Why Governments Should Use The Government Finance Statistics Accounting System

ABACUS, Vol. 47, No. 4, 2011 doi: 10.1111/j.1467-6281.2011.00347.
ALLAN BARTON
Why Governments Should Use

the Government Finance Statistics
Accounting System abac_347 411..445
In May 2008, the Australian government presented its budget to parliament

solely in terms of the IMF Government Finance Statistics (GFS) account-
ing system; and in December 2008 it announced that all outcome financial
statements were also to be GFS based.
These two decisions brought to an end a long and arduous controversy
over the use of accrual accounting by governments in Australia since their
adoption the early 1990s. Initially, the Australian Accounting Standards
(AAS) business-based system was adopted, with a few modest extensions
covering the public sector. However, there was much controversy over the
displacement of cash accounting and budgeting systems by accrual
accounting; and secondly whether the AAS system was appropriate for the
public sector.
In May 1999, the Australian government introduced accrual budgeting in
place of cash budgets. However two sets of accrual budgets were presented
to parliament—an AAS-based one and a GFS-based one. The two budgets
presented substantially different results, causing endless confusion in par-
liament. Furthermore, departments and the whole of government contin-
ued to present only AAS outcome financial statements.
In this paper, the above history is traced out together with the reasons
for the decisions. The final decision to adopt the GFS system, covering both
cash and accrual accounting systems, is explained in terms of the roles and
operating environments of governments. These determine the financial
information needs of government, and they are shown to be fundamentally
different from those of business. Finally, the structure and concepts used in
the GFS system are explained.
Key words: Cash and accrual accounting systems; Government Finance
Statistics accounting system; Roles of governments.
The adoption of accrual accounting by Australian governments during the 1990s was
one of the most important reforms made under the extensive new public manage-
ment reform programs here and in many advanced nations (Hood, 1995). But much
controversy has accompanied its adoption. While accounting professional bodies
and firms supported its adoption, many academics challenged its adoption, both as a
matter of principle or on account of particular requirements of the system adopted.
Allan Barton is an Emeritus Professor in the College of Business and Economics at the Australian
National University in Canberra and an Honorary Professor of Accounting at the University of Sydney.
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Invariably the accounting standard bodies prescribed adoption of the existing stan-
dards by the public sector, with some minor modifications, as occurred in Australia.
The Commonwealth Government of Australia decided to adopt accrual account-
ing (AA) in 1992, and all departments had installed it by 1994 and the first draft
consolidated financial statements were prepared in 1995. During this period, the
only standards available were the Australian Accounting Standards Board (AASB)
standards.1 In 1996, three new standards designed for the public sector were
promulgated—AAS 27, 29 and 31, covering local governments, government depart-
ments and the whole of government. However, the standards were adopted only for
outcome financial reporting; all budgets were still based on cash accounting. In May
1999, the Commonwealth Government presented its budget on an accrual basis in
order that the outcome results could be readily compared with their respective
budgets, and discontinued its cash budgeting system. However, two sets of budget
papers were presented to parliament—an accrual budget based on AAS, and
another one based on a newly upgraded Government Finance Statistics (GFS)
system incorporating accrual accounting. The government’s Charter of Budget
Honesty Act (1998) prescribed that only official external accounting standards
should be used and there were now two such sets of standards. The GFS system is an
International Monetary Fund (IMF) system used extensively around the world for
national income measurement and for fiscal policy purposes. Prior to its upgrade
incorporating accrual measurements in the late 1990s, it was a cash-based system.
However, each set of budgets reported substantially different figures for most
items, leading to much confusion in parliament. Which set of budget figures were the
correct ones, and which budget did the cash appropriation bills relate to? As well,
both sets of accrual budgets were presented with their cash counterparts, adding to
the confusion. This state of confusion persisted until a new Labor government, with
little warning, scrapped the AAS budgets in May 2008 and presented only the GFS
accrual budgets together with their cash counterparts.
Furthermore, another cause of confusion existed in the budget and accounting
systems—departments only used the AAS system for their budget and financial
reporting to parliament. In December 2008, the government made the decision to
discontinue use of the AAS system for their outcome financial statements, and to use
only the GFS cash and accrual system. The changeover is still underway. Australia is
the first nation in the world to use the GFS cash and accrual accounting system for
both its budgeting and outcome financial reporting.
The above history sets the background to this paper. The explanations and analy-
sis are confined to the Commonwealth Government of Australia, and within it, to the
general government sector (GGS). Thus it is confined to the budget sector of the
government which is directly controlled by parliament. The GGS excludes public
financial corporations such as the Reserve Bank of Australia and public non-
financial corporations such as Australia Post. All the other government corporations
are fairly small and their results are scarcely material in the whole of government
financial statements. Furthermore, all state governments are now required to use the
1
AAS became equivalent to IFRS on 1 January 2005.
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W H Y G OV E R N M E N T S S H O U L D U S E T H E G F S AC C O U N T I N G S YS T E M
GFS system and the analysis here can also be applied to them with appropriate
modification for the different activities they undertake.
Before examining why governments should use the GFS accounting system, some
further background information is covered to assist readers to understand the many
issues involved in the final adoption of the GFS system. These topics comprise:
1. the nature and purpose of accounting as a financial management information and

reporting system (FMIRS) which reports required information to stakeholder
users;
2. the nature, purpose and functions of governments as compared with those of
business; and
3. fundamental differences between the two sectors.
The GFS system is then outlined and its relevance for public sector use demon-
strated. Some concluding comments complete the paper.
ACCOUNTING AS A FINANCIAL MANAGEMENT INFORMATION AND

REPORTING SYSTEM (FMIRS)
The purpose of an accounting system is to provide financial information on an

entity’s activities, resources and performance as required by stakeholder users. It
should be a useful FMIRS. To achieve this objective, accounting concepts, standards
and processes must be designed to report the financial information needed by users
to enable them to perform their functions. To be useful, the information must be
relevant, reliable, comparable and understandable by users (AASB Framework, July
2005). Only when these conditions are satisfied can the FMIRS provide financial
statements to stakeholders which faithfully represent what they purport to represent
and hence provide a ‘true and fair view’ of the entity’s financial performance and
position. The AAS and GFS systems are appraised on the basis of these criteria.
THE NATURE, PURPOSE AND FUNCTIONS OF GOVERNMENT
Governments are elected by citizens to manage the affairs of the nation as a whole to
provide those goods and services which cannot readily be provided by private firms.
They act as the agents of citizens and are accountable to them for their actions and
performance. U.S. President Abraham Lincoln (1863, p. 282) recognized the impor-
tant roles of governments many years ago when he observed:‘The legitimate object of
government is to do for a community of people whatever they need to have done, but
cannot do at all, or cannot do so well, for themselves in their individual capacities’.
Nowadays a widely accepted prescription for the roles of government in a modern
democratic nation is ‘the provision of public services that are mainly non-market in
nature, and for the collective consumption of the community, or involve the transfer
or redistribution of income. The services are largely funded through taxation and
other compulsory levies’ (Commonwealth of Australia, Budget Paper No. 1, 2009–10,
p. 9.13, adapted from IMF, 2001, para. 1.2).
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Functions of Governments
Undertaking these responsibilities requires:
1. provision of public goods and services to the community,
2. provision of social welfare services to the community, and
3. raising taxation revenues to fund the above services.
In undertaking these duties, governments aim to formulate their policies in such a
way as to achieve:
4. stable economic growth to ensure high levels of employment, productivity growth
and rising real incomes, and low inflation rates, referred to as macroeconomic
management policies;
5. an acceptable distribution of income and wealth across the nation’s citizens and
the avoidance of poverty;
6. maintenance of intergenerational equity by ensuring that each generation funds
the public and social welfare services that it receives and does not bequeath debts
to future generations;
7. protection, conservation and enhancement of the nation’s natural environment;
and
8. protection, conservation and promotion of the nation’s cultural facilities.
The implementation and funding for these policies is undertaken in government
budgets, and are referred to as fiscal policies.
9. Efficient management of government resources.
The nature of these functions is explained below:
1. Provision of public goods and services to the community Typical examples of

