governmental accounting in portugal why accrual basis is a problem

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J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 19 (4), 411-446 WINTER 2007

GOVERNMENTAL ACCOUNTING IN PORTUGAL:

WHY ACCRUAL BASIS IS A PROBLEM

1

Susana Margarida Jorge, João Baptista da Costa Carvalho,and Maria José Fernandes*

ABSTRACT Until the end of 1997, governmental accounting in Portugal was

characterised as essentially cash-based budgetary accounting, using single-entry as the bookkeeping method. The only compulsory accounting system

was Budgetary Accounting. As many countries all over the world, nowadaysPortugal is implementing a reform of the whole governmental accounting,which has as most important innovations the use of double-entry within a

system compulsorily integrating accrual-based Financial and CostAccounting along with Budgetary Accounting (still essentially cash-based).

The main purpose of this paper is to describe and analyse the reform andcurrent situation of governmental accounting in Portugal, especially

discussing the accrual basis implementation. In particular, it shows that notonly governmental accounting reform in Portugal has been going towards

international harmonization, but also problems that have arisen are common

to others faced by several countries. Perspectives of future evolution arealso presented.

INTRODUCTION

Generally, accounting in Portugal is influenced by the ContinentalEuropean perspective and is characterized by the existence of explicit--------------------------------------------* Susana Margarida Jorge, Ph.D., is an Assistant Professor, Faculty ofEconomics, University of Coimbra, Portugal. Her research interests are in

governmental accounting, with special focus on local government. JoãoBaptista da Costa Carvalho, Ph.D., is an Associate Professor, School ofEconomics and Management, University of Minho, Braga, Portugal. Hisresearch interests are in public sector accounting. Maria José Fernandes,Ph.D., is Coordinator Professor, School of Management, Instituto Politécnicodo Cávado e do Ave, Barcelos, Portugal. Her research interests are in public

sector accounting.

Copyright © 2007 by PrAcademics Press



412 JORGE, CARVALHO & FERNANDES

standards concerning the elaboration and presentation of theaccounting information. Until the end of 1997, governmentalaccounting was essentially cash-based budgeting, using single-entryas bookkeeping method. The only compulsory accounting system wasbudgetary accounting. At the present time, Portugal is passingthrough a reform process of the whole governmental accounting,which has as most important innovations the use of double-entry inan integrated system embracing three compulsory sub-systems:accrual-based financial and cost accounting and modified cash-basedbudgetary accounting.

The approval in 1997 of the first Official Plan for Governmental

Accounting 2

(OPGA – Law-decree 232/97) and the subsequentapproval of specific plans for some public administration sub-sectors,namely the Official Accounting Plan for Local Government (OAP-LG –Law-decree 54A/99) in 1999, in 2000 the Official Accounting Plan forEducation (OAP-Ed – Instruction 794/2000) and the OfficialAccounting Plan for Health (OAP-H – Instruction 898/2000) andfinally the Official Accounting Plan for Social Security (OAP-SS – Law-decree 12/2002) in 2002, indicate the passage from a traditional toa modern governmental accounting. While in the former the maingoal was account for the budget legal compliance, the latter isexpected to be a supporting tool in the management and evaluationof governmental entities, contributing to the implementation of theNew Public Management (NPM).

This paper describes and analyses the situation in Portugalconcerning the reform of governmental accounting. Recent studiescarried out by national oversight and standardization bodies as wellas by researchers, have emphasised that the implementation of theaccrual basis is one of the major problems. Subsequently, the majorcontribution in this study relates to discussing the implementation ofaccrual-based accounting in governmental entities in Portugal,particularly addressing reasons why some have been findingproblems in putting it into practice as well as in reading theinformation reported in accrual-based financial statements.

In particular, the study aims at showing that: on the one hand, the

governmental accounting reform in Portugal has been going towardsinternational harmonization and, on the other hand, problems thathave arose, namely related to accrual basis implementation, arecommon to others faced by several countries.



GOVERNMENTAL ACCOUNTING IN PORTUGAL: WHY ACCRUAL BASIS IS A PROBLEM 413

This subject has not been approached in Portuguese literature,which addresses essentially technical issues, since it is based in lawsand accounting and budgeting manuals. In what concernsinternational literature, Portugal has been included in comparativestudies essentially about the topic of governmental accountinginternational harmonization (e.g. Fernandes & Carvalho, 2001;Ballaguer Coll et al., 2001; Jorge, 2003; Brusca Alijarde & BénitoLopez, 2002). Nevertheless, none of these has analysed the accrualbasis implementation.

Henceforth, the paper is organised in four main sections. Section2 situates the Portuguese Public Administration and governmental

accounting reform within the international context, introducing thesubject of governmental accounting harmonization. Section 3 offersan overview of the recent changes and current state of governmentalfinancial management and accounting in Portugal. Section 4 presentsstudies recently developed in Portugal concerning the implementationof the new accounting system, particularly highlighting issues relatedto the application of the accrual basis. Section 5 discusses reasonswhy accrual basis might be a problem, considering the Portuguesesituation in face of international studies addressing this matter forother countries. To conclude, some perspectives of future evolutionand final comments are presented.

PUBLIC ADMINISTRATION AND GOVERNMENTAL ACCOUNTING REFORM:

PORTUGAL IN FACE OF THE INTERNATIONAL CONTEXT

In the last fifteen years, within the New Public Management(NPM) trend, Portugal has been reforming the public administration,not only in what concerns administrative issues, but also especiallyregarding governmental accounting and financial management. Inthis respect, after a revision of the Constitution in 1989 changing thebasic rules for the State’s Budget structure and the budgetarymanagement principles and methods, the Governmental AccountingBasis Law (Law 8/90) was passed, launching the foundations for thestate financial management new regime, which started in 1992 (Law-decree 155/92). New rules for the State’s general budget framework

were meanwhile issued in 1991 (Law 6/91, already revoked in 2001by Law 91/2001). The main objectives established by the Statefinancial management new regime reflect an evident concern with




modernising the public administration.4 Accordingly, the new regimeaimed at:

− Better rationalization of the public expenses;

− The accomplishment of legality;

− More efficient control of public expenses;

− An increased and more timely financial information; and

− Enhancing the responsibility of public managers.

