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Government Accounting: Recent Trends and

Direction for India

ecessity is the mother cussed in the IASC Frame- tion of assets and liabilities.
of all inventions, so work are: understandability; In the words of Prem-
goes the old saying. relevance; materiality; reli- chand (1995) Government
Accounting as a branch of ability; faithful representation; Accounting may be defined as
knowledge emerged as it was substance over form; neutral- a system that is charged with
felt that a short pencil is bet- ity; prudence; completeness; identification, selection and
ter than long memory. All the and comparability (IFAC, analysis, measurement, esti-
transactions that were under- 2000). In addition, the IASC mation, processing, and com-
taken by any entity in the old notes that timeliness as impor- munication of information on
receipts, expenditure, assets,
liabilities, costs, and benefits
Gone are the days when the function of accounting was
and all other aspects that le-
limited to record keeping. In today’s environment, the ac-
gitimately form part of fiscal
counting, apart from being a statutory requirement is also
management and is now the
expected to provide the government and other users of gov-
recognised handmaiden of fis-
ernment’s financial statements with relevant, reliable and
cal policy.
timely information that will assist them in decision-making
process. This article provides an overview of the government
K.P. Kaushik Objectives of
accounting systems, examines the extent to which the pres-
(The author is Associate Governmental Financial
Professor (Spl. Grd) at ent accounting system followed by our country fulfills the
National Institute of Fi-
requirement of an ideal accounting system and highlights
nancial Management, IFAC PSC Study 1 (1991)
Faridabad. He can be the experience of other countries that have reformed their
reached at kpkaushik@ Financial Reporting by Na-
accounting system in recent past.
tional Governments identi-
fied the following objectives of
days grew to such an extent tant as other characteristics. governmental financial report-
that it became impossible for However, at times a balanc- ing.
anyone to manage all of them ing or trade off between char- Financial reporting should
by memory alone. Gradually acteristics may be necessary. demonstrate the accountabil-
as trade and commerce de- Different accounting systems ity of the government or unit
veloped, accounting became may also score highly on one for the financial affairs and
a requirement and then a ne- characteristic than another. resources entrusted to it, and
cessity. Not only does the law Deciding the relative impor- provide information useful for
requires every organization to tance of the characteristics in decision making by:
prepare the accounts but also different cases is a matter of l indicating whether re-
decides on the format and judgement. sources were obtained
other issues. Today, accounting and used in accordance
has a far greater significance Government Accounting with the legally adopted
because of the role it plays in Government accounting budget;
decision-making process. is the process of recording, l indicating whether re-
analysing, classifying, sum- sources were obtained
Qualitative Characteristics marising communicating and utilised in accordance
of Financial Reporting and interpreting the financial with legal and contractual
The quality of the infor- transaction and events about requirements, including
mation provided in financial government in aggregate and financial limits estab-
reports determines the useful- in detail reflecting transactions lished by appropriate leg-
ness of those reports to users. and other economic events in- islative authorities;
The qualitative characteristics volving the receipt, spending, l providing information
of financial information dis- transfer, usability and disposi- about the sources, alloca-

