Require construction of rolling, continuous budgeted financial statements across forward years.
    - Governments may introduce accrual-based appropriations; approaches vary.
    - Revenues can be budgeted on an accrual basis if reliably forecast and measured; impacts on assets and liabilities must be estimated and reflected in a budgeted balance sheet.
- Budget classification and chart of accounts (COA):
  - Budget classification sets out categorization for budgeted revenues, expenditures, and financing items; cash budgets do not include stocks of assets or liabilities.
  - COA is the logical coding framework for recording accounting transactions and balances in the general ledger.
  - COA should incorporate the budget classification and include accounts for assets and liabilities not in a cash-based budget.
  - COA typically includes more detailed accounts for particular revenues and expenses than required for the budget classification.
  - If accrual accounting and accrual budgeting are introduced simultaneously, COA and budget classification can be unified at appropriate aggregation level.
  - If accrual accounting is adopted while cash budgets continue, COA must generate both accrual- and cash-based reports and prevent breaches of legal expenditure limits based on cash or commitment concepts.

### Alignment of accrual accounting and budgeting (Box 5): selected international experience
- United States:
  - Produces accrual-based financial reports, but has not announced plans to adopt accrual budgeting.
- United Kingdom:
  - Implemented accrual accounting and reporting in executive agencies and subsequently adopted accrual accounting and budgeting for the central government.
- France:
  - Adopted accrual accounting, but has not yet announced intention to adopt accrual budgeting.
- Australia:
  - Introduced annual accrual reporting, and a few years later adopted accrual budgeting.
- New Zealand:
  - Introduced accrual reporting and budgeting simultaneously.

### COA design, opening balance sheet, centralization, and consolidation
- COA design and reporting scope:
  - COA determines classification of transactions and balances in the general ledger and therefore scope and content of financial reports.
  - COA should anticipate future requirements and support diverse reporting requirements (management reports, budget reports, audited financial statements, GFSM 2001, ESA 1995, and SNA) without multiple data entry.
  - COAs often designed as combinations of segments corresponding to economic, functional, administrative, and regional classification, and additional segments for cost centers, programs, projects, outputs and outcomes.
- Opening balance sheet:
  - Systematic identification and valuation of assets and liabilities as at the date accrual accounting commences is essential.
  - Opening balance sheet must be supported by adequate information and explanation for audit.
  - The process can be very challenging and time-consuming; concept of materiality may be used to prioritize items.
  - Phasing implementation may assist prioritization.
- Central versus decentralized processes:
  - Decision required on whether detailed accounting and reporting are central or devolved.
  - Devolving day-to-day accounting to line entities is common in advanced countries but may be infeasible in developing countries with capacity constraints.
  - Risk of delayed consolidated reports if central authority does not receive timely reports from line entities.
  - MoF typically responsible for setting consistent accounting policies and guidelines.
  - System options:
    - One centralized system with distributed processing can offer economies of scale and real-time MoF access; suits developing countries with limited accounting and IT skills.
    - Autonomous separate systems for line entities may be favored by advanced countries and require a specialist consolidation application at MoF.
- Consolidation issues:
  - For consolidated financial statements, all inter-agency transactions and balances must be separately identified to enable elimination.
  - Accrual-based framework requires elimination of stocks as well as flows (accounts payable, receivable, debts, investments).
  - Systems/procedures must ensure eliminations of flows and stocks are equal and opposite within an integrated double-entry accounting system.
  - Special systems/procedures may be necessary to routinely eliminate large volumes of inter-entity transactions (appropriation funding, transfer of collected revenues, equity injections and loans, payment of dividends and interest to the MoF, etc.).
- “Controlled” versus “administered” items:
  - Need to distinguish items “controlled” by the reporting ministry/entity (salaries, goods, services) from items “administered” on behalf of government (subsidies, grants, social benefits).
  - Distinction important where large transfer items handled by an agency may dwarf its service delivery costs.