As necessary measures to achieve the proposed objectives, we

highlight:− The decentralization at administrative and financial levels;

− A progressive reduction of the number of services and funds withadministrative autonomy only, changing to a management regimemore demanding in financial terms;

− The modification of the structure of the State’s Budget in terms ofeconomic classification codes of revenues and expenses and therevision of the Budget preparation process;

− The decreasing of the ex-ante budgetary control system andconsequent increase of the ex-post control;

−

The revision of the stages of expenses execution and of theconsequent accounting records;

− The obligation of producing not only financial information, butalso information concerning the economic situation.

The origins and philosophy of the reforms that have happened inPortugal are shared by different OECD countries. Nevertheless, thereform strategies undertaken have been divergent regarding theirmain objectives, scope and intensity (OECD, 1980, 1990, 1993 and1995), leading to the existence of different models of publicmanagement, depending on the characteristics of each country orgroup of countries (Suleimen, 2000).

Several authors, such as Torres and Pina (2004), Olsen andPeters (1996), Pollitt and Summa (1997), Clark and Newman (1997)and Green-Pederson (2002) have identified three types of factors




normally proposed as explanations for the extent to which differentcountries have implemented NPM reforms:

a) Macroeconomics problems in the OECD countries in the 1970sthat encouraged countries with biggest difficulties to implementNPM reforms to the largest extent;

b) The introduction of NPM reforms as part of a neo-liberal politicalview in the 1980s;

c) Different receptivity from the European Continental tradition tomarket-type reforms of the Anglo-American culture.

However, to Bislev and Salskov-Iverson (2001), the NPM is a

variable concept. Therefore, it is not

a) Analytically consistent in the sense that it can be ascribed to acertain theoretical perspective in the Public Sector;

b) Ideologically coherent, although the first waves of NPM reformswere carried by neo-liberal energies;

c) Homogenous across nations and institutional boundaries.

Table 1 presents the classification of the different OECD countriesin function of the characteristics of their public management system,proposed by the OECD service of Public Management (PUMA). It canbe observed that Portugal presents the characteristics of a country of

normative public management.

According to Pina and Torres (2002), the South Europeancountries (namely Spain, Portugal, Italy, France and Greece) havemore difficulties in adopting NPM postulates. These countries belongto a public administration culture that is grounded in administrativelaw and influenced by structures imported from the French legalmodel. Subsequently, based on the OECD reports, they haveproposed a classification of the degree of implementation of the NPM in Continental European countries as function of four criteria: a)degree of decentralization of the Public Sector, b) degree ofdevelopment of the budget and of governmental accounting, c) role ofthe State and its relationship with the citizens, and d) application of

measures regarding the increase of productivity in labour.

According to this classification, those authors consider Portugalas presenting a degree of decentralization that can be classified as




TABLE 1

OECD Countries according to their Model of Public Management

Countries

Model of

Management

Anglo-Saxon Scandinavian Continental Latin

Management

based onperformance

New ZeelandAustralia

United

KingdomCanadaUSA

Ireland

SwedenFinland

Denmark

Norway

Netherlands

Mixmanagement

AustriaSwitzerland

Germany

BelgiumFrance

Normativemanagement

Portugal

Italy

SpainGreece

Source: Suleiman (2000, p.6)

medium and a level of development of the budget and ofgovernmental accounting considered as medium to low. Araújo

(2001) explains that this happens because the power of tradition andthe persistence of rules, beliefs, norms and practices which areembedded in the culture hampered the introduction of newmanagement models.

Even so, two historic facts definitely mark the path followed in theimplementation of the principles of the NPM in Portugal: 1) therevolution of April 1974, a military coup that put an end to thedictatorial regimen, allowing the possibility of modernising the PublicSector up to then characterised by models of State interventionspecific of those regimens; and 2) the entrance of Portugal to thethen European Economic Community, in 1986, which defined theeffective start of public management reforms.

On the subject of governmental accounting, the differentcountries integrating the EU were required to compulsorily produceaccounting and financial information not only to national users butalso to European bodies as well. The restrictions imposed at the level




of the public deficit control and of the observance of the establishedby the European System of Accounts (ESA) are conspicuous (Ribeiro,2004).

As a consequence, this ‘internationalization of accounting’ gaveorigin, on the one hand, to more users of accounting information and,on the other hand, to a process of international harmonization ofgovernmental accounting to which Portugal could not stay indifferent.In fact, the accounting information will only achieve its objectives if itis able to answer to the informational needs of its different users. Inorder to reach this purpose, accounting information included withinbudgetary and financial reporting, must show several characteristics,

such as: utility, reliability, comparability, be understandable, andreflect a true and fair view of the budgetary, economic and financialsituation of each reporting entity.

Recent literature (e.g. Lüder and Jones, 2003, Lapsley and Pallot,2000; Lüder, 1989 and 2001; Brusca and Condor, 2002; Montesinosand Vela, 2000; Pina and Torres, 1996) has focused on issuesrelated with this harmonization process, which has started in theprivate sector (Nobes and Parker, 1995) but that, at present times,within a trend of bringing governmental accounting closer to businessaccounting, as well as of increasing accountability to supra-nationalentities, has also achieved major relevance within the Public Sectorcontext.

Bac (2005) addresses the importance of internationalharmonization in governmental accounting highlighting three points:

− Comparability, particularly considering the fact that currentlymany countries enter into quasi-supra-national federations, likethe EU. In such a context where common economic policy isintensified (e.g. Euro-zone), interest in comparability may rise.

− Procurement of a basis for a minimum of quality of financialreporting all over the world, especially useful for developingcountries and countries in transition, supporting the developmentof their own governmental accounting legislation.

−

Contribution to the use and dissemination of knowledge andexperience with respect to governmental accounting.

According to Lüder (1989), the international harmonization willalso work as stimulus to the modernization of governmental




accounting across countries, particularly important triggering reformsin nations members of international bodies in which theaccountability process benefits from harmonised statements. Theongoing harmonization process of governmental accounting reliesmainly on the support and work developed by different internationalbodies, from which the International Federation of Accountants (IFAC)is outstanding. Indeed, in 1986 it was created the Public SectorCommittee (PSC), currently designated International Public SectorAccounting Standards Board (IPSASB)3, which main function isproducing International Public Sector Accounting Standards (IPSASs).While acknowledging problems of making them of compulsoryapplication, since IPSASs cannot surpass the regulations issued

nationally by each country, the IPSASB strongly recommends theirworldwide adoption.