these goods and services include the nation’s systems of law, order and regulation,
foreign affairs policies, defence services, public roads, recreational facilities such as
parklands and sports grounds, cultural facilities such as art galleries and museums,
environmental protection, and so on. They also include public schools and hospitals,
preschool and aged-care facilities. With a few partial exceptions, private firms cannot
provide these services to the community as they do not have the legal powers to do
so or they are cost prohibitive. As explained below, most public goods and services
require substantial investment in their facilities which causes fixed costs to be high,
whereas the direct marginal costs of providing additional services to users are often
negligible or zero. As well, for some of the services, such as use of public roads, there
is a ‘free-rider’ problem. Unless the government reclassifies the road as a toll road
(which is only practical for major highways), the owner cannot enforce payment and
users can therefore easily avoid it.
The underlying difficulty with private provision of public goods and services is that
they are characterized by non-rival and non-excludable use characteristics (Stiglitz,
2000).These conditions require that they be provided on a collective basis to citizens,
and funded likewise from taxation. The concept of public goods is a technical eco-
nomics term which also includes services. They are also referred to as community
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goods. The use of public goods is non-rival, as one citizen’s use of them does not
prevent other citizens from using or benefiting from them.Their use by any one citizen
is non-excludable, as no one can prevent others from using them. Public goods are
provided to the community generally—they are open to all citizens to use or benefit
from them, and they share in their use. Citizens have no property rights to them.
Public goods are referred to as pure ones when the above conditions fully apply.
However, for a few public goods where exclusion is possible, such as for public
schools and hospitals, all citizens may not have access to them when capacity con-
straints occur. In such cases, a rationing mechanism such as waiting lists is
required. Alternatively, residents can access private schools and hospitals if they
can afford the price, or the government may subsidize their use by citizens, either
directly (as in a Medicare health insurance payment) or through payment of a
subsidy to the school or hospital. In these cases, the item is referred to as a mixed
public/private good.
Hence, where goods and services required by citizens have the characteristics of
non-rival and non-excludable use, it is more efficient and effective for governments
to provide them on a collective, shared-use basis, and likewise for citizens to fund
them on this basis through taxation. This is in accordance with Abraham Lincoln’s
observation of 1863. Such goods cannot be provided by business firms because of
their non-market nature. They can only be provided by the GGS, as indicated in the
IMF’s prescription of core government roles.
The nature of public goods and services can also be explained in terms of the
economic concept of externalities. Externalities occur wherever private costs do not
equal social costs (i.e., the total cost incurred by the nation) or conversely where
private benefits do not coincide with the total social benefit. Social costs exceed
private costs for example where private production or use of the good causes
pollution of the environment. Where this occurs, environmental degradation results.
The global warming crisis can be explained in terms of such negative externalities.
Alternatively, with respect to differences between the two sets of benefits, an
increase in educational and health standards accruing from private (or mixed
public–private) provision may enhance the productivity and general welfare of the
community. While externalities at the level of individual firms and consumers may
not always be significant, they can have substantial flow-on effects at the national
level. Two current examples of major negative externalities causing severe national
and international problems are the global financial crisis and global warming.
2. Provision of social welfare services to citizens Governments provide a range of

social welfare services to disadvantaged citizens for social equity purposes. Commu-
nities generally desire to provide assistance to elderly folk in the form of age
pensions and health care, unemployed citizens, those needing substantial care
because of injury or medical reasons, as well as to children in day care centres and
public schools. There is always a substantial overlap in the provision of education
and health support between the public goods and social welfare reasons. Private
firms have no obligation to provide social welfare benefits to their staff or the public.
This obligation is also covered in the IMF specification of the key roles of the GGS.
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3. Taxation policies Governments invariably use a range of taxation methods to

fund their activities. These include income taxes on persons, company profits taxes,
expenditure taxes, capital gains taxes, and so on. With respect to personal income
taxes, governments generally use progressive income tax policies and capital gains
taxes to restrict the accumulation of excessive wealth by some citizens. This helps to
avoid a gross maldistribution of income and wealth in the community as well as
providing taxation revenues used by governments to provide welfare services to
relieve poverty.
4. Macroeconomic management policies Free market economies through history

have undergone cycles of unstable economic growth resulting in booms and reces-
sions, and their accompanying substantial unemployment, business bankruptcy and
government budget deficits (Garnaut, 2009; Stiglitz, 2010). The current world finan-
cial crisis is an example of this. Fiscal policies can play an important role in ensuring
stable economic growth with high employment and low inflation, though they must
be supported by complementary policies concerning monetary supply and interest
rates (Reserve Bank responsibilities), exchange rates, tariffs, wages, business com-
petition and other economic policies. The great macroeconomist, John Maynard
Keynes (1936), analysed the problems of the trade cycle and explained how fiscal
policies could be developed to minimize the extent of such cycles. In particular they
require governments to allocate their budget expenditures to promote stable
growth, productive employment and business profitability, and use budgets to
manage aggregate demand in the economy and generate surpluses in good economic
periods which can assist in funding budget deficits incurred in recessionary periods.
This policy also assists in achieving intergenerational equity.
5. An equitable distribution of income and wealth across the nation’s citizens While
measures of national income per head indicate the level of average income in a
nation, they are not good measures of overall economic and social welfare where
there are both some extremely wealthy citizens and large numbers of citizens living
in poverty. Government policies normally aim to improve the overall well-being of
their communities. Taxation and social welfare policies, together with full employ-
ment policies, endeavour to bring about a socially acceptable distribution of income
and wealth.
Neoclassical economic theory does not examine the distribution of wealth and
income across the nation because it is confined to production theory of goods and
services.
6. Maintenance of intergenerational equity The ageing of the population, slower

rates of economic growth in recent years and mounting government debt levels
(though less so in Australia compared with the United States, United Kingdom and
the European Economic Union) have focused long-term budget policy attention on
the need to ensure that budgets over the medium term do not incur deficits. Other-
wise government debt accumulates which must in due course be repaid by future
generations for services provided to previous generations.The National Commission
of Audit Report (1996) drew the government’s attention to the likely impact of an
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ageing population on future government debt levels unless corrective action was
taken. The government accepted the recommendations and included the need to
achieve intergenerational equity in the Charter of Budget Honesty Act (1998). An
Intergenerational Report is currently produced every three years. In Australia, the
age dependency ratio of the population, that is, the number of 65 plus year olds to
18–64 year olds, is forecast to double from 19% to 39% by the year 2047; that is, the
number of people in the working age group who can support the elderly will decline
from 4:1 to 1.5:1 (Intergenerational Report, April 2007). Can the future work force
support such a high number of elderly citizens? Policies to reduce this enormous
burden on future taxpayers include governments reducing their existing debt levels
through generation of net budget surpluses over the longer term, encouraging
citizens to increase their superannuation benefits through higher contributions and
tax incentives, and postponing retirement dates.
As well as an ageing population, the non-funding of public servants’ superannua-
tion by governments until recently (resulting in substantial government debt),
increasing inadequacies in public infrastructure, environmental degradation, and
inadequate preservation of the nation’s cultural facilities, impact on future citizens.
7. Environmental protection policies Governments have a major responsibility to

