THE ADAPTABILITY OF ACCRUAL

ACCOUNTING IN THE PUBLIC SECTOR

BY

IYIKA, PAULINUS I. ACA

Assistant Manager (Technical)

Email: iyika4real@yahoo.com

BEING AN ASSESSMENT SUBMITTED TO

MR IHEANYI ANYAHARA, ASSISTANT

DIRECTOR-TECHNICAL, NIGERIAN

ACCOUNTING STANDARDS BOARD (NASB),

IKEJA, LAGOS.

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CONTENT

INTRODUCTION

BASIS OF ACCOUNTING: TYPES AND

THEIR CHARACTERISTICS.

GLOBAL TREND IN PUBLIC SECTOR

FINANCIAL REPORTING

COST-BENEFIT ANALYSES OF ADAPTING

ACCRUAL ACCOUNTING

CONCLUSION AND RECOMMENDATION

REFERENCES

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INTRODUCTION

In recent years, there has been a gradual but steady shift from traditional

accounting practice in public sector (which is cash based) to accrual

accounting system. This change first started about three decades ago as

political and ideological reforms. Such reforms include ‘Thatcherism’

(in the UK), ‘Reagonomics’ (in the USA), ‘Rodgernomics’ (in New

Zealand) (Broadbent and Guthrie, 1992).

Collectively, these public sector reform ideas have been referred to as

‘New Public Management’ (Hood, 1995; Guthrie et al., 1998, 1999,

2005). This new approach to Public sector management focuses among

other things on improving the overall efficiency and accountability of

government based entities. To achieve result in this area, government the

world over have and are still embracing private sector based financial

reporting system to enhance the transparency of government activities.

Thus, this paper is aimed at reviewing the existing cash basis accounting

system and determining how adaptable accrual accounting can be in the

government owned entities.

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CASH BASIS ACCOUNTING: ITS

CHARACTERISTICS

Cash basis accounting can be defined as a book-keeping method that

records financial events based on cash flows and cash positions. The

following characteristics can be seen from the above definition:

• Sales or revenue are recognized only when

• Cash is received (There are no debtors).

• Purchases or expenditures are recognized only when cash is paid

(There are no creditors).

• Assets are written off in the year of acquisition (There is no

balance sheet).

• There is no stock adjustment since it does not recognize usage of

stock (There is no closing stock).

• It is simple to operate

• Applicable when the time lag between the initiation of transaction

and the cash flow is very short.

• It is relatively cheaper to maintain

• Does not require expertise.

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ACCRUAL BASIS ACCOUNTING:

ITS CHARACTERISTICS

The accrual basis of accounting is a system which recognizes income or

revenue when earned and expenses when incurred whether cash has

been received or paid not withstanding.

From the foregoing, accrual basis can be said to possess the following

characteristics:

• Recognizes income or revenue when sales is made, service

rendered, or promise made to transfer economic benefit (There are

debtors),

• Recognizes expenses when incurred, or obligation to make

payment exist (There are creditors),

• Records asset in the balance sheet,

• Liabilities are recorded in the balance sheet.

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GLOBAL TREND IN PUBLIC SECTOR

FINANCIAL REPORTING

As the whole world is moving towards having a single set of global

financial reporting standards for private sector organizations, efforts are

also currently been made for public sector organization in the same

direction.

Various international Development organizations like the European

Union (EU), the Organization for Economic Co-operation and

Development (OECD), North Atlantic Treaty Organization (NATO) etc

have adopted International Public Sector Accounting Standards

(IPSAS). These are high quality independently developed standards

issued by IPSASB (formerly IFAC Public Sector Committee), an

integral part of International Federation of Accountants (IFAC).

The IPSAS standards for adoption require accounting on a ‘full accruals’

basis. Full accrual is considered best accounting practice by international

organizations for the public as well as the private sector. IPSAS include

detailed requirements and guidance, which provide considerable support

for financial statement consistency and comparability. They are the only

international accounting standards applicable to public sector and other

not-for-profit organizations.