Subsequently, the process of governmental accountinginternational harmonization is still very far from IPSASB aspirationsand certainly very far from the one in the business accountingcontext. Ribeiro (2004) explains that three main factors seem to beresponsible for this delay:

− Financial markets have not the same influence in PublicAdministration as in companies;

− The accounting culture amongst Public Administrations follows

very different traditions; and− Governments are averse in adopting their national regulations to

others external and supranational, since that might questionnational sovereignty without an evident compensation.

However, Brusca and Condor (2002) explain that governmentalaccounting harmonization is getting underway and some internationalorganizations, such as the EU, have started a process which givesevidence of this and aims at reducing the differences between thecountries. Ribeiro (2004) stresses that governmental accountingharmonization within the EU is expected to become a reality beforelong, since:

−

European bodies (e.g. the European Commission) accountingsystems have been reforming according to IPSASs;




− Some EU member-States (e.g. UK, France, Spain and Sweden)have already been adapting their governmental accountingsystems to IPSASs;

− Accounting and auditing professionals across Europe have beeninterested in technical comparability; and

− The political cost in terms of sovereignty and legitimacy mightturn into positive results for politicians (e.g. improvements inEuropean Public Administrations).

In any case, the process is delayed compared to the one in businessaccounting, for which EU regulations were passed in 2002 giving the

member-States a transition period up to 2005 from which IFRSs fromthe IASB would become compulsory at least for listed corporations.5

Regarding governmental accounting, the EU main procedureshave resumed to adopting IPSASs to the European institutionsaccounting system. According to Ribeiro (2004), this is justified by thefact that currently the EU main concern is controlling member-Statespublic debt and deficit, within the Stabilization Pact, safeguarding thevalue of the common currency.

As expected, this delay is reflected in the initiatives carried out bythe national regulatory bodies. Therefore, in Portugal, as in themajority of the EU member-States, the process of adopting IPSASs

has not started yet (although they have already been translated toPortuguese), as it additionally requires further intervention of thePublic Administration Accounting Standardization Commission(PAASC) as the standardization body for governmental accounting.Nevertheless, it can be considered that governmental accounting inPortugal has followed the same track as other countries, as we willanalyse in this study, i.e., Portugal has going towards the internationalharmonization of governmental accounting, even though through a‘legislative accounting’ with a strong political influence.

Caperchione (1999) explains that there is some growinguniformity of policies among the countries that are making an effortto modernise governmental accounting, namely concerning:

−

Introduction of accrual-based accounting systems;

− Modification of the policies and tools to disclose economic andfinancial performance;




− Introduction of tools to assess actual performance, i.e., theimpact on consumer needs, and to adequately disclose it to thevarious stakeholders (performance evaluation and measures of‘service and effort accomplishment’);

− Setting up of a corpus of national accounting standards.

In the recent reform of Portuguese governmental accounting,these features can also be noticed, confirming the convergencetowards the harmonization process. Indeed, the current governmentalaccounting framework generally:

− Comprises accrual-based financial and cost accounting together

with essentially cash-based budgeting;

− Requires the calculation of the costs of services provided;

− Produces financial statements that are reported together withbudgetary statements;

− Aims at providing information to account for each entitybudgetary, financial and economic situation, as well as to supportdecision-making (management);

− Is based on a legal framework produced by a national(governmental accounting) standardization body.

Nevertheless, as Araújo (1999) explains, the emphasis on therule of law, the tradition of bureaucracy and resistance to change, thecentralised nature, the control through hierarchy, and the focus onthe process of inputs, have hampered the success of such reforms.

THE REFORM AND CURRENT STATE OF GOVERNMENTAL ACCOUNTING IN

PORTUGAL

As explained, the actual reform of the State’s financialmanagement and of governmental accounting in Portugal, wasstarted with the approval and publication of a set of regulations.Since legality is one of the most important principles overriding inPublic Sector accounting, this shows the comprehensive and

normative character of the process (Carvalho, 2000). The reformstarted more effectively from 1992, with the State FinancialManagement New System, comprising separate accounting regimes




for the different governmental entities under the CentralAdministration.

By appending as subjects of analysis the economic perspectiveand the public assets ownership aspects, measures of efficiency,effectiveness and economy in the management of the publicexpenses, and the preparation of information to be used as supportto decision making of different users (including National Accounting),the new system of governmental accounting was targeting theobjectives required by the NPM and making possible the informationto become of increased utility and comparably.

These new objectives are mentioned in the OPGA approved in

1997, when it refers that the governmental accounting system has asmain objective “the creation of conditions to the integration ofdifferent aspects – budgetary, financial and cost accounting – in amodern public accounting, that constitutes a fundamental instrumentto support the management of public entities and to their evaluation”(Law-decree 232/97). Table 2 synthesises the differences betweenthe models in use before and after the introduction of the newsystem.

As referred to by Jorge (2001), the approval of the OPGA has anhistorical meaning in the reform of governmental accounting inPortugal, providing an adequate accounting system capable ofanswering to the needs of a modern Public Administration.Nevertheless, it represents only the first of several necessary steps tothe total implementation and consecution of the objectives of thePublic Administration reform in Portugal. The process ofimplementing the new accounting system has represented a ‘culturalshock’, because it requires a change of mentality where economicrationality, management by objectives, achievement of an increasedvalue for money, innovation and rigour, and accountability are central.

The main sources for this new system were:

− The Official Plan for Business Accounting (Law-decree 410/89) –particularly for financial accounting, namely in what concerns thevaluation criteria and accounting principles and also the models

for the reporting statements (except the budgetary maps);




TABLE 2

Portuguese Governmental Accounting System Evolution

Until 1990 From 1990 until 1997 Since 1997

Budgetary Accountingstructured under theCash Basis.

By rule, the entities had abudgetary accountingsystem. Entities withfinancial autonomy(exceptional regime) had asystem based on businessaccounting (accrual basis).