protect the natural environment to avoid its degradation (Barton, 1999b, Stern,
2009). Life depends on the whole ecosystem, that is, the natural environment, and it
requires government protection because it can be treated as a ‘free good’ by firms
and people when they incur no charges for its use. While the threat of global
warming is of the utmost concern at the moment, the problem is a much wider one.
Pollution of land, rivers, seas and water catchment areas by industry and people has
caused substantial damage, poor farming practices cause reductions in soil fertility
and erosion, excessive destruction of native forests (particularly tropical rain forests)
and so on, together with global warming, have damaging environmental impacts.
These include significant reductions in ecological biodiversity and loss of many
species of plants, animals and birds; melting of glaciers and icecaps, destruction of
barrier reefs, and so on. The World Commission on Environment and Development
(1987) expressed grave concerns about the damage being caused to the natural
environment of planet Earth and recommended adoption of policies to achieve
ecological sustainability. Recent concerns about increasing greenhouse gases in the
atmosphere which are a major cause of global warming and climate volatility have
received major attention from governments world-wide. Since around 1850, green-
house gas concentrations in the atmosphere have grown from 285 parts per million
(ppm) to 430 ppm and average global temperatures by around 2 degrees; and climate
volatility (storms and droughts) has increased (Stern, 2009). Many solutions have
been proposed for carbon pollution reduction schemes to reduce the volume of
carbon dioxide and other greenhouse gases being dumped into the atmosphere.
However, international agreement is still to be achieved.
Environmental degradation is a major negative externality which governments
should endeavour to reduce for the benefit of both current and future generations of
citizens, and for the world at large as many of the issues are global ones. Without
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government intervention, firms and people can treat the natural environment as a
‘free good’ and recklessly exploit it. Current Australian government policy is to
reduce greenhouse gas emissions by 60% by 2050. Environmental management
policies can include ‘green’ taxes on carbon pollution and other areas of pollution to
raise private costs to their total social cost and use the revenues for remediation;
placing caps on emissions and subsidizing development and installation of new clean
fuel technologies such as solar and wind electricity generation in place of coal-fired
plants; regulations to stop pollution; restrictions on forest clearing; restrictions on
water consumption; requirements for increased efficiency in building design to
reduce power consumption; upgrading public transport facilities in cities to reduce
use of cars and trucks, and so on.
8. Management of the nation’s cultural facilities Preservation and promotion of the
nation’s important cultural facilities is another important responsibility of govern-
ment (Pallot, 1990; Carnegie and Wolnizer, 1995; Barton, 1999b, 2000). They include
public art galleries, museums, libraries, symphony orchestras, war memorials, park-
lands and gardens, sporting and other recreational facilities which store much of the
nation’s heritage. They all produce significant positive externalities through educa-
tion, scientific research and improvements in human health. Citizens desire to learn
about the nation’s history and culture and they reap enjoyment from them. Because
they cannot readily be provided by private firms on account of the high costs incurred
and the inability to charge cost-recovery admission charges,they become public goods
which depend largely on the government for their provision. Free admission stimu-
lates public use of the facilities and thereby enhances the nation’s culture.
9. Efficient management of government resources A final responsibility of govern-
ments which only came to be emphasized during the extensive public sector reform
programs of the 1980s and 1990s, was recognition of the need to manage all their
own resources (comprising total revenues, total costs, total assets and total liabili-
ties), used to provide services to citizens as efficiently and effectively as possible, and
not confine their attention to only cash receipts and expenditures and cash balances.
Improved efficiency minimizes government operating costs and releases funds for
the provision of additional services, enhanced budget savings or tax reductions. It
also enhances government accountability to citizens for its performance in under-
taking its tasks.
Government Accountability to Parliament and Citizens

A final important requirement for governments concerns their accountability to
parliament and electors (Funnell and Cooper, 1998; Mulgan, 2000, 2007). Govern-
ments are elected by citizens to undertake the above tasks on their behalf. They are
agents of citizens. A fundamental legal and political requirement is that government
policies and their implementation must be transparent so that citizens know what
their governments are doing on their behalf and their financial implications, and
secondly that governments are accountable to citizens for their policies, actions and
performance. Governments must accept responsibility for these matters and are
answerable to citizens in elections. Transparency and accountability are largely
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achieved through all policies and their financial requirements having to be presented
to parliament and approved by it before they can be implemented. Thus with respect
to budget matters, the Australian Constitution (1901, ss 81 and 83) require that all
taxation and expenditure policies must be approved by parliament before they can
be implemented. Secondly, all financial outcome statements must be audited and
presented to parliament. Hence all budget statements must be presented to parlia-
ment for debate and approval and all cash allocations to departments and agencies
must first be approved in Appropriation Bills by parliament. Regular ex post budget
reports are presented to parliament throughout the year so that it is kept advised of
progress to date.
Differences Between Government and Business Operations

As can be seen from the above explanation of the nature, purpose and functions of
government as compared with those of business, there are many fundamental dif-
ferences between the two sectors. While governments are established to act on
behalf of citizens in the provision of public and social welfare goods and services
funded from taxation, and in so doing maintain a stable economy with high employ-
ment levels and so on, businesses are established to sell private goods and services
to users who wish to purchase them in the expectation of earning profit. Buyers own
the goods they purchase and can use and dispose of them as they wish. Firms’
operations are funded from owners’ investment, borrowings, and revenues received
from sale of their outputs, and they must earn adequate profits and maintain a sound
financial position to survive. Thus performance information on revenues, operating
costs and profits, and on all assets, liabilities and equity is essential for their good
management and for reporting to investors and the capital market. This information
is reported in general purpose income statements, balance sheets and cash flow
statements as per the AAS standards.
While there are parallels in the types of information required for public sector
entities, there are also differences because of basic differences in the purposes served
by each sector and the nature of their operations. Sales revenue and taxation
revenues are fundamentally different in nature; profit differs from the government’s
operating budget balance which is not distributable as dividends; the government’s
balance sheet is not a full statement of its financial position as its most valuable asset,
namely the power to tax, is not included. These matters are discussed later in the
paper (pp. 423–6).
Furthermore, there are major differences in the accountability requirements of
each sector. Business operations need to be undertaken on a confidential basis
because they cannot let competitors know any details about them, and their budgets
and departmental activities and results are confidential, while the accountability
information provided to investors is restricted to the provision of general purpose
financial statements once a year, supplemented by abbreviated quarterly reports.
These accountability requirements are only minor when compared with those of
governments, as explained above.
Hence, it can be seen from the above explanation of the respective nature and
roles of government as contrasted with those of business operations that there are
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many important differences between them. For a government accounting system to