1018 The Chartered Accountant January 2006

tion, and uses of financial the accounting system should commitments made during a
resources; be in position to generate rele- fiscal year and the payments
l providing information vant information for decision- that are reported as budgetary
about how the govern- making. The two schools of expenditures.
ment or unit financed its thought that are under refer- Modified accrual account-
activities and met its cash ence are cash accounting and ing: The modified accrual basis
requirements; accrual accounting. In be- of accounting (sometimes also
l providing information tween the two other methods called as expenditure basis)
that is useful in evaluat- of preparing the accounts have recognises transactions and
ing the government’s or also been suggested in the re- events when they occur, irre-
unit’s ability to finance cent past. spective of when cash is paid
its activities and to meet The methods or systems or received. However, there is
its liabilities and commit- of preparing government ac- no deferral of costs that will be
ments; counts can be classified into consumed in future periods.
l providing information four broad categories: Physical assets that will pro-
about the financial con- l Cash Accounting vide services in the future are
dition of the government The modi- l Modified Cash written off (or expensed) in the
or unit and changes in it; fied cash l Modified accrual period acquired. Modified ac-
and basis of l Accrual crual and full accrual account-
providing aggregate infor- accounting Cash accounting: The ing (discussed subsequently)
mation useful in evaluating recognises cash basis of accounting mea- have the same accounting
the government’s or unit’s per- transac- sures the flow of cash resourc- framework. The major dif-
formance in terms of service tions and es. It recognises transactions ference, however, lies in the
costs, efficiency and accom- events that and events only when cash time between the acquisition
plishments. have oc- is received or paid. Financial of goods and assets and their
curred by statements produced under utilisation. Under modified
Accounting in year-end the cash basis of accounting accrual accounting, supplies
Government: Methods/ and are cover cash receipts, cash dis- are considered consumed and
Systems normally bursements, and opening and assets are written off as soon as
The Government, as we expected closing cash balances. A cash they are acquired. Under full
all know, is not there to make to result accounting system has the ad- accrual accounting, changes in
profit. Neither is it a manufac- in a cash vantage of being simple. inventories are recognised and
turing organisation. Consider- receipt Modified cash account- assets are progressively depre-
ing this, a school of thought and/or dis- ing: The modified cash basis ciated according to their useful
has emerged that government bursement of accounting recognises trans- life.
accounting need not be the within a actions and events that have Full accrual accounting:
same as commercial account- specific pe- occurred by year-end and are Like modified accrual, the full
ing. The advocates of this riod after normally expected to result in accrual basis recognises trans-
thought are of the opinion year-end. a cash receipt and/or disburse- actions and events when they
that as long as an accounting ment within a specific period occur irrespective of when cash
system that records each and after year-end. Under this is paid or received. Revenues
every transaction of the gov- system, the accounting period reflect the amounts that came
ernment and has an inbuilt includes a complementary pe- due during the year, whether
facility of comparing the bud- riod for payments (e.g., one or collected or not. Expenses re-
geted figures with the actual, two months) after the close of flect the amount of goods and
will do for government. On the fiscal year. Receipts or pay- services consumed during the
the other hand there is anoth- ments over the complemen- year, whether or not they are
er school of thought that does tary period that are related to paid for in that period. The
not favor this view and is of the transactions of the previ- costs of assets are deferred and
the opinion that the account- ous fiscal year incurred during charged when the assets are
ing system should be such the fiscal year are reported as used to provide service. Full
that in addition to the above the revenue or expenditure of accrual accounting is similar
it should be in a position to this previous fiscal year. Usu- to the accounting systems for
comment on the working of ally, this is achieved by hold- private enterprises (commer-
the government and also could ing the books open during the cial accounting).
reflect on the assets and li- complementary period. This Expenses recognised by the
abilities of the government. To aims at ensuring a greater con- full accrual basis of accounting
put the same in simple words formity between the annual should not be confused with

January 2006 The Chartered Accountant 1019

actual expenditures. They are of the ability if each bases of such change that is desired in
the costs of goods and services accounting in providing infor- the current scenario.
consumed as well as any in- mation that meets the objec- An examination of the
crease of liabilities or decrease tives of financial reporting are possible areas where our Gov-
of assets; over the accounting summarised in Table 1. ernment can presently make
Table 1
Alternative Bases of Accounting including Modification to those Bases – Ability to Meet Objectives

Cash Accrual
Objective Cash Basis Modifications to the Modifications to the Accrual Basis
Cash Basis Accrual Basis
Compliance with legal- Yes Yes Yes Yes
ly adopted budgets.
Compliance with le- Relating to cash Cash and near cash Cash and financial Cash and economic
gal and contractual re- r e q u i r e m e n t s requirements and resources require- resources require-
quirements, including and limits. limits. ments and limits ments and limits.
spending limits.
Sources, allocation and Cash resources Cash and near cash Cash and financial Cash and financial re-
uses of financial re- resources. resources. sources.
Financing and cash re- Cash resources Cash and near cash Cash and other fi- Cash and other finan-
quirements. resources. nancial requirements. cial requirements.
Ability to finance activ- From cash From cash and near From financial re- From economic re-
ities and to meet liabili- cash sources sources.
ties and commitments.
Financial condition and Cash position Cash and near cash Financial resources. Financial and eco-
changes therein. position. nomic resources.
Financial performance Information not Information not re- Limited information Provides information
in terms of service reported. ported. reported. necessary to assess
costs. performance.
Source: Government Financial Reporting, study 11, IFAC Public Sector Committee.

period (e.g. they include de- Accounting System in any meaningful change is the
preciation and losses, which Union Government of India change in the country’s ac-
can occur in the absence of The Government accounts counting system from cash to
transactions). Financial state- and financial reporting cur- accrual basis. This is because
ments produced under a full rently followed in our coun- an accounting system is not an
accrual accounting system try derive their ‘substance and end in itself but rather a means
cover revenues; expenses (in- form’ largely from the account- to an end. A sound account-
cluding depreciation); assets ing procedures introduced ing system should assist the
(financial and physical); li- during the British rule. The Government in fulfilling its
abilities; and assets (Schiavo- system worked reasonably well objectives in a changing sce-
Campo and Tommasi, 1999). in the early phase of post in- nario by providing the desired
Under full accrual sys- dependence era. But over the inputs for decision-making. It
tem of accounting the three last two to three decades, there needs to disseminate informa-
statements that are normally has been a significant change tion of high quality in terms of
prepared include, Operating in the role and responsibili- understandability, relevance,
Statement, Balance Sheet, and ties of the government. Today, materiality, reliability, faithful
the Statement of Cash Flows. our government is expected to representation, substance over
The number of the statements continuously review itself in form, neutrality, prudence and
and the names by which these light of the changes that are comparability (across peri-
are called may differ from taking place and should not ods). The present system of
country to country. In terms hesitate in implementing any accounting does not fulfill the