By rule, governmental entities havethree accounting systems:budgetary, financial and costaccounting.The entities with much reducedbudget (exceptional regime) need tohave budgetary accounting only.

The users of information were almost exclusivelythe Government, Parliament and The Court ofAccounts (Supreme Audit Office).

The new accounting systemsupposes the existence of otherusers of accounting information,

namely the citizens.There were no OfficialAccounting Plans.

The entities obliged tofollow an accountingsystem business alikeused the businessaccounting plan orapproved specific plansbased on that.

An Official Governmental AccountingPlan was approved, with compulsoryutilization to the whole of PublicAdministration.

The legislation concerning reporting statementswas sparse and approved by the State.The Court of Accounts defined reportingstatements.

The legislation concerning reportingstatements is broad and approvedby the State.All governmental sub-sectorsaccounting plans have to beauthorised by the PublicAdministration Accounting

Standardization Commission.The Court of Accounts defines thereporting statements amongst whichfinancial statements are similar tothose defined in the businessaccounting plan (Resolutions04/2001 and 01/2004).

There was onlyobligation of listingfixed operationalassets.The registration offixed assets andvehicles wascentralised in the

State’s PropertyGeneral Department.

Legislation was approvedto the inventory andactualization of the State’sassets.Depreciation rates werethose defined for businessaccounting.

Legislation was approved for theAssessment and Inventory of PublicProperty, including depreciationrates, since 2000 (Instruction671/2000).




- The Spanish Plan General de Contabilidad Pública (PublicAccounting General Plan) – especially for the model of BudgetaryAccounting.

There are, however, several differences between the approvedmodel and these sources. In what concerns the differences betweenthe accounting of the business sector and of the PublicAdministration, it must be emphasised the fact that in the latter theownership (‘patrimonial perspective’) and legal aspects prevail overthe financial and economic perspective. Additionally, governmentalaccounting requires three compulsory sub-systems – budgetary,financial and cost accounting – the first one still playing a central

role. In relation to the differences between Portugal and Spain, it isimportant to highlight the fact that in Portugal the ownership focusprevails over the financial and economic focus. Furthermore, theaccrual basis is integrally accomplished (full accruals) in whatconcerns the preparation of the balance sheet and the calculation ofthe economic annual net result.6

The three mandatory accounting sub-systems currently existing inPublic Administration have different features and objectives. Theirmain technical characteristics are presented in Table 3.

TABLE 3

Governmental Accounting Integrated System

Budgetary Accounting Financial Accounting Cost Accounting

- Revenues andexpenditures

economic

classification- Expenditures

functionalclassification

- BudgetaryStatements

- Book value for fixedassets

- Economic result

- Debts value- Stocks value

- Costs and revenues bynature

- Balance sheets

- Expenses (revenuesand results are

optional) by

functions, activities,services, products,

departments…

Modified Cash Basis Accruals Basis Accruals Basis

Double-entry Double-entry Not defined – freeSource: Fernandes and Carvalho (1999)




Concerning their objectives, while Budgetary Accounting aims atcontrolling the budget execution, Financial Accounting has thepurpose of reporting on the entities’ economic and financial situationand Cost Accounting operates in calculating cost of services. Inaddition, the system:

1) Lays upon general accepted accounting principles (GAAP) andbudgetary rules;

2) Establishes valuation and recognition criteria;

3) Uses complementary legislation for fixed assets actualizationand for the economic (budgetary) classification of expenses and

revenues;4) Follows the historical cost prevailing as valuation criteria for

fixed assets;

5) Requires public domain assets (infrastructure, cultural andheritage assets) to be listed in the Balance Sheet andcompulsory depreciated if appropriate;

6) Requires assets acquired under financial leasing system to beimmediately registered as fixed assets;

7) Has as main standardization bodies the PAASC and the Ministryof Finance;

8)

Has The Court of Accounts as the external supervisor (SupremeAuditor) body.7

Motivated by the specificities associated to the PublicAdministration several sub-sectors, from the publication of the OPGA,four accounting plans have been approved, as mentioned in theIntroduction. In fact, the OPGA (Law-decree 232/97, Article 5, No. 1)states that “(…) the timings for the adaptation of the sub-sectoraccounting plans that are indispensable are approved by instructionof the Minister of Finances and, when is the case, of the otherministers involved, after hearing the Public Administration AccountingStandardization Commission”. There are, however, integrated fundsand services, such as the Ministries Cabinets, for which there was no

need for a specific plan, so they use the general one.

Notwithstanding the particularities of each framework, there aremany commonalities assuring both the uniformity sought in the ‘top-down’ approach that has been followed in the reform process as a




whole, and that conditions remain to comparability and consolidationof information.

We believe it can be said that the legal framework for the ongoingreform is now completed. Indeed, with the recent issuance by TheCourt of Accounts of instructions defining the organization ofreporting statements for all governmental entities, all the legislativeconditions are met to make possible the effective introduction of thenew governmental accounting system. Therefore, the moment hascome to analyse its implementation at the level of several entitiesand whether the information that has been published represents thetrue and fair view of their budgetary, economic and financial

situation, that is, whether the ongoing reform is driving towards theachievement of the initially stated objectives.

In particular, since it has been asserted that the adoption ofaccrual accounting would result in improved accountability tooversight bodies and better management of the public services basedin enhanced information to support decision-making, it is nowimportant to analyse whether those aims were no more than arhetoric exercise.

IMPLEMENTING ACCRUAL BASIS IN PORTUGUESE GOVERNMENTAL

ACCOUNTING

In the last couple of years, national oversight and standardizationbodies have produced several reports and some researchers havealso developed studies regarding the accomplishment of thegovernmental accounting reform objectives, namely whether, with theintroduction of accrual basis, the system is now more informative.From these, which were the first on the subject, we highlight four.