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IPSASB has made considerable progress over the last few years in

developing a set of International Public Sector Accounting Standards for

public sector financial reporting on the accrual basis of accounting

(Sutcliffe 2003). However, as the Standards are not comprehensive,

there are as yet no agreed standards for such significant areas as taxation

and social policy obligations (for example, state pensions). In addition

there is no universally agreed approach to the valuation of particular sets

of assets such as heritage, infrastructural or military assets. As a result,

individual governments that wish to move to the accrual basis will have

to develop their own standards (Hepworth 2003). This may involve

adapting private sector standards or, for some public sector activities

such as for the treatment of tax revenues and social policy obligations,

either inventing new country standards or acting in a way that effectively

ignores the problems that exist.

This paper considers whether this is an adequate approach for the

democratic accountability of government entities and whether it is

appropriate for bodies such as the IMF, World Bank, European Union

and OECD to apply significant pressure on countries to adopt public

sector accrual accounting. The first section of the paper briefly considers

the introduction of private sector style financial statements and accrual

accounting in the UK public sector over the last few years. The paper

then goes on to consider the main users of public sector accounts, the

objectives of these accounts and the particular aspects of public sector

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finance which should be reported. The paper then considers that public

sector accrual accounting should be critically appraised and considered

on its merits. An approach which lauds efficiency should itself also be

assessed on this basis – what are its costs and what are the actual

benefits which have been achieved?

COST-BENEFIT ANALYSIS OF ADAPTING

ACCRUAL ACCOUNTING

Despite this, the emphasis of the IPSASB has been on encouraging all

governments and other public sector entities to make the transition to the

accrual basis of accounting for their general purpose financial

statements. The Committee "has commented extensively on the benefits

of accrual accounting for governments and individual public sector

entities in previous studies (Studies 5, 6, 8, 9, 10, and 11) and

Occasional Papers (Papers 1 and 3)" (IFAC Public Sector Committee

2002, p.7). Even the introduction of the International Public Sector

Accounting Standard for the cash basis of accounting states that, "the

Committee encourages governments to progress to the accrual basis of

accounting" (IFAC 2003, p. 1).

The Committee has expended less effort on considering whether the

transition to the accrual basis of accounting is universally applicable

and, if so, describing the particular preconditions for its success which

have been detailed by, for example, Schick (1998) and Hepworth (2003).

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Although IFAC does recognize that standard-setters and those

responsible for the preparation of financial statements should be aware

that the balance between benefit and cost is a pervasive constraint (IFAC

2000a, page 86). At the same time it admits that “it is difficult to apply a

benefit-cost test in any particular case”

We are left with the assumption that accrual accounting is being

recommended on the basis of the belief that the increased comparability

it will allow with alternative providers of public services will more than

compensate for the additional cost involved and so result in a significant

increase in efficiency or reduction in cost of the provision of such

services.

IPSASB (IFAC, 2003: Page 7) summarized the benefits of reporting on

accrual basis in the public sector as follows:

It shows how a government has financed its activities and met its

cash requirements,

It allows users to evaluate government’s ongoing ability to finance

its activities and to meet its liabilities, and commitments.

It shows the financial position of a government and changes in

financial position

It provides a government with the opportunity to demonstrate

successful management of its resources and,

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It is useful in evaluating a government’s performance in terms of

its service costs, efficiency and accomplishments.

THE NGERIA SITUATION

In August, 2009 precisely, The Accountant-General of and

Auditor-General for the federation carried out a study under the

World Bank Economic Reform and Governance Project(ERGP)

aimed at discovering the gap between the reporting system in

practice and the international requirements.

Cash basis IPSAS was compared to the local accounting system at

it was discovered that Nigeria has only adopted it in principle. This

means that in practice, Federal government financial statements are

not Cash IPSAS compliant. This very fact poses a serious

challenge that the stakeholders are presently grappling with.

As a consequence, the report recommended the continuation of

cash basis accounting for the present since cleaning up cash basis

financial statements is a precondition for transition to accrual

accounting.The report also recommended a Nigerian version of

accrual IPSAS since they envisage problems adopting ‘full

accrual’ reporting system.