be a useful FMIRS, it must be designed to take account of these special attributes of
government. Otherwise it cannot provide relevant and reliable information to man-
agement, parliament and citizens in the financial statements which faithfully repre-
sent what they purport to represent and hence provide a ‘true and fair view’ to
stakeholders. If these fundamental differences did not exist, the functions of gov-
ernments could be reduced largely to law making and regulation, and most services
could be provided by business. But most citizens prefer that they be provided by
government and pay taxes to fund them.
THE PATHWAY TO ADOPTION OF THE GFS ACCOUNTING SYSTEM
Some History
Notwithstanding the above fundamental differences between governments and busi-
ness in their objectives, roles and operating environments, the AASB refused to
recognize their implications for standard setting for the public sector for many years.
Rather, they stayed with their policy of sector-neutral accounting standards under
which business accounting standards should be used by all sectors of the economy,
with only some minor variations to allow for ‘industry differences’. This policy was
applied to the development of the first three industry standards for the public sector:
AAS 27 (1996) covering accounting for local governments, AAS 29 (1996) covering
government departments, and AAS 31 (1996) covering the whole of government. All
the standards required adoption of accrual accounting based on existing business
accounting standards. At that time, they were the only ones available. Most govern-
ments in Australia had installed accrual accounting systems prior to 1996. The policy
of sector-neutral standards was subsequently justified by McGregor (1999) who
stated that:
An important feature of the concepts statements developed by the Board is that they are
applicable to financial reporting by all types of reporting entities. That is, no distinction is
made between entities on the basis of . . . sector location (public or private).
The concepts referred to are in the Conceptual Framework comprising SAC 1
(1990), SAC 2 (1990), SAC 3 (1990) and SAC 4 (1992). SAC 3 and SAC 4 were
subsequently absorbed into an updated Conceptual Framework (2005) upon the
adoption of the International Financial Reporting Standards (IFRS) by Australia in
2005.
When accrual budgeting was introduced in 1999 to enable comparability of budget
statements with their accounting financial statements counterparts, the government
presented two set of budget papers to parliament—one based on AAS and the other
on Government Finance Statistics accounting standards. Treasury required the GFS
budgets for fiscal policy uses as they found the AAS budgets did not provide the
information they required. However, the GFS system was unknown outside Trea-
sury, and in particular to the accounting profession. The GFS accounting system,
which is explained later in the paper, is an International Monetary Fund (IMF)
system designed specifically to provide governments with the financial information
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they require for fiscal policy purposes, as well as for the measurement of nations’
gross domestic products (GDPs) and its components.
The presentation of two sets of budgets to parliament led to major confusion, as
both reported significantly different results (Commonwealth of Australia, Budget
Paper No. 1, 1997–2007; Barton, 2007). Questions arose concerning which budget
presented the ‘true and fair’ results to parliament and should be believed; which
budget was to be approved by parliament; and so on. These issues caused substantial
controversy over the ensuing years and the path to their resolution was a long and
controversial one.
Some academics challenged the application of the business accounting standards
to governments. Walker (1989) began the debate but to no avail. Barton (1999a,
2003) and Newberry (2002) resumed it after the publication of McGregor’s (1999)
justification for the sector-neutral principle, as did the senior Heads of Treasury
Accounting and Reporting Advisory Committee (HOTARAC) which represented
all governments in Australia (Challen and Jeffery, 2003, 2004, 2005).2 The Joint
Committee on Public Accounts and Audit (JCPAA) reviewed the matter (Report
No. 388, June 2002) but was unable to resolve it.3 In December 2002, the Financial
Reporting Council (FRC) issued a directive to the Board that it ‘pursue as an urgent
priority the harmonization of . . . GFS and GAAP reporting. The objective should
be to achieve an Australian Accounting Standard for a single set of government
reports’ (Bulletin, December 2002).4 Later, the FRC commissioned Mr K. Simpkins
to examine the case for applying sector-neutral standards to the public sector, and he
did not find a strong case to support it (Report, 2006).5 Next, the Senate Committee
on Finance and Public Administration (SCFPA) examined the provision of two sets
of budget papers and recommended that a single system was required (Report,
March 2007). While it did not recommend adoption per se of the GFS system, its
recommendations all favoured it. The AASB had established a Convergence Com-
mittee to examine FRB’s ‘urgent’ harmonization directive, and in October 2007 it
finally issued AASB 1049, Whole of Government and General Government Sector
Financial Reporting. While the new standard incorporated many improvements to
the former AAS 29 and 31 standards (which were then withdrawn), it still remained
based on the AAS Conceptual Framework standards (SAC 1, SAC 2 and the Frame-
work, 2005) and retained many limitations for a useful public sector accounting and
budgeting information system. In return, the GFS system was modified to include
AAS treatment of some items.
2
Mr D. Challen was the Head of HOTARAC and Treasury Secretary in Tasmania, and Mr C. J. Jeffery
was Director of Finance and Accounting in the Tasmanian government. In addition, HOTARAC made
a large number of submissions recommending many changes to the standards to AASB, again with
little success.
3
The JCPAA is a senior parliamentary committee comprising members of the government and the
opposition from both Houses.
4
The FRC is a government-appointed body which determines the broad strategic directions for the
setting of accounting standards by the AASB.
5
Mr Simpkins was a former Deputy Auditor-General of New Zealand.
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However, a newly elected government chose to present its first budget for 2008–09
in May 2008 based solely according to the GFS system, as slightly modified to include
some AAS treatment of items where they were considered to be preferable. This
brought the complex and controversial matter of dual budget reporting to a sudden
end and the government has continued to present only GFS budgets since then.
At the same time in early 2008, the new Minister for Finance, Mr L. Tanner,
commissioned experienced Senator A. Murray, who was about to retire, to examine
and respond to a series of issues listed in his Operation Sunlight paper designed to
improve transparency and accountability in budget reporting. Many of the issues
arose from government departments continuing to use the AAS systems for their
accounting whereas throughout the government focused attention only on the GFS
budget, and comparability between the budget and outcome statements was lacking.
This further accentuated the confusion occurring in parliament. In his response,
Senator Murray recommended that all departmental and agency expenditures
should use the same accounting system as used in the budget to enable their align-
ment (Operation Sunlight Report, June 2008). The government accepted these rec-
ommendations in its December 2008 Response.
Before examining the issues concerning applicability of particular AAS concepts
and objectives to the public sector, a brief summary of the case provided for adop-
tion of the sector-neutral standards, as contained in the Simpkins Review (2006), is
given.
Sector-Neutrality of Accounting Standards

The major justifications provided by the standards setting authorities in several
countries for the adoption of sector-neutral accounting standards for the Simpkins
Review (2006) were as follows:
1. Economies in standard setting Only one rather than two sets of standards are
required, leading to cost savings in standard setting. Likewise only one rather than
two standard setting boards is required. Early in the adoption of accrual accounting
by the public sector, the question was raised by some professional accountants of
‘why reinvent the wheel?’ (Christensen. 2003).
While there can be initial cost savings, they will only be maintained in the long
term if the standards are appropriate for their areas of application. Use of inappro-
priate standards will result in the presentation of misleading information in the
adopting industry and thereby cause inefficiencies to occur. The accounting systems
will not satisfy the framework requirements of relevance, reliability, comparability
and understandability for a quality information system for the use of management
and stakeholders.
2. Governments use much the same types of assets as in the private sector While this
is true for normal administrative assets and financial assets, many types of physical
assets used in the public sector are not used to any extent in the business sector.
These assets include many infrastructure facilities (public roads, water storages, etc.),
defence equipment, war memorials, museums, art galleries, community parks and
gardens, and so on. Moreover, even where there is similarity in the physical form of
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the assets, the markets where they are employed differ, that is, public versus private
markets, and this affects their financial valuations. Consider, for example, how land
values differ according to zoning regulations even though the land itself is the same.
3. Enhanced comparability in financial reports of the two sectors Comparability can
only occur where like things are compared.Apples must be compared with apples and
not with oranges.The present system is akin to rolling all the fruit into one basket and
calling them apples. But given some fundamental differences between the public and
private sectors which are ignored by the standards setters, presentation of financial
information in the same format results in false comparisons being made, and leads to
incorrect decision making and performance accountability. Again the accounting
system will not be providing the useful information required of them.
4. Facilitate transfer of private sector accountants into the public sector to help ease
staff shortages A modest amount of retraining is the appropriate solution here,
rather than the adoption of sham comparability.
Simpkins (2006, pp. 88, 102) concluded that: ‘the current documents do not
provide a sufficient, nor, in some respects, appropriate basis to underpin sector-
neutral accounting standards for the future’, and ‘in my view the needs of users of
public sector . . . entities in Australia are not being met to the extent that they
ought’. Finally, he stated that ‘the primary test should be which approach is likely to
best meet user needs’.
PROBLEMS WITH THE APPLICATION OF AAS TO