### Preconditions for a move to accrual accounting
- Essential preconditions:
  - An acceptable cash accounting based system capable of generating reliable cash-based data before moving to an accrual framework.
  - Planned introduction must have high-level executive political ownership and legislative support for new financial management legislation and changed reporting regimes.
  - Technical capacity: a core of officials with technical (accounting, IT, etc.) skills or capacity to recruit them; outside consultants should be used mainly for capacity-building and technical implementation to ensure sustainability.
- Desirable institutional/professional arrangements (though not essential):
  - a well-established and regulated national professional accounting body;
  - a well functioning supreme audit institution;
  - effective parliamentary public accounts committees;
  - a national valuation office (or private sector valuation experts) for asset valuation;
  - an actuarial institution to assist with valuation of employee and social policy liabilities.
- Systems:
  - Full accrual accounting implementation is inadvisable without a modern government financial management information system (GFMIS) with proven functionality in general ledger, accounts payable, purchases, assets management, etc.
  - Implementation of a GFMIS would normally be a major project and a subset of the accrual accounting project.

### Sequencing, timeframe, staging, and implementation guidance
- Implementation timetables and examples:
  - United States: implemented accrual reporting by agencies and consolidated reporting for entities included in the federal government’s budget.
  - United Kingdom: piloted accrual accounting and reporting at executive agencies before moving to accrual accounting and budgeting; intends to produce “whole of government” financial statements in the future.
  - Australia: initially implemented annual accrual-based departmental financial reporting and prepared “whole of government” financial statements as a separate project.
- Broad timeframe guidance:
  - Developed or transitional countries with good access to resources may target an overall timeframe of three to five years for full implementation of accrual accounting.
  - A developing country with resource constraints may target an overall timeframe of ten years to achieve full implementation, although it may be possible to complete the implementation in selected areas within a shorter timeframe.
  - Staged approach recommended with a clearly articulated migration plan.
- Implementation staging by business areas:
  - Business-area phasing may focus initially on financial assets and liabilities and continue nonfinancial assets on a cash basis.
  - Within financial assets and liabilities, phase items such as accounts payable, accounts receivable, and debts first; address more complex items (PPP liabilities, nonmarketable equity investments) later.
  - Many governments maintain memorandum records of accounts payable, receivable, and debts that can be incorporated into accrual accounts relatively quickly to produce a “financial” balance sheet; nonfinancial asset valuation can follow over a longer period.
- By sector or size:
  - Graduated implementation across public sector entities is an option for developing countries.
  - SOEs operating on a cash basis may be targeted first, followed by general government entities.
  - Produce consolidated reports for various subsectors first, progressing to whole of government reports later.
  - Defer very small entities that may constitute only, say, 1 percent or 2 percent of the consolidated government budget, concentrate on larger entities.
  - Pilot studies in key representative agencies and a “train the trainer” approach to build capacity.

### Stage-wise business-area implementation (recommended timing)
- Stage one implementation (Years 1-3):
  - General ledger; Purchasing; Payments and accounts payable; Revenue; Receipts and accounts receivable; Banking management; Cash management; Fund management; Data collection and consolidation; Financial reporting; Management of estimates, projections and budgets (if integrated).
- Stage two implementation (Years 3-4):
  - Investment management (if applicable); Debt management (if applicable).
- Stage three implementation (Years 3-10):
  - Fixed asset management; Inventory management (if applicable).
- Additional initiatives:
  - Management cost accounting systems; human resource and payroll management systems; Executive Information System for user-friendly extraction and reporting.

### Business-area implementation steps (for each business area)
- Confirmation of business requirements.
- Development of full business area design, including detailed system technical design, business process design, data migration plan, and training plan.
- Configuration and modification of application software, including development of reports and interfaces.
- Rigorous documentation of business area policies, procedures and system processes.
- Planning, design, and delivery of training programs.
- Identification, valuation, and recording of opening balances of assets, liabilities, and equity elements.
- Commencement of accrual accounting in a “live” environment.
- Post-implementation review after six months.