Public Administration Accounting Standardization Commission

CNCAP, 2003)

In the activities report for 2003, the PAASC presentedconclusions from the analysis performed to the financial statementsof 50 pilot entities of the central administration firstly experimenting

the new accounting system.8 The most important were:

- Recognising that the implementation of new governmentalaccounting system has progressively grown;




- Presenting reservations about the reliability, relevance andcomparability of the information disclosed in the reportingstatements, namely pointing out the need for specialisedverification of the accounts, in order to assure that theinformation is fairly presented (i.e. whether the new systemrequirements are satisfied);

- Admitting that the implementation of the new system is still in aphase with complex problems to solve and difficulties toovercome, most of them related to the suitability of softwareapplications and the insufficiency of human resources qualified inthese subjects;

- Acknowledging that changing from cash to accrual basis,although had intended to improve the quality and quantity of theinformation reported (namely adding the economic to themonetary perspective), has brought serious problems concerning:the valuation of public domain assets; the clear understanding ofthe difference between cost and expenditure; and the recognitionas receivables or accrued revenues of the grants transferred fromthe Central Government.

The

Court of Accounts TC, 2003)

In 2002, The Court of Accounts has applied a questionnaire to thereporting entities of the public tertiary education sector subject to thenew accounting system, totalising 201 entities, with the purpose ofidentifying the degree of implementation and difficulties in theapplication of the new framework. The main results achieved,published in 2003, were as follows:

− The most important limitations or constraints in theimplementation of the new accounting system are: 1) difficultieswith integrated software programs; 2) lack of human and financialresources; 3) difficulties in the preparation of some requiredfinancial statements, such as the Balance Sheet and theOperational Statement; 4) need of reformulating the internalcontrol system; 5) lack of a technical supporting group;

−

The main difficulties in the elaboration of the initial inventory ofassets are the attribution of an actual value to the library booksand art objects;




− It is recognised the utility of consolidated accounts, but the maindifficulties of its preparation concern the lack of harmonization ofthe information amongst the different entities of the group,specifically the software programs, the internal control systemand the valuation criteria;

− Recognising the need to have a conceptual structure instructinghow to understand the business accounting notions within thePublic Administration context, especially those concerning totalassets that must include specific items, the interpretation of theNet Result as a performance measure, and the meaning of equityas indicator of financial position.

Fernandes 2004)

This was a study on the degree of implementation of the newaccounting system in the Local Government, developed by using aquestionnaire delivered to all Portuguese municipalities. From aresponse rate of just over 30% of the population (since 101 out of308 municipalities answered), it was verified that:

− 87.2% have started the implementation in 2002, 6.4% in 2001and only 3.2% in 2000, what is not to be found strange as thecompulsory implementation firstly expected for 2000 was laterpostponed for 2001 and after for 2002.9

−

The Cost Accounting system is the one that presents a morereduced degree of implementation (only 17% of the entitiesenquired said to have started implementing), while all entitieshave the Budgetary Accounting system already considerablyimplemented. Reasons for this relate to difficulties faced byentities considering items that are budgeted as expenditures andmust be allocated to activities and services as expenses/costs.The perspective of resources consumed (accruals), implying therecognition of internal economic flows, is difficult to put inpractice, since it demands an accurate identification of the timingwhen costs are incurred and revenues obtained, regardless theirpayment or receipt; this is not easy, given the still very strong

“cash culture” as well as the way grants and taxes collected bythe Central Government are transferred to the Local Government.

− 33% have not valuated and inventoried any of the public domainassets yet, so the Balance Sheets reported do not reflect the total




patrimony (property owned and controlled) of each entity;accordingly, they are financial balance sheets and not‘patrimonial’ balance sheets, as intended by the newgovernmental accounting. Only 17% of the entities answered tohave the inventorying process already concluded.

− Concerning the organizational alterations that were derived inorder to implementing the new accounting system, 40% answeredchanges at the level of:

- Creation of new department related with the systems ofaccounting, audit and management control;

- Recruiting personnel with specific training in the accountingfield. This has been necessary since the background of manycivil servants responsible for the accounting services, was inlaw, public administration or public finances, therefore not sofamiliar with certain accounting practices, in particular thosecloser to business accounting (e.g. double-entry bookkeepingmethod and the accrual concept). Before the reform, their mainresponsibilities concerned merely budgeting – the budget(legal) execution in a cash basis.

- Reorganization of procedures and of communication channels.

Carvalho et al. 2006)

This was an empirical preliminary study evidencing how the rulesand some failures of the Local Government accounting new systemframework might cause distortions when analysing the entitieseconomic and financial situation. The specific topics analysed were:

− The effect of recognising public domain assets on the assetsstructure, on the entities’ equity, and on the annual net economicresult, namely considering those assets depreciation;

− The weight of the deferred revenues within the liabilitiesstructure;

− The weight of the receivables over the total assets;

−

The structure of cash on hand and deposits in banks;

− The annual economic net result compared with the budgetaryresult and the cash balance.




From a universe of 308 they have analysed the financial reportingstatements of 147 municipalities. Out of these, 59 were selected assample to this study, considering the following exclusion criteria:

− Did not have public domain assets in the balance sheet or, inspite of having, more than 80% were “in-process”, indicating that,in fact, those public domain assets existing before theimplementation of the new system were not yet totally or in greatpart valuated and recognised;

− Did not have deferred revenues within the liabilities, indicatingthat they were not using the accrual basis correctly. In fact, everymunicipality develops investment projects generally financed byearmarked capital grants and transfers, either from the StateBudget or the EU that, according to the new system rules, mustbe recognised as deferred revenues;

− Although fulfilling the two above criteria, did not havedepreciation in the Operational Statement neither accumulateddepreciation in the Balance Sheet, revealing that they were notaccomplishing with one of the main rules of the new system.

In their point of view, not listing public domain assets, notaccomplishing with the accrual basis and not considering assetsdepreciation are the crucial issues that have a substantial influenceon the financial statements analysis, according to the new accounting

system. This led to a first conclusion that only 40% of the entitiesanalysed have presented a Balance Sheet fairly meeting the newsystem requirements, i.e., appropriate information about each entityfinancial and economic situation. Additionally, their main findingswere:

− Since public domain assets cannot be sold and mortgaged, whenanalysing the Balance Sheet from the financial perspective, theycannot be considered neither as part of the assets nor withinequity. Given that those assets were representing 51% of the totalfixed assets and their depreciation 74% of the annualdepreciation, the requirement for them to be listed according to

the new accounting system was changing considerably the assetscomposition and the costs structure within the OperationalStatement. Indeed, listing public domain assets in the BalanceSheet was increasing the equity over total assets from 48.3% to73%, which did not represent an effective increasing, given the




legal features of those assets. Consequently, an economic andfinancial analysis of the financial statements prepared accordingto the new system (‘patrimonial perspective’) offers a distortedversion of the financial perspective.