THE PUBLIC SECTOR
The main concern with the application of AAS to the public sector is that they do not
sufficiently acknowledge the fundamental differences in the nature, purpose and
functions of government from those of the business sector, as explained earlier in the
paper. These matters are the primary determinants of the relevance of financial
information for stakeholder needs. Many of the issues examined below are covered
in the extensive literature in the topic. This includes Barton (1999a, 1999b, 2000,
2004, 2005, 2006, 2007, 2009), Carnegie and Wolnizer (1995), Christiansen (2003),
Conn (1996), Ellwood and Newberry (2007), Guthrie (1998), Guthrie et al. (2003),
Lapsley (1999, 2009), Mulgan (2000, 2007), Newberry (2003), Newberry and Pallot
(2005), Walker (1989), Walker et al. (2000), and Wanna (2008).
The major limitations in the AAS Conceptual Framework with respect to the
public sector all concern matters of relevance. They comprise:
1. Objectives statement The Framework (paras 12–14) states ‘the objectives of
financial reports is to provide information about the financial position, financial
performance and cash flows of an entity that is useful . . . to users in making eco-
nomic decisions . . . and to show the accountability of management for the resources
entrusted to it’. This is appropriate for business because profit generation is their
fundamental objective and they must earn sufficient profit and maintain a solvent
financial position to remain in business. Investors, capital markets and other
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external stakeholders require this information primarily for their decision making.
However, these are not the objectives of governments because of their service
provision roles. Government outcome financial statements should focus on their
accountability responsibilities to parliament and citizens rather than on providing
decision-useful information for investors (Mulgan, 2000, 2007). The decision making
information role is largely fulfilled by the publication and prominence given to their
budgets, unlike in business where budgets are confidential to the entity. In demo-
cratic nations governments must remain accountable to their citizens for their poli-
cies and actions. Published financial statements are one of the key mechanisms for
informing citizens of the government’s stewardship of their taxation payments and
provision of services. Accountability is a much more onerous responsibility for
governments than it is for business entities because of the different nature of their
environments and roles. Hence it requires greater emphasis in the objectives
statement.
2. Operating statements In AAS, operating statements under their varying names
(financial performance, profit and loss, and now comprehensive income) summarize
the revenues and expenses/losses of the business and its profit/loss. This information
is required for assessing its financial performance and for dividend distribution
purposes. While government operating statements also report on operating activi-
ties, these are significantly different from those of business. Taxes provide most
government revenues rather than sales to customers, and government expenses
contain a large share of cash transfer payments to citizens and other government
sectors (some 66% for the Australian government). The budget balance is not a
measure of profit or loss, but the extent to which government revenues have funded
the expenses of the period.
3. Balance sheets AAS balance sheets show all the assets, liabilities and equity of
the business as a means of assessing its financial position and its rate of return on
investment. Liquidity and solvency are important components of financial position.
However, while government balance sheets show their assets and liabilities, and net
worth in place of equity, they are not necessarily comprehensive statements of
financial position for several reasons. Governments do not have contributed capital
to provide funds for investment in assets; rather, they have a more valuable
right—the power to tax—which is not reported on the balance sheet. Secondly,
governments only report those assets that can be reliably valued, and this thereby
excludes many resources such as many cultural and environmental items, roads, and
complex defence equipment for which there are no active markets. Hence a negative
net worth (as currently exists for the Australian government) does not imply bank-
ruptcy as it would for a business. Finally, most of the non-financial assets are used to
provide services to the public and not for government revenue generation.
4. Assets AAS defines assets as ‘resources controlled by the entity . . . from which
future economic benefits are expected to flow to the entity’ (Framework, para. 49).
While this definition is appropriate for business and for the financial assets and some
physical assets of governments, it is not appropriate for most of their non-financial
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assets for three reasons. First, these assets do not generate cash revenues for gov-
ernment. Future economic benefits represent future cash inflows; cash is the medium
in which they are received (with a few negotiated exceptions). Rather, they provide
public services to the community such as defence, health, education, public roads and
so on. Secondly, the benefits are not received by the government; rather they flow to
the public.While the Framework extends the description of future economic benefits
to include ‘service potential’ (para. 49.1), this attaches an incorrect meaning to
economic benefits. Thirdly, for reasons about the control concept covered below, it is
appropriate to replace ‘control’ by ‘ownership’ for government assets.
5. Equity AAS defines equity as ‘the residual interest in the assets of the entity
after deducting all liabilities’ (para. 49). While this is appropriate for business, it is
not an appropriate concept for governments and is liable to misinterpretation in a
government balance sheet. Unlike business entities, governments do not need inves-
tor owners to fund their assets as they do this from taxation revenues and borrow-
ings. The item is better called net worth or net assets, and is useful information in this
context. For the GGS, it summarizes the financial consequences over time of fiscal
policies, and hence is an indication of their sustainability and intergenerational
effects. Furthermore, at the departmental level, departments have no equity in the
assets over which they have day-to-day management responsibilities. Again, net
assets or net worth are preferable titles.
6. Revenue The AAS definitions are convoluted and confusing. Revenue as such is
not defined in the Framework, and is referred to as income. However, income (or
profit) is traditionally defined in terms of the gain in net assets, whereas the term
revenue in the context of para. 74 relates to the inflow of assets that arise in the
course of the ordinary activities of the entity, and it is stated that revenue includes
both revenue and gains. It is desirable for definitions to have a contextual content to
indicate the nature of the item, rather than just be an arithmetical rule. Thus in the
case of governments, revenue is obtained from taxes and other compulsory levies on
the public as well as from user charges and investment returns, and which increases
government assets.
7. Expenses are defined in para. 70 as ‘decreases in economic benefits . . . in the
form of outflows or depletions of assets . . . that result in decreases in equity’. This
definition is the reverse of the (gross) income definition and it suffers from the same
inadequacies. It does not indicate that the entity receives resources or service ben-
efits from incurring the expenses to produce its services for sale to customers. As
well, it lacks contextual relevance for governments as the bulk of expenditures
comprise social welfare benefits paid to citizens and transfer payments to other
governments. For governments, expenses are the costs incurred to provide services
to itself or to the public.
8. Net profit This important concept is not defined in the AAS Framework, not-
withstanding that the pursuit of profit is the motivating objective of business and is
of tremendous importance to investors and the capital market and is the basis for
dividend payments. Its public sector counterpart is the budget balance, which is the
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difference between the operating revenues and costs of service provision, as mea-
sured in accordance with the other government standards. The measure is a key
variable in fiscal policy formulation and management. It affects the government’s
liabilities (for a deficit) or financial assets (for a surplus), capital markets and interest
rates (both being important externalities).
9. Measurement basis for the elements of financial statements The financial mea-
surement basis is critical to the meaning and uses of the statements of financial
performance and financial position. It affects the reported values of all assets and
liabilities, and hence net worth, and also the asset consumption charges which affect
profit or income. The options allowed comprise historical cost, current cost, current
realizable values, fair values, present values, and varying combinations thereof (para.
100). Historical cost is the most commonly adopted basis, but is rarely used alone.
Normally a range of bases are used together. Furthermore, no capital maintenance
basis is specified in the Framework (para. 81). This item determines the treatment of
asset and liability revaluations as revenue or as equity/net worth adjustments, as well
as asset consumption charges and hence income/budget balance, and it underpins
the concept of income or budget balance being measured.
Because no asset measurement and capital maintenance bases are prescribed in
the Standards, published corporate financial statements can fail to satisfy the criteria
required for information to be useful, particularly those of relevance, reliability and
representational faithfulness, comparability and understandability. (Framework,
paras 24–41). As a result, the financial statements may not report the ‘true and fair’
information on financial performance and position required for resource use deci-
sion making and accountability purposes.
10. Control The AAS concept of control concerns the capacity of the entity to
dominate the decision making of another and is used to define boundaries of the
entity (SAC 1, para. 6). Control over assets rather than their ownership is appropri-
ate for complex business structures as occurs in many corporate groups. But this
approach is not suitable for the public sector, and for example it was the reason for
the GGS not being recognized as an accounting entity prior to the release of AASB
1049 in October 2007 (Challen and Jeffery, 2003, 2004, 2005). Hence the GGS is
controlled by governments through parliament and not by some parent entity, and
for citizens it is the most important accounting entity in the nation.
Furthermore, the business control concept is not appropriate for judicial institu-
tions and for most statutory bodies. Courts of law are given complete autonomy for
adjudicating on cases before them under the Westminster system of democracy. The
governing boards of public corporations are given operational independence so as to
restrict ministers’ powers to intervene in their operations, even though they are
owned by governments.
Because of the above limitations of the AAS Conceptual Framework for public
sector accounting and financial reporting, it is not an appropriate one. Accounting
standards for the public sector must be designed for the specific nature and roles of
government. While the number of standards that require changing is relatively few,
they are the most fundamental ones mainly concerning the conceptual framework of
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the FMIRS. Most of the AAS concern the recording of transactions and these are
similar in both sectors apart from taxes and transfer payments.
THE GOVERNMENT FINANCE STATISTICS (GFS)