### Conclusion and policy implications
- Benefits of accrual accounting:
  - Provides a more comprehensive measure of fiscal sustainability.
  - Supplies information about full resource implications, not just cash expenditure, of government programs.
  - Enhances transparency and focus on better management of assets and liabilities.
- Realization of benefits:
  - More likely if accounting and budgeting are both on an accrual basis, but accrual budgeting is more complex and generally should not be attempted until accrual accounting systems are firmly established.
- Implementation considerations:
  - For many countries, capacity constraints (accounting and IT skills, modern GFMIS) mean full implementation should be viewed as a long-term objective.
  - Governments should initiate implementation by progressively identifying and measuring financial assets and liabilities and constructing an opening financial balance sheet while continuing work on nonfinancial assets.
  - Implementation is a major reform requiring strong political support, sustained effort over several years, and significant investment of human and financial resources.

*Source: Technical Notes and Manuals 09/02 | 2009*

### Box 1. Accounting Basis for Annual Financial Statements

### Box 1. Accounting Basis for Annual Financial Statements

### Accounting basis by country (table reproduction)
- Full Cash Basis
  - Australia X
- Combination of Cash and Accrual basis
  - Austria X
  - Belgium X
  - Cambodia X
  - Canada X
  - Colombia X
  - Czech Republic X
  - Finland X
  - France  X
  - Germany X
  - Greece X
  - Hungary X
  - Iceland X
  - Indonesia X
  - Ireland X
  - Israel X
  - Jordan X
  - Kenya X
  - Mexico X
  - Morocco X
  - Netherlands X
  - New Zealand X
  - Norway X
  - Slovak Republic X
  - Slovenia X
  - Suriname X
  - Sweden X
  - Turkey X
  - United Kingdom X
- Full Accrual Basis
  - United States X

Source: Data selected from OECD/World Bank Budget Practices and Procedures Database, updated by current information where available.
- Note: “Full accrual basis” means financial statements are prepared on the basis of accrual-based national or international accounting standards, also sometimes referred to as generally accepted accounting principles (GA A P).

### What is accrual accounting?
- Definition:
  - Accrual accounting recognizes transactions as the underlying economic events occur, regardless of the timing of related cash receipts and payments.
  - Revenues are recognized when income is earned; expenses are recognized when liabilities are incurred or resources consumed.
  - Contrasts with cash-accounting where revenues and expenditures are recognized when cash is received and paid respectively.
- Public sector implications:
  - Recording transactions on an accrual basis and preparing accrual-based financial statements for the government as a whole.
  - Individual ministries may prepare audited financial statements annually and unaudited reports more frequently.
  - Some advanced countries have implemented accrual budgeting.
- Scope of discussion:
  - Unless otherwise indicated, the paper discusses accrual accounting including financial reporting, but not accrual budgeting.

### Rationale for moving to accrual accounting
- Macrofiscal relevance:
  - Accrual accounting measures assets and liabilities relevant to fiscal policy and fiscal sustainability not captured by cash accounting (e.g., accounts payable for goods and services, employee liabilities such as civil service pensions).
- Broader measurement of government commitments:
  - Accrual accounting provides a broader measure of the burden of government financial commitments than cash accounting.
- The “golden rule” interpretation:
  - If “expenses” are measured on an accrual basis, the golden rule (prohibiting borrowing to meet costs of current service provision) can be articulated as requiring the budget to be balanced in accrual terms over the business cycle; depreciation should be met from revenue rather than borrowing.
- Full cost information and performance management:
  - Accrual accounting is essential to determine full costs (including noncash costs such as depreciation and accrued civil service pensions) for assessing efficiency, outsourcing, cost recovery, and international benchmarking.
  - Specialized management costing systems would use accrual-based data from the main accounting system.
- Asset and liability management:
  - Preparation of government balance sheets requires identification, measurement, and periodic reporting of assets and liabilities, encouraging asset registers and better planning and management.
- Behavioral effects:
  - Accrual information may prompt legislators and managers to ask different questions about fiscal policy, use of public resources, and long-term liabilities, potentially changing behavior and policy (empirical evidence pending).
- Link to accrual budgeting:
  - Benefits may be limited unless accrual reforms encompass accrual budgeting; this issue is discussed later.