1020 The Chartered Accountant January 2006

above requirements. On the budget. Under the present ac- and more in nature of a docu-
other hand accrual system of counting system, our Govern- ment that can be used for con-
accounting has the ability to ment generates the following trol purpose. This is because
generate information that is of accounting documents: the focus of this account is
more use in decision-making. l The Appropriation Ac- on whether the expenditure is
If accrual accounting is count incurred as per the budgeted
considered to be a benchmark l The Finance Accounts amount or not. This account
of an ideal accounting system The Appropriation Ac- does not give an indication
for government, it is necessary counts list the original bud- about the source of funds and
to look into the accounting get estimate, supplementary how they are spent or how
information that the pres- grants, surrenders and re-ap- much of what is generated or
ent accounting system of our propriation distinctly. It also spent relates to the current
country fails to provide but records the actual expenditure year. The document as such
could otherwise be available incurred against each of the should not even be considered
to the decision makers had the above. In addition to it, this as a part of accounting sys-
accrual system of accounting account also indicates wheth- tem, as it is more in nature of
been followed by our country. er the money that has been knowing the extent to which
The present accounting spent was legally available for expense has been made as per
system of our country can the purpose or not, and also the allocations in the budget.
best be described as ‘cash ba- whether the expenditure in- In case more amounts have
sis of accounting’ that records curred confirms to the author- been spent than the budget,
a transaction only when either ity. In the event of any varia- whether the same has been
cash comes in or when cash tion from the budgeted figures explained and sanction of the
moves out, rather than record- explanations of the same are additional amount has been
ing the transaction or event as also recorded in this account. obtained. On the other hand
it occurs. It also lays emphasis This document appears to if amount less than the bud-
on transactions vis-à-vis the be less of accounting nature get has been spent, the reasons

Lamiya Lokhandwala

January 2006 The Chartered Accountant 1021

thereof have been indicated.
This is a control document
rather than a part of govern-
ment’s financial accounting.
It is for this reason a consid-
ered view has been developed
that this document may not
be treated as the part of Gov-
ernment accounts but may be
considered as a report gener-
ated for control purposes.
In addition to it, the Gov-
ernment also prepares Finance
Accounts that contain 16 State-
ments. This document mainly
lists the receipts and payment
of the government. It follows
the cash basis of accounting,
and as such, records a transac-
tion only when either cash is
paid or received. The Finance
Accounts of the Union Gov-
ernment comprise the account
of the Central Government as
a whole and include the trans-
action of Central (Civil) Min-
istries, Defence Services, Posts
and Telecommunications De-
partments and the Railways.
It presents the accounts of
receipts and outgoings of the
Central Government for the
year together with the finan-
cial results disclosed by differ-
ent accounts and other data
coming under examination
namely Revenue and Capital
Accounts, accounts of Public
Debt and all other liabilities
and assets as worked out from
the balances recorded in the
accounts. It presents classi-
fied and consolidated accounts
of all transactions of Central
Government under the Con- adequate information that is the liabilities of the country
solidated Fund, Contingency needed in day-to-day decision- such as:
Fund and Public Account of making. It fails to provide full l Statement 2 that lists the
India. The Finance Accounts picture of the Government’s Balance position;
is the general accounts of financial position at any given l Statement 7 regarding
Government to the Parlia- point of time. As of today if External debt (charged).
ment and serve the purpose one intends to have an idea Loan to government ser-
of financial statements of the regarding the total assets and vice (voted); Statement 8
Union Government. total liabilities of the Govern- detailing account of capi-
Analysis of both the docu- ment, the same is not possible tal receipt by minor head;
ments stated above indicate under the present system of l Statement 13 regard-
that they do not provide the accounting. There are, how- ing Consolidated funds,
Government in particular and ever, a few Statements that do Contingency funds and
other users in general with the contain information regarding the Public Account;