The cost of using accrual basis seems to outweigh whatever

benefits are expected from it at least in the short run. For

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developing countries, the following challenges are being faced in

the process of transiting:

• Non-experts accountants employed in the public sector,

• Lack of stable government policies,

• Lack of proper legislations,

• Corruption,

• Poor infrastructure,

• Technological backwardness etc

Some of the above challenges are not limited to developing

countries since researches have shown that even the so-called

developed have encountered similar bottlenecks in trying to transit

accrual based IPSAS. Countries like UK, New Zealand, and

Australia are few examples.

CONCLUSION AND RECOMMENDATION

Supporters of the move to accrual accounting argue that a range of

significant benefit is available to governments which move from

cash to accrual basis of accounting.

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However, the authoritative independent research which is now

available suggests that few, if any, of these benefits have been

actually achieved in practice. In contrast, the cost of moving to

accrual accounting has been considered substantial.

Unless the issues involved in moving to accrual accounting are

carefully considered and all the associated risks are adequately

managed, it is possible that past mistakes of government adopting

mega reforms may be repeated.

As a recommendation, countries, especially the developing ones

should

Not be coerced to adopt accrual IPSAS,

Be encouraged to converge with cash IPSAS at least in the interim,

In the words of Noel Hepworth(2003:37)“Before this

reform(accrual accounting) is introduced, cash accounting should

be robust, control should be secure, external audit should be

functioning well and the legislature should have the ability to call

the executive to account”

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REFERENCES

1. Guthrie, J. (1998) Accrual Accounting in the Australian

Public Sector. Financial Accountability and Management, 14 (1)

pp 1-19

2. Hepworth, N.(2003) Introducing Accrual Accounting in the

Public Sector: Some introductory remark Chartered Institute of

Public Finance and Accountancy(CIPFA).

3.Hepworth,N.(2003)Precondition for Implementation of

Accrual Accounting in Central Government Public Money &

Management 23(1), pp 37-43

4. Hood, C. (1991) A Public Management for all Seasons.

Public Administration, 69 spring pp 3-19.

5. IFAC Public Sector Committee (2000a) ‘IPSAS 1 –

Presentation of Financial Statements’ IFAC

6. IFAC Public Sector Committee (2000b), Study 11

‘Government Financial Reporting, Accounting Issues and

Practices’ IFAC

7. IFAC Public Sector Committee (2002), Study 14 ‘Transition

to the Accrual Basis of Accounting: Guidance for Governments

and Government Entities’ IFAC

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8. IFAC Public Sector Committee (2003) ‘Cash Basis

International Public Sector Accounting Standard: Financial

Reporting Under the Cash Basis of Accounting’ IFAC

9.Michael, H. G (2007) Government and Not-For-Profit

Accounting: Concepts & Practices. John Willey & Sons

Inc.39, 40

10.Nigeria: Public Sector Accounting and Auditing.

Comparison to International Public Sector Accounting and

Auditing, Country Report Exposure Draft, August, 2009.

11. Robinson.(2000) Accrual Accounting and the Public Sector.

School of Economics and Finance, Queensland University of

Technology, Brisbane.

12. Rowan, J and Maurice, P. (2000) Public Sector Accounting

Prentice Hall, England

p.166.

13. Schick, A. (February 1998) Why Most Developing

Countries Should Not Try New Zealand Reforms. The World

Bank Research Observer, 13(1) pp 123-131.

14. Sutcliffe, P. (2003) The Standards Programme of IFAC’s

Public Sector Committee. Public Money & Management 23(1),

pp 29-36.

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15. Wynne, A (2009) Accrual Accounting for the Public Sector-

A fad that has had its day.SCRIBD.

DISLAIMER: THE OPINIONS EXPRESSED IN THIS

PAPER ARE THAT OF THE AUTHOR AND HAS

NOTHING TO DO WITH NIGERIAN ACCOUNTING

STANDARDS BOARD.

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