### Consolidated financial reporting on an accrual basis (Box 2: selected international experience)
- The U.S. government produces audited consolidated financial statements for mainly the budget entities; it excludes entities such as Army Force Exchange Service, Board of Governors of the Federal Reserve System, and USA Education Inc. (Sallie Mae).
- The U.K. government is currently working on a project to produce consolidated financial statements of the central government.
- The Australian government produces audited financial statements for the federal government as a whole, including analysis of key aggregates related to: general government entities, public nonfinancial corporations, and public financial corporations that are controlled by the federal government.
- The New Zealand government produces audited financial statements for the government as a whole.

### Illustrative cases for adopting accrual accounting (Box 3)
- “Costless” civil service pay increase:
  - Under cash accounting, pension entitlement increases that do not have immediate cash impact can leave increased future liabilities hidden; under full accrual accounting, increased pension costs are reflected in the budget bottom line in the year costs are incurred.
- “Amazingly inexpensive” police vans:
  - A purchase paid in installments may show only a portion of cost in the cash budget while the full liability is not transparent; under accrual accounting, the full liability for purchased assets is reflected in the accounts.

### Issues associated with the transition to accruals
- Formulating accounting policies:
  - Accrual accounting is more comprehensive and requires recording flows and stocks within an integrated framework.
  - Recognition and measurement of complex transactions, assets, and liabilities (e.g., finance leases, PPPs, financial instruments, intangible assets) require judgment and technical skill, with attendant risks of errors and misstatements.
  - National and international accounting standards reduce such risks by guiding acceptable accounting treatments and defining minimum requirements for general purpose financial statements.
  - Governments must select and apply appropriate accounting policies consistent with relevant accounting standards; where standards do not exist, judgment is required to generate relevant and reliable information.
- Gaps in current International Accounting Standards:
  - IPSASB (part of IFAC) issues International Public Sector Accounting Standards (IPSAS).
  - Currently there are some twenty IPSASs applicable to accrual-based accounting, and one IPSAS applicable to cash-based accounting.
  - Subjects covered include presentation of financial statements, effects of changes in foreign exchange rates, financial instruments, contingent liabilities, and segment reporting.
  - Significant gaps remain in accrual-based recognition and measurement for non-exchange revenue (e.g., taxes and transfers), accounting for social policies of government, heritage assets, and PPPs.
  - Consultative documents have been issued by the IPSASB for possible standards on the first three issues, and work is starting on an exposure draft on accounting for PPPs.
  - Governments need to formulate interim standards or guidelines in these areas until international standards are finalized.
  - The requirements of the IPSAS are broadly comparable to those of GFSM 2001; work is underway to harmonize these standards.
- Cash information in an accrual framework:
  - Moving to accrual accounting does not abandon cash accounting; cash management is integral to an accrual-based financial management framework.
  - IPSAS and GFSM 2001 require production of a full statement of cash flows identifying cash receipts and payments associated with operating, investing, and financing activities.
  - Modern accrual-based systems can support cash-based accounting and reporting.
  - Design question: what level of information on cash receipts, payments, and cash holdings is required?
    - For high-level treasury purposes, macrolevel cash information may suffice; configuring systems for macro-cash reporting is relatively simple.
    - If detailed tracking of cash transactions by entities, programs, functions, products, or cost elements is required, system configuration and maintenance become more complex.
- Alignment of accrual accounting and budgeting:
  - Some argue accounting and budgeting should be closely aligned to provide a transparent basis for comparing planned and actual financial outcomes.
  - Critics contend that moving only to accrual accounting without accrual budgeting would fail to change culture and incentives and thus be of limited benefit.
  - Governments may adopt accrual accounting first and accrual budgeting later; this can create temporary incongruity between ex ante (budget) and ex post (financial statements) information (e.g., accrual expenses in financial statements versus cash-based budgets).
  - Accumulation of accrual accounting experience and historical data can smooth future transition to accrual budgeting.
  - During timing differences, capacity must be maintained to generate suitable cash-based reports.
  - Accrual-based budgets:
    - Seek to show full resource (not just cash) implications of planned activities.
    - Budgeted financial statements show accrual-based budgeted revenues and expenses, budgeted cash receipts and payments, and estimated impact on assets and liabilities.
    - Require construction of rolling, continuous budgeted financial statements across forward years.
    - Governments may introduce accrual-based appropriations to align spending authorization with budgets and actuals; approaches vary across jurisdictions.
    - Revenues can be budgeted on an accrual basis if they can be reliably forecast and measured; impacts on assets and liabilities must be estimated and reflected in a budgeted balance sheet.
- Budget classification and the chart of accounts (COA):
  - A budget classification sets out how budgeted revenues, expenditures, and financing items are categorized and presented; cash budgeting systems do not include stocks of assets or liabilities.
  - A chart of accounts (COA) is the logical coding framework for recording accounting transactions and balances in the general ledger.
  - In a well-designed system, the COA should incorporate the budget classification and also include accounts for assets and liabilities not in a cash-based budget.
  - The COA typically includes more detailed accounts for particular revenues and expenses than required for the budget classification.
  - If accrual accounting and accrual budgeting are introduced simultaneously, the COA and budget classification can be unified at the appropriate aggregation level.
  - If accrual accounting is adopted while cash budgets continue, the COA must maintain capacity to generate both accrual- and cash-based reports and provide functionality to prevent breaches of legal expenditure limits based on cash or commitment concepts.