1022 The Chartered Accountant January 2006

l Statement 14 that lists the partly lists report about the as- tem also allows deferring one
Interest bearing obliga- sets are: year’s payment to the next year
tions of government (in- l Statement 3 that deals and thereby reducing the ex-
cluding foreign loans in with Loans and Advances penses of that particular year.
foreign currencies.); by the Union Govern- The cash base system of ac-
l Statement 14a indicat- ment; counting also provides a scope
ing the Securities issues l Statement 7 that records for creative accounting in a way
to International Financial charged and voted capital that the revenue side could also
Institutions; and account; be manipulated by collecting
l Statement 14a that talks l Statement 9 that lists the excess revenue in a particular
about the market loan detailed account of capi- year and refunds could be made
raised in India. tal expenditure by major in subsequent year. This act is
In addition to the above The cash heads; termed as fiscal opportunism.
Statement No. 4 talks about base l Statement 11 that reports Apart from this the cash basis
the contingent liabilities of system of the investment of Union of accounting also fails to make
the government in somewhat account- Government in statuary a distinction between revenue
a similar fashion as is required ing also corporations government and capital items and does not
by accrual accounting but does provides a companies other joint even require the Government
not report all the contingent scope for stock companies; to charge depreciation on the
liabilities. Contingent liabili- creative l Statement 12 that lists assets it possesses.
ties such as the liabilities from accounting the capital expenditure The total revenue that re-
any legal action, indemnities in a way incurred outside revenue lates to a particular year cannot
against different types of risk that the account (also the sources be ascertained under the pres-
are at present not reported by revenue form which these funds ent system. This is because we
the present accounting system. side could were generated are talked follow cash basis of account-
These Statements do not give also be ma- about.); ing. For example, presently the
the complete picture of total nipulated l Statement 13 that lists un- road tax that the Government
liabilities. Further the partly by collect- der the head Consolidated receives relates to next several
information that is available is ing excess funds loans and advances; years but because the same are
also scattered here and there, revenue in and received in the current year it
reducing its usefulness in deci- a particular l Statement 15 that also is recorded in the current year.
sion-making. year and provides information on This makes the exercise of
The analysis also reveals refunds balance of loans advances. comparing the financial state-
that the present accounting could be The above is in no way ment of two years useless.
system of the country fails to made in the full picture of the assets of The accounting informa-
record all the liabilities of the subsequent the country. In addition to the tion that is provided by the
government such as the liabili- year. above the present system also present accounting system is
ties that arise out of unfunded fails to provide full information not amenable for performance
pensions and superannuating regarding the changes that take evaluation. This is because the
benefits. The current liabilities place over time as a result of transactions are not recorded
that emerge because of the dif- government policy. The pres- as per accrual system, i.e., the
ferences between commitments ent system is unable to track transactions are not recorded as
and payments are also not re- current assets as well as non- they take place, but are recorded
corded. The present system financial assets. It totally fails on cash bases. Cash basis of ac-
also permits the Government to list the assets held by the counting permits that expenses
to shift its liabilities outside its Government and also the cost that related to last year could be
canvas by making its agencies of holding such assets. Apart recorded in the current year or
autonomous. In addition to from it the impact of current other way could also happen.
it the contingent liabilities of consumption on the value of This prevents us from ascer-
the government for which the the asset is also not reflected by taining the amount of expenses
government usually gives guar- the present system. that relates to current year and
antee are again not reflected in The present system also as such results in difficulties in
finance accounts. lacks in ascertaining the full controlling the cost.
As regards the assets, the cost of services provided to The present system also
following Statements of Fi- Government’s departments or lacks appropriate and well-
nance Accounts give some idea the commitments made by the specified accounting stan-
of the country’s assets. To be Government regarding pay- dards. No doubt the Govern-
specific the Statements that ment in future years. The sys- ment Accounting Standards

January 2006 The Chartered Accountant 1023

Board has very recently been is required that not only the and United States of America
set up and has come out with total expenses or revenues are among the first to imple-
certain Accounting Standards, may be reported but the same ment accrual accounting in
but a lot is yet to be done in are shown segment-wise also. government. In addition to the
this direction. The accounting information above, Malaysia and Tanzania
The present accounting is normally segmented on the have also implemented accrual
system also fails to prepare basis of more than one attri- accounts but at local govern-
Proforma Accounts that is the bute. On the whole, all these ment level (IFAC, 2000). We
forecasted accounts for next factors contribute to poor pre- now intend to discuss the ex-
year. Modern accounting sys- sentation of accounts. perience of United Kingdom
tems, apart from reporting the and New Zealand, the nations
past results, also attempt to Experience of Other that have implemented accrual
forecast the financial perfor- Countries accounting.
mance and position for future In recent past, several Experience of United
years. countries have reformed their Kingdom: Reforms in govern-
The geographical spread accounting system or are in ment accounting has attracted
of expenses is also not ascer- the process of the same. The widespread attention as part
tainable from the existing ac- Table 2 lists the name of such of the public management
counting system. Modern countries with a brief detail. reform agenda in UK. The ar-
accounting systems that are It is evident from the Table chitect of accounting reforms
developed also talk about Seg- 2 that New Zealand, Iceland, in UK Central Government,
ment Accounting, wherein it Sweden, Australia, Finland has repeatedly stressed that the
Table 2
Status of Government Accounting System of Selected Countries moving towards Reforms