− According to the new system, deferred revenues are consideredliabilities; however, they are not claimable. Therefore, whenanalysing debt ratios, they should not be considered.

− The interpretation of the annual economic net result might bemisleading, since following the business accounting model, fullaccruals are considered as well as the matching concept. But the‘profit’ or ‘loss’ is not a meaningful measure to assess theperformance of governmental entities. Since it is difficult toestablish a direct relationship between costs incurred and taxes(the main revenues), the interpretation of the annual economicnet result must be done carefully and necessarily complementedwith other economic and budgetary indicators/measures. Thestudy showed an economic surplus of 5.6% at the same time as abudgetary deficit of -6.7% (undertaken commitments higher thanrights) and a cash balance of -1.9% (payments are higher thanreceipts only possible considering a surplus from previous years),evidencing different balances obtained when analysing the samereality in different perspectives. The economic result might,however, be seen as more subjective, inasmuch as it is a

consequence of some conventions (e.g. considering non-earmarked capital transfers as revenues of the year they arereceived) as well as of not using the accruals basis completely(e.g. recognising every fiscal revenues within the year they arereceived).

The researchers finally concluded that, since the informationdisclosed by the Balance Sheet and the Operational Statement tendsto be more subjective, users still give preference to the informationincluded within the budgetary statements. There is still the need toestablish a conceptual framework for governmental accounting inPortugal, which might help to reduce the subjectivity still existingwithin the financial statements, in particular the Balance Sheet andthe Operational Statement, eventually increasing usefulnessperceived by their users.




One common issue from the above studies is that all of themhave emphasised that the implementation of accrual-basedaccounting somehow has been one of the major problems or hascreated difficulties. Consequently, they show that it is not yet possibleto conclude that the introduction of accrual basis has caused, asintended, the accounting system to become more informative, i.e.,many issues concerning the claimed benefits of accrual accountingare still unresolved.

WHY ACCRUAL BASIS IS A PROBLEM

Within the private sector, the accrual-based accounting is the

most commonly used accounting method, implying the recognition ofrevenues and expenses in the accounting period in which they areearned or incurred respectively rather than when cash is paid orreceived. On the other hand, governments traditionally use cashbasis, allowing managers to control and monitor receipts andpayments against appropriations and to account to Parliament for theappropriated monies. Nevertheless, it is currently believed that theinformation reported in accrual basis brings many potentialities togovernmental financial statements users, thus becoming more usefulthan cash basis information.

Many have been discussing the advantages and drawbacks ofaccrual accounting within Public Administration. Two importantframeworks that address governmental financial statements to beprepared using full accrual-based accounting are GASB (1999)Statement 34: Basic Financial Statements – Management’sDiscussion and Analysis – for State and Local Governments, andIPSASs (IFAC, 2001a; 2001b; 2001c; 2001d; 2001e; 2001f; 2002a;2002b; 2002c; 2004). The former changed the way State and Localgovernments in US present financial information to the public,proposing a disclosure format of financial statements similar to thoseof business companies, i.e., accrual-based, along with traditionalfunds statements. Together these allow to:

− Reporting on the overall state of the entities’ financial health, not

just “funds”;− Including information on infrastructure assets;




− Showing charges for services separately from general governmentrevenues so one can determine whether a program is paying foritself or being paid for by general tax revenues.

IFAC (2003) pronounces that the financial statements preparedunder the accrual basis allow:

- Assessing the accountability for all resources the entity controlsand the deployment of those resources;

- Assessing the entity’s performance, financial position and cashflows;

- Making decisions about providing resources to, or doing business

with, the entity;

- Getting information on how a government financed its activitiesand met cash requirements;

- Evaluating a government’s ongoing ability to finance its activitiesand to meet its liabilities and commitments;

- Getting information on the financial position of a government andchanges in financial position;

- Providing a government with the opportunity to demonstratesuccessful management of its resources; and

- Be useful in evaluating a government’s performance in terms ofits service costs, efficiency and accomplishments.

As to academic research, the issue has been largely debated(Guthrie, 1998; Christiaens, 2002). Within the context of countriesmore advanced in introducing accrual basis accounting in the PublicAdministration, we highlight Guthrie (1998) who addresses someadvantages of accrual accounting and financial reporting forAustralia: accrual-based financial statements contain a range ofaccounting-based information more comprehensive than the subsetof information captured by traditional cash accounting systems;accounting systems record information about revenues, expenses,assets and liabilities. Moreover he explains that accrual information

has been considered as:− Providing an accurate assessment of the full cost of service

provision – since non-cash expenses (e.g. depreciation) areincluded in governmental accounts;




− An indicator of efficiency of program performance – since it offersmore comprehensive indication of the cost of governmentprograms, allowing greater emphasis on cost control andefficiency measurement;

− Offering numbers that would have a significant impact on thedetermination of pricing policy for user charging;

− Improving accountability by governments to their constituents,better financial management by public service managers andgreater comparability of management performance between jurisdictions.

Although in Portugal, as referred to in Sections 2 e 3, theseadvantages have also been acknowledged and promoted, somedrawbacks have been recognised as well. From Section 4, the mostimportant problems can be summarised as relating to: 1) listing andvaluating public domain assets; 2) understanding the accrualsconcept and subsequent application of the economic perspective inthe recognition of costs and revenues; 3) conventions assumed forthe new system that increase the subjectivity of the Net Resultmeaning, already per se very problematic to understand within thegovernmental entities; 4) the need to have a conceptual frameworkthat would clarify how to adapt the business accounting statementsand concepts to some specificities of the Public Administration

context; and 5) the need for more intervention of the PAASC inproviding guidance. Moreover, it might be said that these and otherdifficulties have also been identified in the literature as have beenfaced by several countries.