ACCOUNTING SYSTEM
As outlined earlier, the government initially adopted the GFS system for its 1998–99
budget along with the AAS budget; and following years of controversy and the
release of AASB 1049 in 2007, modified the GFS system as part of the harmoniza-
tion process. The GFS adopted some preferred AAS item treatments, the most
important one being the capitalization of defence weapons platform expenditures as
assets and subjecting them to depreciation charges. On the other hand, the AAS
adopted the GFS operating statement in place of its business income statement and
permitted the use of GFS treatment of items if they did not conflict with AAS
treatments where options were allowed. Some AASB 1049 requirements were not
accepted by the government. Budget Paper No. 1, 2008–09, Statement 9, Notes 1 and
2, and Appendix A set out details of the new policies and the reasons for the changes
accepted or rejected. Subsequently in December 2008, the government accepted the
recommendations of Senator Murray’s Operation Sunlight Report that all govern-
ment financial reports (of programs, departments and the GGS) should use the
enhanced GFS system.
Thus, with these few amendments, the government was able to produce a single
and meaningful set of budget statements based on one set of harmonized accounting
standards which complied with the requirements of the Charter for financial report-
ing. Furthermore, the GFS system provides for reporting both accrual and cash
budgets, together with their outcome financial statements, on the transactions basis.
Nature and Purpose of the GFS System

The purpose of the GFS system (IMF, 2001, paras 1.2–1.4) ‘is to provide a compre-
hensive conceptual and accounting framework suitable for analysing and evaluating
fiscal policy, especially the performance of the general government sector and the
broader public sector of any country’. Similar statements are included in the Aus-
tralian System of Government Finance Statistics (Australian Bureau of Statistics,
2005, paras 1.7, 1.14), a local adaptation of the IMF System. The system was devel-
oped specifically for the public sector to provide the financial information required
to accommodate the special nature and roles of governments and for assessing their
economic impact on the nation, as outlined earlier in the paper (pp. 413–19). It was
adopted by Treasury for these fiscal policy purposes because the existing AAS
accrual accounting systems did not provide the information. However, the statement
of purpose needs updating to include the provision of financial information required
to facilitate efficient management of all government resources
The system is based on IMF economic measurement standards used for the
measurement of the GDP of nations and its components, and is integrated with the
UN System of National Accounts (SNA). The system enables relevant and reliable
measurements of GDP to be made which are internationally comparable. It is an
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economic measurement system based on economic concepts throughout and uses a

rigorous, analytical approach. It is based on double entry recording, a sharp distinc-
tion between stocks and flows of resources, and use of current market prices of all
assets and liabilities (primarily current buying prices of non-financial assets and
realizable prices of financial assets and liabilities).
Outline and Structure of the GFS System

In order to provide the financial information required by governments to develop
fiscal policies and to measure their impact on the economy, and to measure all
government resource uses and stocks, the GFS incorporates the following features.
1. Distinction between stocks and flows of resources A sharp distinction is made
between stocks and flows of resources in the system because of their differing
economic effects. Resource flows directly affect production, sales and employment
and enter into the GDP, and they are reported in the operating statement. As well,
they affect the stocks of assets and liabilities as shown in the balance sheet. Changes
in resources can also arise from some non-transaction events such as changes in
market prices, discovery of new mineral deposits and the growth of forests.
Two types of resource flows are distinguished: transactions and other economic
flows. Transactions represent resource flows that come about as a result of interac-
tions between the government and external parties. Under accrual accounting, these
flows are recognized as and when they occur. Transactions are classified into
exchange transactions which involve the purchase and sale of items; while transfers
involve provision of goods, services or cash to or from the government without
recognizing something in return such as taxes and social welfare benefits.
Other economic flows represent changes to stocks that do not result from trans-
actions or from internal asset consumption. They arise from price movements and
abnormal events. They often arise fortuitously without any active decision making
being involved. Valuation changes in stocks of resources arise from price changes in
individual assets and liabilities. They are holding gains and losses which do not alter
the physical stock of resources. All assets and liabilities are revalued at current
market prices prevailing at the end of each year, and holding gains and losses are
then recognized.Abnormal items include damage caused by natural disasters (earth-
quakes, bushfires, floods, etc.), discovery of new mineral resources, and growth of
forests, etc. However, they are excluded from normal operating resource flows
because (for most items) they are irregular and largely unpredictable.
2. A transactions-based recording and financial reporting system A transactions-
based system is used in contrast to the AAS system based on the balance sheet
approach. With the transactions-based system, cash transactions are summarized
and reported directly into a cash flow statement, and likewise all transactions (cash
and credit) are summarized and reported in a statement of external transactions
(formerly known as a funds statement), see Appendix A. In a central data-based
financial information system, these transaction reports can be prepared daily if
required with little effort. In contrast to this approach, professional accounting
standards systems no longer provide for presentation of the (former) funds state-
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ment, and the cash flow statement is normally prepared from the accrual financial
statements by eliminating all non-cash components from each item. This is a time-
consuming and needlessly complex process when a simple, speedy and low-cost
alternative is available. It is also of note that the amounts disclosed in the cash flow
statement under the GFS and AAS systems differed markedly when both systems
were in use (Barton, 2007). Parliament expects statements of cash receipts and
expenditures of the government to be identical other than for classification
differences.
3. Financial statements reporting In Australia three statements are prepared—the

operating statement, balance sheet and cash flow statement—whereas four are used
under the IMF presentation. Other economic flows are included as a separate
component in the Australian operating statement but shown as a separate statement
in the IMF version. The IMF structure of the financial statements is shown in
Appendixes B and C, while the Australian version is shown in the Appendix D
financial statements.
While the three statements are broadly similar to those of business, their presen-
tation and classification of items differ significantly to suit the information needs of
government. The statements show important economic measures required for fiscal
policy purposes known as analytical balances, which are italicized in the following
paragraphs.
The operating statement summarizes on an accruals basis total transaction rev-
enues and operating expenses of the government, and asset consumption expenses
(inventory usage and depreciation) to derive the net operating balance for the
budget and its outcomes report. The net operating balance measures the extent to
which current revenues fund the operating costs of government service provision. It
thereby reports on the change in net worth of the government from recurrent
transactions activity and the ongoing sustainability of government operations. The
gross operating balance (not shown) can also be calculated by excluding the asset
consumption charges from the expenses to show the net redistribution of resources
from the private to public sector use. (This parallels the distinction between GDP
and the national income measurements in national accounting.)
Other economic flows comprising holding gains and losses on assets and liabilities
are reported in the lower tier of the operating statement. They are not included as
income as can occur under AAS, and they flow directly to net worth. Adjusting the
‘other economic flows’ provides the comprehensive result for the government’s
recurrent activities and resource revaluations over the period, and it shows the total
change in net worth. This information is important for assessing the government’s
performance over time and for its intergenerational consequences.
Next, as a note to the operating statement, the net operating balance is adjusted
for non-financial asset sales and purchases to determine the government’s capital
formation over the period and the fiscal balance. Government capital formation
indicates the extent to which the budget has added to the nation’s capital stock and
its capacity to provide additional public services. The fiscal balance measures the
government’s net lending or borrowing over the period, that is, the extent to which
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the government is either placing resources for disposal by other sectors of the
economy or utilizing savings. It indicates the financial impact of the government on
financial markets and on the rest of the economy.
The balance sheet presents the stock of government assets and liabilities and
shows its net worth. This information is necessary for their efficient management by
departments, rather than for fiscal policies. Assets are classified into financial and
non-financial items, and liabilities into interest-bearing liabilities, and provisions and
payables, unlike the current/non-current classification in the AAS. Net worth mea-
sures the extent of government ownership of the measured wealth of the nation.
However, unlike a business balance sheet, a government balance sheet is not a
comprehensive statement of its financial position and long-term solvency for the
reasons indicated earlier in the paper (see pp. 424) However, footnotes show parts of
the solvency information. Net financial worth of the government (total financial
assets less all liabilities), net financial liabilities (total liabilities less financial assets)
and net debt (borrowings and deposits held less all financial assets excluding equity
investments in other government entities) measures are shown in Appendix D.
Furthermore, a negative net worth does not imply government bankruptcy because
governments do not need contributed capital for funding their assets; rather, they
have taxation powers. Changes in net worth help assess the sustainability of existing
policies in government operations and their impact on future generations. Declining
net worth (consequent upon a running down of asset stocks or increasing liabilities
as a result of net operating deficits) can indicate the non-sustainability of present
fiscal policies and future budgetary problems, whereas increasing net worth does the
opposite.
The cash flow statement. While the statement records all cash flows arising from
operating, investing and financing activities, it is presented in a somewhat different
format to business ones to relate cash flows to their accrual counterparts for fiscal
policy purposes and for cash management. The statement reports cash receipts and
payments on operating activities to derive the operating cash surplus/deficit (which
is comparable to the gross operating balance in the operating statement). Cash
transactions on non-financial assets (capital formation), on financial assets for long-
term investment purposes, and on financial assets for short-term liquidity purposes,
are each shown separately for budget decision purposes. However, three important
analytical balances—the GFS underlying cash balances (the cash operating balance
plus capital formation expenditure and which is the counterpart to the accrual fiscal
balance measure), the underlying cash balance (the above plus income from long-
term financial investments), and the headline cash balance (the above plus income
from short-term investments), are reported in the main budget papers to highlight
their role in fiscal policy strategy (Budget Paper No. 1, 2010–11, Statement 3, Table 5,
pp. 3–12) rather than in the cash flow statement.
Specification of Key Items