Name of the Accrual Accounting Consolidated Accrual Budgeting

Country for Individual Agencies Accrual
/Departments Reporting
Australia Since 1995 Since 1997 Since FY 2000
Austria No 1
No ESA 95. Modified accrual.
Belgium Some No ESA 95. Modified accrual.
Canada Since FY 2002 Since FY 2002 Yes
Czech Republic No 1
No No, but will be introducing modified accrual
budgeting in accordance with ESA 95.
Denmark Some Some ESA 95. Is introducing full accrual budget-
Finland Since 1998 Since 1998 ESA 95. Yes.
France Being introduced Some, full accrual ESA 95. Intends to move to modified accrual
being introduced. basis.
Germany Cash Statements sup- No ESA 95. In preparation.
plemented with accrual
Greece Some Yes ESA 95. Modified accrual.
Hungary Cash statements sup- No No, but will be introducing modified accrual
plemented with accrual budgeting in accordance with ESA 95.
Iceland Since 1992 Since 1992 ESA 95. since 1998.
Ireland Cash statements sup- No ESA 95. Modified accrual.
plemented with accrual
Italy Yes Yes ESA 95. Yes

1024 The Chartered Accountant January 2006

Japan Yes Introducing No
Korea, Republic of Is introducing full ac- No Is introducing full accrual budgeting
crual accounting.
Luxembourg No1 No ESA 95
Mexico No 1
No No
The Netherlands Since 1994 Introducing ESA 95. For agencies since 1997. Is introduc-
ing full accrual budgeting.
New Zealand Since FY 1992 Since FY 1992 Since FY 1995
Norway No 1
No No
Poland Some Some No, but will be introducing modified accrual
budgeting in accordance with ESA 95.
Portugal Yes No ESA 95. Is introducing additional accrual in-
Slovak Republic No1 No No, but will be introducing modified accrual
budgeting in accordance with ESA 95.
Spain Modified accrual Modified accrual ESA 95. Modified cash.
Sweden Since 1994 Since 1994 ESA 95. Is introducing full accrual budget-
Switzerland Yes No Is introducing full accrual budgeting
Turkey No 1
No No
United Kingdom Since FY 2000 From FY 2006 RSA 95. Since FY 2002
United States Since FY 1998 Since FY 1998 Some
Most of these countries actually use modified cash accounting.
ESA-European System of Accounts, EU member countries are required to prepare government forecasts and financial statement in accordance to
ESA 95.
Source: Athukorala, Sarath Lakshman, (2003) Accrual Budgeting and Accounting in Government and its Relevance for Developing Member Coun-
try, Asian Development Bank, Philippines, pp 12-14.(Modified)

Resource Accounting and Bud- heralded a new era in public that it would be wise if both
geting (RAB) is not just about sector financial management accounting and budgeting are
a switch to accruals account- reform, for the UK Govern- based on accrual system oth-
ing but also about enhanced ment with the full implemen- erwise most of other countries
public accountability improved tation of Resource Accounting that have implemented accrual
and financial management. and Budgeting (RAB). RAB accounting do not follow ac-
After a long process of transi- is an accrual based approach crual for budgeting purpose. In
tion, first notice of which was to Government accounting terms of the scope, RAB cov-
given in November, 1993, De- and budgeting, which also re- ers all UK central government
partmental Resource Accounts flects Parliamentary control departments, over 40 in all
became the sole mechanism and a move to focus on out- (with restructurings and merg-
of Parliamentary accountabil- puts, rather than inputs. The ers, the numbers keep chang-
ity for Supply expenditure in term ‘resource accounting’ was ing, but for 1999-2000, there
2001-02, and 2003-04 public devised to highlight that the were 42 departmental resource
expenditure plans were fully change proposed by the UK accounts and for 2000-01,
on a Resource Budgeting (RB) Government goes wider than there were 45 accounts). Ex-
basis. The Resource Account- simply the adoption of accrual ecutive agencies are included
ing (RA) component provides accounting techniques. within each department’s re-
the infrastructure upon which Resource accounting as a source accounts, and the seven
improved decision-making and technique involves the use of of the main government pen-
enhanced accountability can be resource accounting informa- sion schemes for public sec-
constructed. tion as the base for planning tor employees. In addition, a
The start of 2001-02 fi- and controlling public expendi- number of ‘Developed Bodies’
nancial year, in April 2001, ture. It is only UK that believes in Scotland, Northern Ireland