Again taking the Australian example, Guthrie (1998) stresses theproblem of interpreting ratios calculated on the basis of businessstyle financial statements, which are meaningless or non-relevant inthe Public Sector. Questioning the adoption of accrual-basedbusiness-type financial statements to governmental entities, heexplains that “much of the information produced (…), such as assetsvaluation and owners’ equity cannot be used for decision aboutperformance, accountability or funding decisions in the government

sector. (…) It is difficult to reconcile the rhetoric underlying theadoption of these private sector ‘performance’ measures with thereality of their unsuitability for the adoption in public sector settings”(Guthrie, 1998, p. 9). As to the argument of accruals allowing the




assessment of full cost of service provision, Guthrie (1998, p. 3)explains that it ignores the fact that the difference between cash andaccrual numbers is ultimately one of timing for recognition oftransactions – in the long run, one cannot expect cumulativelysignificant differences in cost measure between the numbers of bothbases.

In what concerns public domain assets, Guthrie (1998, p. 15)addresses their valuation methodology, explaining that the definitionof assets ground in notions of economic benefit may not beappropriate for many of the assets controlled by the PublicAdministration. Despite being commonly argued that it is important to

know the total value of public assets in order to have the capacity toeffectively manage them (particularly in connection to decisionsrelated to the running down of assets or the utilization of publicassets), there is little to suggest that adding together monetaryvaluations (sometimes rather subjective) of infrastructure, culturaland historical assets, is important to achieve that purpose. Indeed,public domain assets have not commercial values (Byrne, 2002), solisting them within the total assets in the Balance Sheet impliessomehow arbitrary economic valuations. On the other hand, sincethey cannot have a financial value, the exercise of listing them ishardly useful.

In Europe, also Christiaens (2004) explains that, with the

introduction of accrual accounting in Public Administration, somerelevant questions regarding the recognition and valuation of certainassets remain unanswered. These fundamentally relate with thedifficulties to fit such assets in a business-oriented accrualaccounting system where there is room only for assets creatingeconomic output. Similar issues are also addressed by Barton(1999). Guthrie (1998) also emphasises the problem that thedefinition of ‘assets’ itself in the Public Administration context mightbe, indicating the need for a conceptual framework about thesesubjects.

Näsi et al. (2001) explain that, considering the current purpose ofgovernmental accounting of providing the general public with a

reliable picture of the overall financial situation of governments, it isimportant to have a comprehensive Balance Sheet, i.e., listing allpublic assets. Nonetheless, they raise the question on the usefulnessand relevance of information on certain type of public assets to the




stakeholders to whom the Balance Sheet information is primarilyaddressed. “Needs of the stakeholders, be they legislative,managerial or public knowledge, are better served by excluding someassets from the balance sheet, for unreliable measurement reasonsor for their lack of monetary relevance. This may make the financialstatements more understandable and therefore more useful fordecision-making (…)” (Näsi et al., 2001, p. 13).

In conclusion, as in other countries, in Portugal many issuesconcerning the potential benefits of accrual accounting style reformsin Public Administration are still unresolved. Furthermore, Portugalmight have gone around some of these problems if, on the one hand,

the issues had been more debated and investigated consideringother countries’ experiences and, on the other hand, someinvestment had been made in preliminary studies on theconsequences of such changes. As Yamamoto (1999) explains for theinternational context, the NPM, of which changing from cashaccounting to accrual accounting is considered an important tool, hasbeen “in fashion” in many developed countries. This also seems tohave been the case in Portugal, compromising the success of thegovernmental accounting reforms implementation: businessaccounting appears to have been copied, without paying full attentionto a different conceptual framework.

CONCLUSION

In Portugal, governmental accounting has passed along the lastfifteen years through profound changes, materialised with thepublication of a set of regulations, which added more usefulness andan evident closeness to the business accounting model and to theinternational reforms. Nevertheless, although it has walkeddeterminedly in this governmental accounting worldwide reformprocess, in reality there is still a long way to run, until the reportedinformation is able to reflect a real and appropriate image (true andfair view) of each governmental entity (and of the PublicAdministration as a whole), a final objective of the ongoing reform.

As the countries belonging to the so-called Continental Europeanstream, Portugal is characterised by the fact that the accountingalterations are triggered through the publication of legal standards.However, it is not enough to publish laws, since a culture of severalcenturies cannot be changed by decree. It lacks, hence, the creation




of conditions and motivations to its effective implementation throughthe participation of all those interested agents (managers, employeesand citizens). In truth, it still prevails the idea that the reportingstatements do exist to be submitted to The Court of Accounts, theadministration is still oriented to the management of inputs andcontrol of fraud. It is missing that other users, namely internalmanagers, recognise the usefulness of this new system formanagement purposes, as is still missing an increased connectionbetween National Accounting (macro) and Governmental Accounting(micro).

In what concerns the empirical evidence, after ten years since the

publication of the new governmental accounting system, ofcompulsory application to all entities of the Public Administration, it ispossible to understand that its process of implementation is not yetconcluded. From several empirical studies that we have presented orparticipated, it can be verified that the process of governmentalaccounting reform has not been performed in its whole and that inthose entities that have already implemented it, it is still missing theverification whether the financial statements represent the true andfair view of the economic, financial and patrimonial situation of eachreporting entity. To this delay in the implementation of the newgovernmental accounting framework we have pointed out, amongother factors, problems associated with the introduction of accrualaccounting, namely:

i) Listing and valuating public domain assets;

ii) Understanding the accruals concept and subsequentapplication of the economic perspective in the recognition ofcosts and revenues;

iii) Conventions assumed for the new system that increase thesubjectivity of the Net Result meaning, already per se veryproblematic to understand within the governmental entities;

iv) The need to have a conceptual framework that would clarifyhow to adapt the business accounting statements and conceptsto some specificities of the Public Administration context; and

v) The need for more intervention of the PAASC in providingguidance.




Due to these problems, entities have been following differentpractice and thus, accrual accounting has been embedded ofsubjectivity and consequent diversity. Moreover, in our opinion, sometime is still needed for users to learn how to use financial andeconomic information and also to realise its importance. Onepractical consequence of these problems has happened recentlywhen The Court of Accounts, as the entity to which Local Governmententities must present the reporting statements, sent back about 80%of the 2002 accounts presented by municipalities, because they werenot fairly presented in accordance with the requirements of the newaccounting system.

