Accrual accounting in the public sector

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Accrual accounting in the public sector is a method to present financial information on government operations.[1]: 45  [2]: 3  Under accrual accounting, income and expenditure transactions are recognized when they occur, regardless of when the associated cash payments are made.[3]: 116  The difference between public sector accrual accounting and cash accounting is most apparent in the treatment of capital assets (i.e. equipment, buildings, and public infrastructure that lasts many years).[4]: 19  Under accrual accounting, expenditure on capital is added as an asset in the government's balance sheet in the year the capital is purchased, but the cost is not included in the year's budget as an operating expense.[4]: 19  Instead, payment for capital used (i.e., the estimated depreciation or amortization) is included in that year's budget as an operating expense.[4]: 19 

The usefulness of accrual accounting in the public sector remains in dispute.[3]: 124  Advocates say a government that employs accrual accounting is less likely to underinvest in public infrastructure since large up-front capital costs are not recorded as a current period expenditure — rather, the expense is recorded over the years the capital is used (depreciates).[5]: 392–393  Detractors counter that, following this reasoning, since the capital purchase does not generate a current period expense, accrual accounting may encourage excessive spending on capital and borrowing.[3]: 145  [5]: 393–394  [6]: 2  [7]: 106 

A central argument in favour of public sector accrual accounting over cash-based accounting is that it can provide more comprehensive information on government finances, including balance sheet data on assets, liabilities, and depreciation.[5]: 392–394  However, accrual accounting income statements and balance sheets are based on technically complex and often arbitrary estimates of the value of public assets (market values are usually not available), so the information may not be reliable.[5]: 392–394  This may impede citizen comprehension and the transparency of government finances.[5]: 392–394  [8] Other concerns with accrual accounting in the public sector are that it is more easily manipulated because it tends to be less transparent and is less understood by the public;[6]: 6  a deficit/surplus under accrual accounting provides a less accurate measure of the government's borrowing and fiscal stimulus to the economy compared to a cash-accounting deficit/surplus;[9]: 10  [6]: 4  and accrual accounting is more costly because of the technical demands (often requiring new IT systems and more qualified accountants).[2]: 7 

While accrual accounting has been used in the private sector for over a century,[2]: 1  it has become common in the public sector only since around 2000.[10] In 2020, 30% of 165 jurisdictions surveyed worldwide used accrual accounting.[11][12]

  1. ^ Blöndal, Jón (2003). "Accrual Accounting and Budgeting: Key Issues and Recent Developments" (PDF). OECD Journal on Budgeting. 3 (1). doi:10.1787/budget-v3-art4-en.
  2. ^ a b c Cavanagh, Joe; Flynn, Suzanne; Moretti, Delphine (September 2016). Implementing Accrual Accounting in the Public Sector (PDF) (Report). International Monetary Fund, Fiscal Affairs Department.
  3. ^ a b c Moretti, Delphine; Youngberry, Tim (2018). "Getting added value out of accruals reforms". OECD Journal on Budgeting. 2018/1: 114–166. doi:10.1787/budget-18-5j8l804hpvmt. S2CID 158811342.
  4. ^ a b c Cite error: The named reference CICA2003 was invoked but never defined (see the help page).
  5. ^ a b c d e Dorn, Florian; Gaebler, Stefanie; Roesel, Felix (2021). "Ineffective fiscal rules? The effect of public sector accounting standards on budgets, efficiency, and accountability". Public Choice. 186 (3–4): 387–412. doi:10.1007/s11127-019-00755-8. hdl:10419/213589. S2CID 254944141.
  6. ^ a b c Dahlby, Bev; Smart, Michael (May 2015). The Structure and Presentation of Provincial Budgets (PDF) (Report). The School of Public Policy, University of Calgary.
  7. ^ Blöndal, Jón (2004). "Issues in Accrual Budgeting" (PDF). OECD Journal on Budgeting. 4 (1): 103–119. doi:10.1787/budget-v4-art5-en. ISSN 1608-7143.
  8. ^ Cite error: The named reference Dees was invoked but never defined (see the help page).
  9. ^ "Accounting for What?: The Value of Accrual Accounting to the Public Sector". Organisation for Economic Co-operation and Development. 1993.
  10. ^ Osterkamp, Rigmar (Autumn 2007). "Accrual Accounting in the Public Sector" (PDF). CESifo DICE REPORT: Journal for Institutional Comparisons. 5 (3): 43–45.
  11. ^ International Federation of Accountants (16 June 2021). "International Public Sector Financial Accountability Index: 2020".
  12. ^ International Federation of Accountants (16 June 2021). "Global Public Sector Shift to Accrual Accounting Forecast to Continue".