Revenues are all transactions that increase the net worth of the GGS (IMF, 2001,
para. 4.20). They exclude all proceeds from sales of non-financial assets other than
inventories and all asset and liability holding gains and losses.
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Expenses are operating transactions that reduce the net worth of the GGS.
However, in the operating statement, depreciation (which is a non-transaction
event) is included as a deduction from gross operating balance to derive the net
operating balance (which flows through to net worth). The purchase of a non-
financial asset is not an expense because it has no effect on net worth (para. 4.25).
Assets are resources owned by the GGS and provide future benefits to the gov-
ernment or the community at large from holding or using them over a period of time
(para. 7.4). Non-financial assets may be general-purpose assets such as office build-
ings, equipment and schools; infrastructure assets which are immovable and gener-
ally do not possess alternative uses and whose benefits accrue to the community at
large such as roads and lighting systems; and heritage assets which the government
intends to preserve indefinitely because of their unique cultural and historical sig-
nificance (paras 7.7–7.10).
Liabilities are obligations to provide economic benefits for owners of the corre-
sponding financial claim (para. 7.14).
Net worth is the difference between the total value of all assets and total value of
all liabilities (para. 7.140).
All the descriptions of items are thus simple and appropriate for government
operations. Descriptions are also provided for sub-categories of each item.
Valuation of assets and liabilities. They are to be valued at their current market
values, that is, the amount to be paid to acquire the asset on the valuation date or to
discharge the liability (p. 114). If there are no observable market prices, assets can be
valued at their current new price less an allowance for consumption of fixed capital
(i.e., accumulated depreciation). Most fixed assets are recorded at their written down
replacement cost. However, those assets for which acceptably reliable valuations
cannot be obtained need not be included in the balance sheet. Many cultural and
environmental assets fall into this category.
Evaluation of the System

The GFS system which provides both cash and accrual information is superior to the
alternative systems. The system is designed specifically for government use and it
takes into account all the special features of governments which distinguish them
from the private sector, and hence the information provided is relevant to the needs
of government and parliament. It is a comprehensive FMIRS which provides gov-
ernments both with the financial information they require to undertake their desired
fiscal policies and to manage their resources efficiently and to fulfil their account-
ability obligations to parliament and citizens. A complete cash accounting and
budgeting system (CABS) can be an integral part of it to provide the information
required for fiscal policy and cash management purposes, along with the full accrual
information required to manage all the governments resources efficiently and to
assist in longer term fiscal policy management.
Cash budgets and outcome reports are required for annual fiscal policy purposes
and for assessing the liquidity of the GGS. Cash funds all the resources required by
governments to provide their services to the public. The Constitution requires that
all tax revenues to be raised and all expenditures to be made must first be approved
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by parliament. Fiscal policies cannot be managed without this information. Fiscal

policies substantially transfer the distribution of resources in the economy away
from the private sector to the public sector for the reasons contained in the budget
policies, and the extent of wealth and income redistribution from taxation and social
welfare policies. These amount to about 25% of the GDP in Australia. They also
have significant impacts on the performance of the macro economy apart from the
distribution of resources across it. A cash budget deficit shows the extent to which
the budget has stimulated the level of aggregate demand in the economy, which
increases employment and GDP, but can also promote inflation. Conversely, a
budget surplus withdraws money from the economy and reduces the level of aggre-
gate demand and employment, and lowers inflationary pressures.
Several important fiscal analytical balances and cash management balances are
reported in the cash flow statement and in the Budget Papers. All this information is
required for the good management of the macro economy to achieve stable eco-
nomic growth with full employment and low inflation. It is vital for budget policy
decision making and approval and for accountability purposes that this information
is provided to parliament.
CABS is also necessary for efficient cash management by the government to
ensure it has the liquidity to fund its daily operations and to minimize the borrow-
ings required to fund cash deficits when they occur. Large differences between cash
inflows from taxation and expenditures occur throughout the course of the year,
resulting in temporary cash surpluses and deficits.Where a deficit is expected, it must
arrange to borrow the money in advance through the sale of treasury notes by the
Reserve Bank, while conversely it can use temporary cash surpluses to redeem them
or invest them on the money market to reduce annual interest costs. Rolling cash
budgets must be prepared daily to facilitate efficient management. This can be
readily done in the GFS transactions-based system, but not from the traditional
method of adding back non-cash components used in the AAS system.
Finally, CABS information is required at the departmental level for budget legal
compliance and accountability purposes in addition to managing operations. Depart-
ments must operate within their budgets.
Hence, ongoing CABS information is required throughout the year for fiscal
policy management, cash management and budget compliance management. The
direct reporting of CABS data in the GFS system enables the provision of this
information.
Furthermore, the cash transactions of governments have significant flow-on
effects (externalities) on the macro economy. Budget deficits have to be financed
from government borrowing or asset sales and these impact on financial markets,
interest rates and the level of overseas debt, while budget surpluses have reverse
effects.
Accrual budgets and outcome financial statements are required primarily for the
good management of total government resources. These are largely departmental
management responsibilities. Information on total revenues and costs of service
provision, and on all assets and liabilities, must be known to enable their good
management and thereby enhance efficiency of operations (a major criticism of
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earlier reviews of government operations) and departmental accountability to par-

liament for their performance. Regular revaluations of physical assets at market
replacement cost (as new less accumulated depreciation) and charging depreciation
thereon and use of the physical capital maintenance concept provides information to
management about maintenance of the government’s operating capability to sustain
provision of infrastructure services into the future. Citizens expect their govern-
ments to do this.
The operating statement serves similar fiscal purposes as the cash budget but is
focused on whether the government’s revenues cover the full cost of service provi-
sion and not just the cash costs. It is also useful for showing the net impacts of current
fiscal policies on all the assets and liabilities in the balance sheet and on government
net worth. Changes in net worth, that is, the government’s share of the national
wealth, is a useful indicator of the sustainability of current fiscal policies. Increasing
debt incurred to fund services to current residents incurs future interest charges and
repayment obligations to be borne by future residents. If taken to an excess, this
can cause the acute political and economic problems currently occurring in many
nations.
The two tasks remaining to be completed for full use of the revised GFS system
are to complete its implementation in departments as their only FMIRS, and to
integrate the departmental cash reporting systems into a central data base for daily
cash management purposes.These tasks have arisen because departments previously
used the AAS systems as their primary system. Use of the GFS system throughout
the GGS facilitates comparability of departmental and whole-of-GGS activities at
budget and outcome levels, and cash management
CONCLUDING COMMENTS
The adoption of an accounting system by the Australian government appropriate for

