International Journal on Governmental Financial Management – 2008 39

International Trends inGovernment Accounting

Pawan Adhikari

Pawan.Adhikari@hibo.no

andFrode Mellemvik Bodø Graduate School of BusinessBodø University College,8049 Bodø, Norway

Abstract

There is no standardized global framework for the adoption and implementation of accrualgovernment accounting. This has lead to a questioning of the consistency andcomparability of financial statements prepared and presented in different jurisdictions.Two approaches are widespread which deal with the issue of financial consistency andcomparability across nations and organizations; the accounting approach and the statisticalapproach. Whilst the former uses accounting standards for the preparation and presentationof general purpose financial statements, the later emphasizes the statistical bases for producing accounting information for economic analysis and policy making. Manycountries have adopted both approaches providing widely different financialmeasurements. This seems not to be an effective way of using resources. However, thereare some promising bridges between them in applying and requiring consistent financialinformation. Harmonizing these two systems into a single set of government reports is asignificant issue in international issue in public sector accounting.

Introduction

The last three decades have witnessed substantial efforts to re-invent the public sector around the world. Public sector reform ideas, which started more as a political andideological phenomenon such ‘Thatcherism' (in the UK), 'Reagonomics' (in the USA), and'Rodgernomics' (in New Zealand) are becoming a reality (Broadbent and Guthrie, 1992).Collectively these public sector reform ideas have been referred to as ‘New PublicManagement’ (Hood, 1995; Guthrie et al., 1998, 1999 and 2005). Couched in the languageof economic rationalism or neo-liberalism, new public management aims to replace theWeberian approach to public administration with a management model, which is used in private enterprises (Hood, 1995; Carlin, 2006).

40 International Journal on Governmental Financial Management – 2008

Connolly and Hyndman (2006) state that new public management reforms underpin sixcore elements in public sector governance: privatization, marketization, decentralization,output orientation, quality systems, and intensity of implementation. A primary goal is to boost efficiency, effectiveness, transparency, and accountability in public service deliveryand resource management. This has led governments to introduce cost improvement programs, performance indicators, financial management information systems, financialtargets, delegated budgets and resource allocation rules (Arrington and Watkins, 2007;Pettersen, 1999; Groot, 1999). Consequently, government agencies have been transformedinto competitive business units, and citizens have become customers (Chan, 2003). OECD(2005) claims that contemporary governments in most OECD countries are more efficient,more transparent, and more focused on performance than 20 years ago.Business like governments or entrepreneur governments often use private sector financialmanagement techniques (Chan, 2003). Thus accounting reorientation has been part of new public management reforms in several countries. Accrual accounting is probably the mostvisible phenomena within this accounting reorientation, referred to as ‘New PublicFinancial Management’ (Guthrie et al., 1998, 1999 and 2005; Lapsley, 1999). However,the number of governments which have actually adopted accrual accounting is relativelymodest. Wynne (2007) lists only nine countries which had actually taken this step and,although the IPSAS Board lists approximately 70 countries which have agreed to movetowards accrual accounting, only five of these are “Governments that already apply fullaccrual accounting standards and apply accounting standards that are broadly consistentwith IPSAS requirements” (IFAC, 2007b, page 4). In addition, studies have shown that theimplementation of new financial public management, particularly the adoption of accrualaccounting has not been uniform nor pursued with discernible coordination (Guthrie et al.,1998, 1999 and 2005). The types and degrees of accrual accounting vary significantly fromgovernment to government. Moreover, while some countries have adopted accrualaccounting reforms at their central governments, others have embarked on reforms at locallevels and within government agencies.There is no standardized global framework for the adoption and implementation of accrualgovernment accounting. This has lead to a questioning of the consistency andcomparability of financial statements prepared and presented in different jurisdictions.Two approaches are widespread, which deal with the issue of financial consistency andcomparability across nations and organizations; the accounting approach and the statisticalapproach. Whilst the former uses accounting standards for the preparation and presentationof general purpose financial statements, the later emphasizes the statistical bases for producing accounting information for economic analysis and policy making. With thestatistical approach, the IMF’s Government Financial Statistical Manual (GFS Manual) isdesigned exclusively for the use of governments. All governments are required to submitannual financial returns, or GFS tables, to the IMF in line with the GFS Manual. Althoughit is accepted that not all governments, and especially those of developing countries, willnot be able to apply the accrual aspects of the 2001 manual (IMF, 2001). Many countries

International Journal on Governmental Financial Management – 2008 41

have adopted both approaches providing widely different financial measurements. Thisseems not be an efficient way of using resources. There are several conflicting areas between these two approaches and consequently tensions between them. However, thereare some promising bridges between these two approaches in applying and requiringconsistent financial information. Harmonizing these two systems into a single set of government reports is a significant international issue in international public sector accounting.The aim of this paper is to reflect international trends in government accounting bydescribing ongoing endeavours to harmonize the accounting and statistical approaches tofinancial reporting. In doing so, the paper reflects similarities and differences in these twoapproaches and progress made in achieving convergence between them in recent years.The paper proceeds as follows. The next section outlines the emergence of accrualaccounting in the public sector. The following two sections provide descriptions of theaccounting and the statistical bases of accounting with reference to the IPSASs and theGFS Manual respectively. Ongoing attempts to harmonize these two bases of accountingare then discussed in the section before the conclusion.

Evolution and Proliferation of Accrual Accounting

An aspect of new public management reforms is the move from cash to accrual accounting.Cash and accrual accounting have different principles for recognizing, recording and presenting financial information. While accrual accounting aims to recognize transactionsand other events when the associated goods or services are used, cash accounting recordstransactions at the time cash is exchanged. Financial statements prepared and presentedunder the accrual basis of accounting include the statement of financial position, thestatement of financial performance, the cash flow statement and the statement of change innet assets/equity (IFAC, 2007a). A statement of cash receipts and payments is the primaryfinancial report under the cash basis, although many governments also provide a balancesheet including financial assets (for example, bank balances) and liabilities (for example,debts). Traditionally, governments have also provided detailed comparisons of actualreceipts and payments with their agreed annual budget.Accrual accounting has long been the generally accepted accounting basis for the privatesector, whilst governments’ financial statements aimed to provide evidence of budgetarycompliance. The cash basis of accounting was used by governments to discharge their accountability to parliament by showing that no money had been collected nor spent exceptin ways and amounts approved by parliament (Barton, 2007). With the rise of new publicmanagement, accrual accounting has been included as part of these reforms in at leastsome developed countries. The introduction of accrual accounting may be considerednecessary to realize the potential benefits of new public management (FEE, 2006). Carlin(2005) outlines the supposed superiority of accrual accounting and reporting compared to