*Source: Technical Notes and Manuals 09/02 | 2009*

### Box 5. Alignment of Accrual Accounting and Budgeting

### Box 5. Alignment of Accrual Accounting and Budgeting

### Selected international experience
- The United States produces accrual-based financial reports, but has not announced any plans to adopt accrual budgeting.
- The United Kingdom implemented accrual accounting and reporting in executive agencies and subsequently adopted accrual accounting and budgeting for the central government.
- France has adopted accrual accounting, but has not yet announced an intention to adopt accrual budgeting.
- Australia introduced annual accrual reporting, and a few years later adopted accrual budgeting.
- New Zealand introduced accrual reporting and budgeting simultaneously.

### Chart of accounts (COA) design and reporting scope
- The COA determines classification of transactions and balances recorded in the government’s general ledger and therefore determines the scope and content of financial reports available from the central system.
- COA must accommodate current data requirements and, to the extent practicable, anticipate future requirements.
- COA should support diverse reporting requirements (management reports, budget reports, financial statements subject to audit, and reports in accordance with GFSM 2001, ESA 1995, and SNA) without multiple data entry.
- COAs are often designed as a combination of segments (or dimensions) where each segment corresponds to a particular information element:
  - Separate segments for economic, functional, administrative, and regional classification.
  - Additional segments for cost centers, programs, projects, outputs and outcomes.
- Transactions recorded and reports generated using appropriate combinations of segment codes, facilitating capture, classification, analysis, and reporting of large quantities of data.

### Opening balance sheet
- Systematic identification and valuation of assets and liabilities as at the date from which accrual accounting is to commence is essential.
- The opening balance sheet must be supported by adequate information and explanation necessary for audit.
- The process can be very challenging and time-consuming.
- The concept of materiality may be used to prioritize assets and liabilities for attention.
- Phasing of implementation may assist in prioritizing the opening balance sheet exercise.