January 2006 The Chartered Accountant 1025

that is prepared by the private
Schedule 3 – Balance Sheet:
This shows the assets and li-
abilities at the year end that are
represented by taxpayers equi-
ty. As in the private sector, the
Balance Sheet provides a finan-
cial snapshot of the assets and
liabilities of a body at one point
in time. The layout that is used
follows Format 1 prescribed in
the Schedule 4 of the Compa-
nies Act, striking a balance at
total assets and liabilites. The
main difference, however, is in
the ‘Taxpayers Equity’ section
and Wales produce Resource both a department’s own ad- of the statement, where the ter-
Accounts. ministrative expenditure and minology replaces that of shre-
RAB, however, does not its programme expenditure, net holders capital and reserves to
cover the main central funds of of departmental income. While reflect the central government
Government, Executive Non- similar to a profit and loss ac- context.
Departmental Public Bodies count, Schedule 2 does not fol- Schedule 4 – Cash Flow
(NDPBs), Trading Funds, Na- low the form of the profit and Statement: This statement
tional Health Service (NHS) loss account as prescribed in analyses the net cash flow on
Trusts, and other public corpo- the UK Companies Act. It has both operating activities and
rations, and local government. been designed mainly to meet capital expenditure and also
These sectors are planned to the Tressury’s budgetary con- shows how the net cash flow
be covered subsequently. The trol requirements and those of that has been financed. The
RAB of UK Government con- Parliament. Profit and loss ac- Statement is prepared in ac-
sists of 5 Schedules and Notes count that could be considered cordance with the relevant
to the Accounts. A brief de- to be equivalent to schedule in Financial Reporting Standard-
scription of these statements is the private sector. This state- FRSI (revised). The Cash
Cash Flow presented below: ment is to be prepared by all Flow Statement prepared by
State- Schedule 1 – Summary of but for agencies, which are not the private sector could be con-
ment: This Resource Out turn: This is the whole departments. sidered to be equivalent to this
statement Parliamentary control schedule Statement of Recognised schedule.
analyses which compares outturn with Gains and Losses: This shows Schedule 5 – Resources by
the net estimate for both resource ex- gains and losses arising on Departmental Aim and Ob-
cash flow penditure and the overall cash asset revaluations and any jectives: It is a restatement of
on both requirement. This schedule is other gains or losses reported Schedule 2 to show spending
operating unique to resource accounting. through reserves. In the private during the year by aim and ob-
activities The Schedule plays an impor- sector, the Statement of Total jective. This Schedule provides
and capital tant role in providing the link Recognised Gains and Losses the equivalent of segmental in-
expendi- between resource budgeting (STRGL) includes the oper- formation. However, its link to
ture and and resource accounting. Al- ating costs for the year. The programme aims and objectives
also shows though supply-financed agen- Statement in resource accounts makes it unique to resource ac-
how the cies, which are not whole de- omits this, on the grounds that counting. The purpose of this
net cash partments need not produce it would be misleading to in- Schedule is to reanalyse oper-
flow that this schedule. There is no ac- clude the net operating costs ating expenditure and income
has been count or statement that could as a ‘loss’ because it is not a according to the aim and ob-
financed. be considered to be equiva- loss in the commercial sense of jectives it is intended to serve.
lent to schedule in the private the word. The net expenditue The supply-financed agencies,
sector. shown is incurred to obtain, in which are not whole depart-
Schedule 2 – Operating the main, non-financial bene- ments need not produce this
Cost Statement: This Schedule fits. This statement is similar to schedule. The private sector
shows the resources consumed Statement of Total Recognized does not prepare any schedule
during the year in support of Gains and Losses (STRGL) or account or statement that is