Therefore, as Christiaens (2004) did for Belgium, we observe thatin Portugal there are important remaining conflicts and implement-tation problems of adopting accrual accounting in an existingtraditional environment of budgetary cash-based accounting. Hence,there is still room for further debate and studies in order to analysewhether accrual-based accounting is in fact adequate to thePortuguese Public Administration reality. Given that Portugal startedthe reform later than many countries, if attention had been paid totheir experience, some the above problems might have been avoided.Considering that, at present moment, there are still a huge gapbetween the potentialities claimed for the governmental accountingreform and its reality, budgetary accounting within the integrated newsystem it still the most important given its major role in providingcash-based budgetary information.

Comparability is, no doubt, one of the requirements of anyaccounting system. Thus, it is necessary to create a conceptualstructure for governmental accounting in Portugal, which mightinclude the adaptation of the IPSASs, i.e., to follow the way ofinternational harmonization. It is also necessary to go further with thecost accounting system as well as with the implementation ofconsolidated accounts amongst different governmental bodies.

The theoretical advances and the empirical studies that willcontinue to be undertaken, the active participation of professionalbodies (namely the Chamber of Certified Accountants and the Order

of Certified Auditors) which have created specific commissions in thisarea, are indicators that make us to believe in the improvement ofthe new model of governmental accounting in Portugal in the sensethat it represents more opportune, complete, adequate, reliable,




transparent and relevant information, requirements that are still farfrom being a reality.

ACKNOWLEDGEMENTS

The authors acknowledge the important comments of ProfessorIrvine Lapsley of the University of Edinburgh in Scotland.

NOTES

1. This study was sponsored by FCT Fundação para a Ciência e aTecnologia, Ministério da Ciência e do Ensino Superior, Portugal

(POCTI/CPO/ 58391/2004).

2. This is a law-based general accounting plan as others existing inFrance, Belgium and Spain. In Portugal it is the fundamental setof instructions for governmental accounting practices and itcontains: a standard decimalised Chart of Accounts, instructionsrelating to the presentation of uniform published financial andbudgetary statements, and standard definitions of items and theirvaluation methods.

3. In respect, Lapsley et al. (2003) explain that the ‘New PublicSector’ is intended to replace a public sector characterised bybureaucracy, professionalism and departmentalism. It is more

strategic and corporate in its thinking, with a customer/userfocus.

4. The IFAC Council approved this change of name in November2004 to better reflect the role of the committee.

5. Regulation CE No. 1606/2002, 19/97/02, published in theJournal of the European Communities in 11/09/02, approvingthe European Council proposal for adoption of IASs/IFRSs.

6. For further details on these differences see Fernandes andCarvalho (2001; 2004).

7. According to the Constitution (Article 214, No. 1), The Court ofAccounts is the “supreme body of supervision of the legality ofpublic expenses and of judgement of the reporting statementsthat the law decides to submit to it”. It supervises the legality andfinancial regularity of the public expenses and revenues.Therefore, the State and its services, the autonomous regions,




the local government, public institutes and social securityinstitutions, are subjected to the jurisdiction and financial controlof The Court of Accounts.

The number of entities under this condition surpasses 11,000and the reporting statements to be submitted toauditing/inspection are defined in two resolutions: for LocalGovernment, Resolution 04/2001 and for all the other entities,Resolution 01/2004.

8. Two years after its legal approval, no entities were introducing thenew system (general plan). In face of the serious problem manywere facing, the PAASC decided to select a sample of 50 to start

the process under its supervision and support.

9. On the two delays see Law 166/99 and Law-decree 315/2000.

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APPENDIX

Main Legislation

− Constituição da República Portuguesa (2000) – actualizada deacordo com a Lei Constitucional nº 1/97, de 20 de Setembro;Almedina; Coimbra; Outubro.




− Decreto-lei nº410/89, de 21 de Novembro – Plano Oficial deContabilidade (empresas)

− Decreto-Lei nº155/92, de 28 de Julho – Novo Regime daAdministração Financeira do Estado

− Decreto-Lei nº 232/97, de 3 de Setembro – Plano Oficial deContabilidade Pública

− Decreto-Lei nº 68/98, de 20 de Março – Comissão deNormalização Contabilística da Administração Pública

− Decreto-Lei nº54–A/99, de 22 de Fevereiro – Plano Oficial de

Contabilidade das Autarquias Locais− Decreto-Lei nº 315/2000, de 2 de Dezembro – Altera o decreto-

lei nº54-A/99 (segunda alteração)

− Decreto-Lei nº 12/2002, de 25 de Janeiro – Plano Oficial deContabilidade das Instituições do Sistema de Solidariedade e deSegurança Social

− Decreto-Lei nº 26/2002, de 14 de Fevereiro – Estabelece oregime jurídico dos códigos de classificação económica dasreceitas e das despesas públicas, bem como a estrutura dasclassificações orgânicas aplicáveis aos organismos que integrama Administração Central

− Lei nº 8/90, de 20 de Fevereiro – Bases da Contabilidade Pública

− Lei nº 6/91, de 20 de Fevereiro – Enquadramento do Orçamentodo Estado

− Lei nº42/98, de 6 de Agosto – 3ª Lei das Finanças Locais

− Lei nº162/99, de 14 de Setembro – Primeira alteração aodecreto-lei nº54-A/99, que aprova o POCAL

− Lei nº91/2001, de 20 de Agosto – Lei de EnquadramentoOrçamental

− Portaria nº671/2000, de 17 de Abril – Cadastro e Inventário dos

Bens do Estado

− Portaria nº794/2000, de 20 de Setembro – Plano Oficial deContabilidade para o Sector da Educação




− Portaria nº898/2000, de 28 de Setembro – Plano Oficial deContabilidade para o Sector da Saúde

− Resolução nº04/2001, de 12 de Setembro – 2ª Secção doTribunal de Contas – Instruções para a organização edocumentação das contas das Autarquias Locais e entidadesequiparadas, abrangidas pelo Plano Oficial de Contabilidade dasAutarquias Locais (POCAL)

− Resolução nº01/2004 – 2ª Secção do Tribunal de Contas –Instruções para a organização e documentação das contas dasentidades sujeitas ao POCP, POC-Educação, POC-Saúde ePOCISSS

governmental accounting in portugal why accrual basis is a problem

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