output budgeting and accrual accounting by tarun das

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    Accrual Accounting Session-4B by Tarun Das 2

    Contents of thispresentation

    1. Cash and accrual accounting

    2. Experiences of OECD countries

    3. Steps for successful movementto Accrual Accounting

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    1.1 Cash and Accrual Accounting

    In the case of cash accounting,expenditures are recorded when cashpayments are made.

    On the contrary, in the case of AccrualAccounting, flows are recorded at thetime when liability is created,

    transformed, exchanged, transferred, orextinguished.In other words, the effects of economic

    events are recorded in the period inwhich they occur, irrespective of

    whether cash is received or paid or dueto be received or paid.

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    1.2 Accrual Accounting (AC)

    In general, in the case of AC the time

    attributed to events is the time: when ownership of goods changes, services are provided, obligation to pay any dues is created, liability to make payments is created, the claim to a social benefit payment is

    established, or other unconditional claims are

    established.

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    1.3 An Example of AccrualAccounting

    The following example considers aweek in the life of a smallgovernment.

    The effects of the following fivetransactions are shown in thefinancial statements below:

    a. Corporate taxpayers are required tomake tax payments of $100 millionto the government, but only $90million is received. At the end of theweek, $10 million is outstanding.

    b. The government sells fixed assets for$100 million. The assets had beenvalued at $100 million.

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    1.4 An Example of AccrualAccounting

    c. Government salary payments are made duringthe week. In addition to paying employees $60million, government is obligated to contribute fortheir pensions employees earned $30 million aspension rights in the week.

    d. The government settles a long-running legaldispute. It agrees to pay $30 million to the plaintiff

    in 2 months time.e. All the governments external borrowings are heldin foreign exchange. The exchange rate declinedby 2% during the week.

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    1.6 Cash Accounting-Cash Flow Statement

    Receipts Taxes aAsset sales b

    Total

    90100190

    PaymentsSalaries c -60

    Cash surplus 130

    Bank balanceOpeningClosing

    50180

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    1.8 An Example of AccrualAccounting

    Cash accounting would report a$130 million surplus, while theaccrual operating statement showsa $30 million deficit.

    The $160 million difference arises fromthe following fact:

    Cash accounting ignores the pensionliability ($30 million), the asset alreadyhad a value equal to its sale price ($100million), the exchange rate change ($10million), the judgment liability ($30million), and the taxes to be received($10 million).

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    Accrual Accounting Session-4B by Tarun Das 11

    1.9 Balance Sheet

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    2.2 Status of Accrual Accounting inOECD

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    3.1 Transition to AccrualAccounting IMF GFSM 2001 recognizes that, in a

    developing country like Mongolia withconstraints in resources, technicalmanpower and IT,, transition to a fullaccrual accounting and budgeting

    systems cannot be created overnight; and have to be evolved through variousstages over a number of years.

    Stages span from a cash basis accounting

    to cash-plus-accrual accounting (alsoknown as modified accounting or partialaccounting) to full accrual accounting.

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    3.2 Transition to AccrualAccounting

    Government of Mongolia already adopts

    some amount of accrual data, particularlyfor govt commitments for terminal benefitsof govt staff.

    It is also making an attempt to list andvalue physical assets.

    Usually, the accounting of assets may notinclude common assets such asinfrastructure assets (e.g. roads, rails,ports, bridges and water supply).

    So, it will be opportune to adopt a cash plus accruals strategy based on theavailability of accrual-based data.

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    3.3 Stage-1: Restructure cashdata

    Without the need of additional data, cash data may

    be reorganized on the basis of new statementsrequired under IMF GFSM 2001.

    In brief, taxes and other current revenues, wagesand salaries, purchases of goods and services,interests and other current payments are included

    in a cash operating account.

    Purchases of non-financial assets are classified toan investment account.

    Changes in financial assets and liabilities are

    shown in a separate financing account.

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    3.4 Stage-1:Adopt simple recognitionrules For revenue recognition, adopt a rule that is very

    close to cash realisation while recognizing taxrevenues on accrual basis.

    For expenses, do not adopt category of use ofgoods and services .

    Distinguish between current expenditure and

    longer lasting materials assets acquisitions. For these assets, adopt a 100 percent first year

    depreciation rule (as used in Canada).

    Also do not adopt category of consumption offixed capital, a periodic depreciation of fixedassets.

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    3.5 Stage-1:Adopt simple recognitionrules Article 26.3 of the Public Sector Management

    and Finance Act (PSMFA, 27 June 2002) ofMongolia mandates that Cost of outputsshall be determined on the basis of fullaccrual cost of production,includingmanagement overheads and capitalcharges.

    In our opinion, inclusion of capital chargemay not be necessary for Mongolia

    as most of the surplus public assets havebeen privatized,

    and most of the budgetary bodies do nothave their own resources and depend on thecentral government for investment.

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    3.6 Stage-1:Adopt simple recognitionrules The issues on depreciation and capital

    charges have earlier been examined byinternational consultants Jim Yardley andAndrew Hilton in November 2005.

    They concluded that Capital chargesand current value accounting are

    complicated, expensive, and may notprovide much benefit in return. Depreciation estimated on the basis of the

    book value of capital investment mayprovide reliable and inexpensive

    approximations of capital charge for five orten years. We agree with their conclusions..

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    3.7 Stage two: Use partial accrualdataAccommodate some elements ofstatement of economic flows

    Most flows under this category involverevaluation of fixed and financial assetsand liabilities at market prices.

    At the early period, only some flows may

    be recognized such as: (a) write-off ofassets; (b) revaluation of financial assets/liabilities due to exchange ratefluctuations; (c) windfall gains/ losses dueto natural disasters; (d) unforeseenaccretion to wealth due to discovery ofnew mineral assets; (e) privatisation ofcorporations with unremunerative assets(reclassification).

    i l l

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    3.8 Stage two: Use partial accrualdata

    Progressive recognition of existingfinancial and nonfinancial assets.

    First priority is financial assets includingon-lending, and

    Then easily quantifiable non-financialassets such as govt buildings and lands.

    The most difficult assets like publicinfrastructure assets (e.g. roads, rails,telecom, air ports, sea ports, water andpower supply etc.) would follow, but can

    be avoided for an in

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