1026 The Chartered Accountant January 2006

similar to this. New Zealand introduced ac- vices’ in the Balance Sheet as a
Notes to the Accounts: crual system of accounting ear- reduction in inventories and a
The notes to accounts explain ly in the present decade. The corresponding increase in cash
and amplify the information financial statements of New or bank balances, and in the
in the previous schedules. It Zealand Government include Statement of Cash Flows as an
is, however, too early to com- three core statements, namely, operating receipt.
ment on the benefits which the Operating Statement, the Some transactions affect
United Kingdom could get by Statement of Financial Po- the Operating Statement and
implementing accrual account- sition and the Statement of balance sheet but are not re-
ing (referred to as resource ac- Cash Flows. The Operating flected in the Statement of
counting) but the perceived Statement summarises revenue Cash Flows. This is because
benefits of resource accounting earned and expenses incurred the transactions are of a non-
(as described in the Whited by the government during the cash nature, or because of tim-
Paper on resource Budgeting The Op- year. The difference between ing differences. For example,
and Accounting in Govern- erating total revenue and total ex- pension liabilities accrued dur-
ment) are as follows: Statement penses is the operating balance ing the period are included as
After consultation and fur- summaris- for the period. The Statement an expense in the Operating
ther work, the Government has es revenue of Financial Position (Balance Statement and are shown as
concluded that a fully resource earned and Sheet) summarises the assets an increase in liabilities in the
based system of public expen- expenses owned and the liabilities owed Balance Sheet, but are not re-
diture planning and control incurred by by the government. The differ- corded in the Statement of
would achieve improved man- the gov- ence between the two is termed Cash Flows until they are paid
agement and value for money ernment as the Crown Balance, a mea- out some years in the future.
by the taxpayer by: during the sure of government’s net worth. The three core statements are
l making decision-makers year. The The Statement of Cash Flows closely interrelated and are also
focus more on resources difference analyses the net movement in supplemented by additional
consumed and not just on between cash held during the year in information as required by the
cash spent; total terms of operating, investing Public Finance Act, 1989.
l treating capital and cur- revenue and financing activities. Other Financial State-
rent expenditure in a way and total The three core statements ments: The other statements
which better reflects their expenses is —the Operating Statement, that are required by the Public
different economic sig- the operat- the Statement of Financial Finance Act 1989 contain ad-
nificance; and ing balance Position and Statement of ditional information for inter-
l encouraging a greater em- for the Cash Flows— are interrelated preting the Crown’s financial
phasis on outputs and the period. closely. The operating balance performance:
achievement of aims and (the difference between the l The Statement of Bor-
objectives. governments’ revenue and ex- rowings and Appendix
Heald (2005) in his study penses) flows through directly D to the Financial State-
examined the effects of imple- to the balance sheet, where it ments provide details of
mentating resource accounting is the main item affecting the the Crown’s short, and
in UK and concluded that the change in governments’ net long-term debt.
subsequent to the implemen- worth. Cash inflows from bor- l The Statement of Com-
tation of resource accounting rowing, reported in the State- mitments, the Statement
and budgeting in the country ment of Cash Flows, will also of Contingent Liabilities
the quality of accounts im- be reflected in an increase in and Note 23 indicate the
proved (even during the tran- the level of borrowing reported magnitude of obligations
sition period) and substantial in the Statement of Financial and contingent risks that
variation has been witnessed in Position. Similarly, cash trans- do not appear in the bal-
the certification lag. Potential actions have an impact on the ance sheet.
for shorter certification lags is Statement of Cash Flows, the l The Statement of Un-
identified, as are administra- balance-sheet and sometimes appropriated Expendi-
tive deficiencies that delay the the Operating Statement. Some ture and Costs and the
arrival of some certified De- transactions can also affect all Statement of Emergency
partmental Resource Accounts the three core statements. For Expenditure and Costs
(DRAs) into the public do- example, a cash sale of goods disclose amounts not ap-
main. held in stock would be record- propriated by Parliament
Experience of New Zea- ed in the Operating Statement during the financial year.
land: The Government of under ‘sales of goods and ser- l The Statement of Trust