### Central versus decentralized financial processes
- Key decision: should detailed accounting and reporting be undertaken by the central finance ministry or by line ministries and agencies?
- Secondary decision: if devolved, should line ministries develop and maintain their own financial systems, or have online access to one system maintained by the ministry of finance (MoF)?
- Considerations:
  - Accrual framework increases scale and complexity of identification and measurement of transactions and balances; devolving day-to-day accounting to line entities may be beneficial and is common in advanced countries.
  - For developing countries with capacity constraints, devolving may not be feasible in the short term.
  - Risk: central authority may not receive timely reports from line entities, delaying consolidated reports.
  - Responsibility for setting consistent accounting policies and guidelines usually rests with the MoF or equivalent central agency.
- System options:
  - One centralized system with distributed processing by line ministries can offer economies of scale and suit developing countries with limited accounting and IT skills; enables MoF real-time access to transaction data and may reduce consolidation delays.
  - Autonomous separate systems for line entities, favored by advanced countries, may require the MoF to maintain a specialist consolidation application to automatically collect and consolidate entity financial reports.

### Consolidation issues
- For consolidated financial statements for the general government sector or the public sector, all inter-agency transactions and balances must be separately identified by sector in entities’ accounts to enable elimination.
- An accrual-based framework requires elimination of stocks as well as flows (e.g., accounts payable, accounts receivable, debts, and investments).
- Systems and procedures must ensure eliminations of flows and stocks are equal and opposite within an integrated double-entry accounting system.
- Special systems/procedures may be necessary to routinely eliminate large volumes of inter-entity transactions (appropriation funding, transfer of collected revenues, equity injections and loans, payment of dividends and interest to the MoF, etc.).

### “Controlled” versus “administered” items
- Accrual accounting provides information about the full cost of service delivery, but it may be necessary to distinguish items that are “controlled” by the reporting ministry/entity (salaries, goods, and services) from items that are “administered” by it on behalf of the government (subsidies, grants, social benefits).
- Distinction is important because large transfer items handled by an agency may dwarf its costs of service delivery, potentially obscuring assessment of service costs versus total budgetary resources handled.

### Preconditions for a move to accrual accounting
- An acceptable cash accounting based system:
  - A sound accounting system that can generate reliable cash-based data is essential before moving to an accrual framework.
  - Countries lacking a reliable cash-based system should first improve existing systems and processes.
  - Countries may be assessed as lacking a sound system if they exhibit some or all of: an inadequate budget classification, no COA or double-entry based general ledger system, and inadequate fiscal reporting, including large unexplained differences between revenue and expenditure and financing data.
- Political ownership:
  - Planned introduction must be supported at the highest levels of the executive, prominently and unambiguously.
  - Support of the legislature is essential for passage of new financial management legislation and endorsement/utilization of changed reporting and evaluation regimes.
- Technical capacity:
  - Lack of adequate technical resources is a major impediment.
  - Essential to have a core of officials with technical (accounting, IT, etc.) skills or the capacity to recruit them.
  - Outside consultants may supplement in-house resources but should be used mainly for capacity-building and specific technical implementation issues (e.g., IT systems) to ensure sustainability.
- Desirable (though not essential) institutional/professional arrangements:
  - a well-established and regulated national professional accounting body;
  - a well functioning supreme audit institution;
  - effective parliamentary public accounts committees;
  - a national valuation office (or private sector valuation experts) for asset valuation;
  - an actuarial institution to assist with valuation of employee and social policy liabilities.
- Systems:
  - Full accrual accounting implementation is inadvisable without a modern government financial management information system (GFMIS) with proven functionality in areas such as general ledger, accounts payable, purchases, assets management, etc.
  - Implementation of a GFMIS would normally be a major project and a subset of the accrual accounting project.