January 2006 The Chartered Accountant 1027

Money reports on the cepted Accounting Practice. reforms also improved the po-
Crown’s stewardship of The Fiscal Responsibility Act, sition of total public debt in
money held on behalf of 1994, aims to promote consis- the country. From 1992 to
third parties. The Public tent and a good quality fiscal 1997 the total public debt as
Finance Act 1989 distin- management. It encourages a percentage of GDP dropped
guishes between public better decision-making by the from 63.8 per cent to 37.8 per
money and trust money, government, strengthens ac- cent and this further dropped
and requires separate countability and ensures more to 29.8% in 2003. During the
management of and ac- informed public debate about same period (1992-1997) the
counting for the latter. fiscal policy. operating balance also wit-
Notes to the Financial Moving with the reform nessed a significant improve-
Statements: The Notes ac- process, the New Zealand The main ment from 1.1% of GDP to
companying the Financial Government went in for free objective of 3.7% of GDP. This rose to
Statements are audited. They play of market forces, stripping the State 4.5% for the year ended on
provide additional detail and away the complex and compre- Sector Act, June 2003. Total operating ex-
form an integral part of the hensive web of regulations and 1988 is to penses as a percentage of GDP
statements to which they re- subsidies and improving the improve also improved from 41.2% in
late. The government of New accounting and reporting sys- produc- 1992 to 35.4% in 1997 and
Zealand for the first time came tem of the government to pro- tivity, to was 39.3 % in 1997, indicating
out with the financial state- vide information essential for a ensure that more scope for improvement.
ments based on accrual system robust system of government the manag- The most exciting result of the
of accounting for the year end- budgeting. The policy changes ers have reform undertaken by govern-
ing June 30, 1992. This change brought about by the Labour greater ment happens to be the appre-
in the reporting system was Government (1984-90) were degree of ciation of NZ$ against US$
certainly the result of the eco- so extensive that they were col- freedom from 0.5382 in 1993 to .6788
nomic crisis the nation faced lectively more popularly called and flex- in 1997. Since then, the rate is
in 1984. The crisis resulted in `Rogernomics’ after the name ibility in clustering around this appreci-
20 per cent devaluation in the of the than Finance Minister exercising ated rate. In addition to it the
country’s currency and all time Sir Roger Douglas. their duties government also achieved its
high government deficits. Also, This exercise did improve and are ac- objective of zero net foreign-
the public debt accumulated to the financial indicators of countable currency debt during 1996.
an all time high. In addition to New Zealand. In 1994, the to the Gov- Another significant achieve-
it, the currency witnessed ex- fiscal deficit of the country ernment ment of the Government of
cessive fluctuations. All this led was eliminated after 10 years for the New Zealand has been that
to the defeat of the Muldoon of difficult political decision- work done from September 1997 on-
government. The new gov- making and managing the by them. wards, monthly Financial
ernment was forced to bring reforms. The position of ex- Statements are now published.
about some innovative chang- ternal public debt improved This is done on cumulative
es. The process gave birth to from NZ$ 17,256 million basis that is for the month
three key pieces of legislation, (44.1% of total public debt) of July one-month accounts
the State Sector Act, 1988, the in 1988 to NZ$ 5,262 million are presented. In subsequent
Public Finance Act, 1989, and (14.1 % of total public debt) months cumulative perfor-
the Fiscal Responsibility Act, in 1997. As on June 2003 mance is reported, for example
1994. The main objective of this further improved to NZ$ for the month of August it will
the State Sector Act, 1988 is to 4,523 million (11.8% of total be two months and for Sep-
improve productivity, to ensure debt). The interest burden of tember it will be three months.
that the managers have greater external public debt also ex- If we evaluate the cost and the
degree of freedom and flex- hibited a significant decline benefits associated with the
ibility in exercising their du- from NZ$ 1,477.8 million in adoption of accrual account-
ties and are accountable to the 1988 to NZ$ 559.1 million in ing by the government it can
Government for the work done 1997 and further dropped to be safely concluded that the
by them. The Public Finance NZ$ 216.6 million in 2003. benefits far outweighed the
Act, 1989, provides a legislative Interest charges on external costs involved in the transition
basis for improving the quality public debt as percentage of to accruals accounting. It also
of financial management and total exports also moved fa- needs to be stated that it is not
also requires that government vorably from 9.0% in 1988 to only the change in account-
should report on a basis that is 2.1% in 1997. This further ing system that has improved
consistent with Generally Ac- dropped to 0.5% in 2003. The the financial indicators of the

1028 The Chartered Accountant January 2006

economy but the commitment
from the government itself to
improve is also must. Good
accounting system is a means
for bringing about the desired
improvements and not an end
in it self.

Steps Taken and Directions

Suggested for India
India at present is following
cash basis of accounting. The
following steps taken by India,
however, indicate that it is on
its way to an accrual system ac-
l Very recently all the Lo-
cal Bodies, Autonomous
Institutions and Universi-
ties have been instructed
to prepare their accounts
on format basis that is just
equivalent to meeting the
requirements of accrual
l The Twelfth Finance
Commission in its report
has suggested for a change
in the nations accounting
system that has been ac-
cepted, indicating a move
from cash basis to accrual
l A committee has also been
set up by the Comptroller accrual system of accounting b) sufficient knowledge has
and Auditor General of and also understanding its been imparted to the of-
India to develop a frame- strategic need for a nation in ficers involved at different
work and examine the terms of providing informa- levels;
technical feasibility of re- tion which is more useful for c) the change should not be
forming the Government decision making, India cer- spontaneous but gradu-
accounting system. tainly needs to quickly switch ally over a span of three
l The Government has also over to the accrual system of to four years and all pos-
set up Government Ac- accounting. However, it is also sible preparation should
counting Standards Board important to mention that the be done before embarking
for the developing Gov- exercise of moving from cash on full implementation;
ernment accounting stan- system of accounting to ac- d) there must be sufficient
dards for the country. crual system of accounting resources with it to imple-
l The activity of account- should be done in a phased ment the change;
ing reforms has already manner and some pilot studies e) it has examined the im-
been initiated at ‘Ministry may be conducted. Before the plications of presenting
of Surface Transport’ on government wishes to move financial statements in ac-
pilot basis. The accounts from cash accounting system crual manner; and
there are initially planned to accrual accounting system f ) the employees are trained
to be prepared on accrual it must ensure that: not only to prepare the
basis parallel with cash a) the top level officers are statements based upon ac-
basis. fully involved in the pro- crual system of accounting
Considering all this and cess and are committed to but also to understand as to
the merits associated with the implementing it; how to analyse them. r

January 2006 The Chartered Accountant 1029