### Sequencing of reform steps and implementation timeframe
- Accrual accounting is usually a supportive component of broader public sector reforms; some governments implemented accrual accounting first and later accrual budgeting.
- Implementation timetables vary by scope and sequencing:
  - The United States implemented accrual reporting by agencies and consolidated reporting for entities included in the federal government’s budget.
  - The United Kingdom piloted accrual accounting and reporting at executive agencies before moving to accrual accounting and budgeting; the government intends to produce “whole of government” financial statements (i.e., public sector—central government) in the future.
  - Australia initially implemented annual accrual-based departmental financial reporting and prepared “whole of government” (public sector—central government) financial statements as a separate project.
- Broad timeframe guidance:
  - Developed or transitional countries with good access to resources may target an overall timeframe of three to five years for full implementation of accrual accounting.
  - A developing country with resource constraints may target an overall timeframe of ten years to achieve full implementation, although it may be possible to complete the implementation in selected areas within a shorter timeframe.
- Staged approach recommended in accordance with a clearly articulated migration plan.

### Implementation staging: business areas, sectors, size, and pilots
- By business areas:
  - It may be expedient to initially focus on financial assets and liabilities and continue to account for nonfinancial assets on a cash basis.
  - Within financial assets and liabilities, phase items such as accounts payable, accounts receivable, and debts first; address more complex items (PPP liabilities, nonmarketable equity investments) later.
  - Many governments maintain memorandum records of accounts payable, receivable, and debts that can be incorporated into accrual accounts relatively quickly to produce a “financial” balance sheet; nonfinancial asset valuation can follow over a longer period.
- By sector or size:
  - Graduated implementation across public sector entities is an option for developing countries.
  - State-owned enterprises (SOE) operating on a cash basis may be targeted first, followed by general government entities.
  - Governments may produce consolidated reports for various subsectors first, progressing to whole of government reports later.
  - Different paths by size/materiality: defer very small entities that may constitute only, say, 1 percent or 2 percent of the consolidated government budget, concentrate on larger entities.
  - Pilot studies in key representative agencies and a “train the trainer” approach can build capacity for wider implementation.

### Conclusion and policy implications
- Accrual accounting is beneficial at macro and micro levels:
  - Provides a more comprehensive measure of fiscal sustainability.
  - Supplies information about the full resource implications, not just cash expenditure, of government programs.
  - Enhances transparency and focus on better management of assets and liabilities.
- Benefits are more likely realized if accounting and budgeting are both on an accrual basis, but accrual budgeting is more complex and generally should not be attempted until accrual accounting systems are firmly established.
- For many countries, capacity constraints (accounting and IT skills, modern GFMIS) mean full implementation should be viewed as a long-term objective.
- Governments should still initiate the implementation process by progressively identifying and measuring financial assets and liabilities and constructing an opening financial balance sheet while continuing work on nonfinancial assets.
- Implementation is a major reform requiring strong political support, sustained effort over several years, and significant investment of human and financial resources; governments should be aware of these implications before embarking on change.

*Box 5. Alignment of Accrual Accounting and Budgeting — Technical Notes and Manuals 09/02  |  2009*

### References

### References

### References cited
- IFAC (International Federation of Accountants), 2003, Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities (Second Edition), December 2003.
- IFAC, 2005, International Public Sector Accounting Standards (IPSASs) and Statistical Bases of Financial Reporting: An Analysis of Differences and Recommendations for Convergence, January 2005.
- IMF, 2003, The Implications of the Government Finance Statistics Manual 2001 for Country Work in the Fund, August 2003.
- IMF, 2005, Public Information Notice (PIN) No. 05/167, December 23, 2005.
- OECD/World Bank, 2003, Budget Practices and Procedures Database, 2003.

### Illustrative guidance on the sequencing of accrual accounting reforms
- Purpose: Provide suggested sequence of key implementation steps and staging across business areas to guide government transition to accrual accounting.
- Emphasis on adapting detailed implementation strategies and sequences to country circumstances while considering the suggested sequence.

### A. Key Implementation Activities
- Development and dissemination of an overarching philosophy of change, including a clear exposition of the drivers for change and the objectives and deliverables of the reform process.
- Undertaking of a detailed scoping study to determine the nature of required change, the structure, speed, context and sequencing of change, the impact on staff and systems, and resources required.
- Establishment of implementation steering committee (SC).
- The SC should plan and establish the project governance structures: technical advisors and focus groups, consultative groups, project manager, team leaders and team personnel, project quality assurance and audit.
- Establishment of communication and training program.
- Adoption of accounting policies consistent with international or national accounting standards.
- Drafting and passage of requisite financial legislation.
- Selection of a systems solution to meet the accrual accounting requirements, including conceptual design, functional and technical requirements, development of request for proposal (RFP), evaluation of proposals, and selection and contracting of vendor(s) and implementation consultants.
- Determination of the sequencing of accrual business areas to be implemented, and for each business area, a full implementation plan.
- Development of an opening balance sheet.

### B. Business Area Implementation Staging
- Rationale: Stage implementation to address pressing requirements first and defer complex areas (e.g., nonfinancial assets) until technical skills are built.
- Suggested staging across business areas.

Stage one implementation (Years 1-3)
- General ledger—management of the government’s central financial data repository, including COA, ledger structure, and journal structure
- Purchasing—management of the full procurement cycle, including commitment management
- Payments and accounts payable—management of all supplier and grantee payments, including management of accounts payable (arrears)
- Revenue—management of all invoicing and related processes (excluding taxation revenue—this will be managed by the central tax agency)
- Receipts and accounts receivable—management of receipts and receivables functions (excluding taxation revenue—this will be managed by the central tax agency)
- Banking management—including management of banking deposits, bank transfers, bank accounts, and bank reconciliation.
- Cash management—including management of cash budgeting, cash forecasting, cash accounting, and cash reporting
- Fund management—including accounting for and reporting all transactions and balances of trust accounts, extrabudgetary accounts, special accounts, hypothecated funds, etc.
- Data collection and consolidation—including automated elimination of intrasector transactions and balances. Note that data collection may not be required if the accounting function is centralized.
- Financial reporting—including production of full range of management reports, GAAP financial reports, GFSM 2001 reports, SNA reports, ESA reports, etc.
- Management of estimates, projections and budgets (if the government has decided that these should be integrated with the accounting functions)

Stage two implementation (Years 3-4)
- Investment management (if applicable)
- Debt management (if applicable)

Stage three implementation (Years 3-10)
- Fixed asset management—including registration, revaluation, depreciation management, maintenance, etc.
- Inventory management (if applicable) —including recording, valuation, maintenance, stocktaking etc.

- Additional initiatives: management cost accounting systems, human resource and payroll management systems, Executive Information System for user-friendly extraction and reporting.

### Business-area implementation steps (for each business area)
- Confirmation of business requirements.
- Development of full business area design, including detailed system technical design, business process design, data migration plan, and training plan.
- Configuration and modification of application software, including development of reports and interfaces.
- Rigorous documentation of the business area policies, procedures and system processes.
- Planning, design, and delivery of training programs.
- Identification, valuation, and recording of opening balances of assets, liabilities, and equity elements.
- Commencement of accrual accounting in a “live” environment.
- Post-implementation review after six months.

### Publication details and classification
- Technical Notes and Manuals 09/02 | 2009
- Title: Transition to Accrual Accounting
- Authors: Abdul Khan and Stephen Mayes
- Authorized for distribution by Carlo Cottarelli
- JEL Classification Numbers: H61, H83
- Keywords: government accounting, accrual accounting, cash accounting, GFSM 2001, government financial reporting, IPSASB, accounting standards, budget classification, chart of accounts, accrual budgeting
- Author emails: akhan@imf.org; mayesks@hotmail.com

*Content extracted from _tnm0902 - References*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2009/_tnm0902.pdf_