its information needs has been a long and arduous task involving many conflicts and
differences of opinion over almost 30 years. If accounting is to be an FMIRS which
measures and reports useful information, it must be designed to suit users’ informa-
tion needs and report information which is understandable, relevant and reliable so
that the financial reports faithfully represent what they purport to represent and
thereby provide a true and fair view of the entity’s financial operations.
The paper examines the experience of the government in the development of new
accrual budgeting systems following the adoption of accrual budgeting in 1999 and
the scrapping of its former cash budgeting system. Along with the AAS budgets,
which complemented its accrual systems, the government introduced the largely
unknown GFS budget system. Doing so resulted in much confusion in parliament as
the two sets of budgets produced very different results and a major controversy
ensued concerning the merits of each system.
To resolve this issue, the paper explains the nature, purpose and functions of
governments to establish their financial information requirements for their budget
and accounting outcome reports, and how they differ from those of business. It then
traverses the long and controversial path to the ultimate adoption in 2008 of an
433
© 2011 The Author
A BAC U S
enhanced GFS system which incorporated AAS treatment of some items. This
includes an examination of the limitations of AAS concepts in their application to
the public sector and the validity of the sector-neutral accounting standards prin-
ciple adopted by the AASB. Pressure on the AASB to include the unique features of
government operations resulted in the development of the new standard, AASB
1049, for government use. This standard made some significant compromises and
some of its proposals which were desirable improvements were incorporated into
the GFS system. However AASB 1049 largely retained the conceptual framework
basis underlying all AAS which were formulated for business operations, and most
of its requirements were not accepted by the government.
In 2008, the government made the courageous decision to go it alone with the
adoption of the enhanced GFS system as its sole FMIRS. In doing so, it could report
on all cash transactions and all accrual transactions directly, which is important for
fiscal policy purposes. The GFS system is explained to show how it is designed to
provide the information needed by governments for fiscal policy, resource manage-
ment and accountability purposes. By being transactions based, cash and accrual
accounting and budgeting systems can be integrated into one comprehensive
FMIRS which reports the information needed by governments and parliaments to
perform the functions that citizens require of them. The information can satisfy the
standards for quality information.
Australia has now become the world’s leader in use of the GFS system for
government accounting purposes. Hopefully the benefits from using it will be rec-
ognized by other nations and its use becomes widespread.
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436
© 2011 The Author
APPENDIX A
FRAMEWORK FOR FINANCIAL MANAGEMENT AND
REPORTING SYSTEMS
Transaction Data processing Transaction Events Financial

data reports performance and
position reports
All external Recording, Financial

transactions of classifying and performance
entity summarizing and position
(transaction transactions in Internal based on
prices) the accounts historical costs
allocations for
asset
consumption
Cash flow Financial

statements performance
summarize all and position
external cash based on current
receipt and Changes in market values of
payment market prices of assets and
transactions assets and liabilities
liabilities
Operating Detailed
statements management
summarize all segment reports
external
transactions for
cash and credit
Source: Barton (1982, p. 46).
437
© 2011 The Author
A BAC U S
APPENDIX B
STRUCTURE OF THE GFS ANALYTICAL FRAMEWORK FLOWS
Source: Government Finance Statistics Manual, 2001, Figure 401, p. 37.
438
© 2011 The Author
APPENDIX C
STATEMENT OF GOVERNMENT OPERATIONS
Transactions affecting net worth Transactions in financial assets and liabilities

REVENUE (financing)
Taxes NET ACQUISITION OF FINANCIAL
ASSETS
Social contributions
Domestic
Grants
Foreign
Other revenue
NET INCURRENCE OF LIABILITIES
EXPENSE
Domestic
Compensation of employees
Foreign
Use of goods and services
Consumption of fixed capital
Interest 1 The net operating balance equals revenue minus
expense. The gross operating balance equals
Subsidies
revenue minus expense other than consumption
Grants of fixed capital.
Social benefits 2 Acquisitions minus disposals and consumption
of fixed capital.
Other expenses
3 Net lending/borrowing equals the net operating
NET/GROSS OPERATING BALANCE1 balance minus the net acquisition of non-
Transactions in non-financial assets financial assets. It is also equal to the net
acquisition of financial assets minus the net
incurrence of liabilities.
NET ACQUISITION OF NON-FINANCIAL
ASSETS2
Fixed assets
Changes in inventories Source: Government Financial Statistics Manual,
2001, Table 4.1, p. 38.
Valuables
Nonproduced assets
NET LENDING/BORROWINGS3
439
© 2011 The Author
A BAC U S
APPENDIX D
STATEMENT 9: BUDGET FINANCIAL STATEMENTS
Table 1
AUSTRALIAN GOVERNMENT GENERAL GOVERNMENT SECTOR OPERATING

STATEMENT
Note Estimates Projections
2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m
Revenue
Taxation revenue 3 275,751 267,727 275,981 301,876 331,002
Sales of goods and 4 6,373 7,483 7,746 7,918 7,706
services
Interest income 5 5,454 4,697 4,586 4,512 4,484
Dividend income 5 3,194 6,413 2,562 2,566 2,406
Other 6 5,166 4,292 3,967 3,905 4,085
Total revenue 295,939 290,612 294,841 320,776 349,684
Expenses
Gross operating expenses
Wages and salaries (a) 7 15,691 17,069 16,993 17,023 17,085
Superannuation 7 2,945 3,384 3,490 3,556 3,631
Depreciation and 8 5,520 5,634 5,570 5,343 5,430
amortisation
Payment for supply of 9 57,925 63,229 63,155 65,855 67,177
goods and services
Other operating expenses 7 4,694 4,571 4,806 4,995 5,177
(a)
Total gross operating 86,774 93,887 94,013 96,772 98,500
expenses
Superannuation interest 7 6,432 6,792 7,016 7,245 7,489
expense
Interest expenses 10 5,358 7,556 9,664 12,036 13,864
Current transfers
Current grants 11 94,804 102,185 105,371 110,451 113,529
Subsidy expenses 8,088 8,121 8,569 10,072 13,727
Personal benefits 12 111,556 99,579 106,406 111,960 120,085
Total current transfers 214,448 209,885 220,345 232,483 247,342
Capital transfers 11
Mutually agreed 1,717 1,657 1,738 1,846 1,932
write-downs
Other capital grants 9,712 18,434 11,752 6,006 5,865
Total capital transfers 11,430 20,091 13,490 7,852 7,796
Total expenses 324,443 338,213 344,528 356,388 374,990
Net operating balance -28,504 -47,601 -49,687 -35,612 -25,306
440
© 2011 The Author
Table 1
CONTINUED
2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m
Other economic flows

Revaluation of equity (b) -8,490 2,044 2,012 2,481 2,887
Net write-downs of assets -4,089 -3,903 -4,069 -4,268 -4,608
(including bad and
doubtful debts)
Assets recognised for the 316 293 272 228 218
first time
Actuarial revaluations -1,866 -1 0 0 0
Net foreign exchange -143 -5 0 0 0
gains
Net swap interest received -25 187 93 48 39
Market valuation of debt -3,245 147 -56 -372 -447
Other economic -112 -595 110 -98 -173
revaluations (c)
Total other economic flows -17,653 -1,832 -1,638 -1,981 -2,084
Comprehensive result—
Total change in net worth 13 -46,157 -49,432 -51,325 -37,593 -27,391
Net operating balance -28,504 -47,601 -49,687 -35,612 -25,306
Net acquisition of
non-financial assets
Purchases of non-financial 9,910 11,305 11,639 11,300 10,163
assets
less sales of non-financial 516 619 258 154 161
assets
less depreciation 5,520 5,634 5,570 5,343 5,430
plus Change in inventories 417 425 216 171 468
plus Other movements in 56 68 241 165 -24
Total net acquisition of 4,347 5,545 6,269 6,139 5,016
Fiscal balance (Net lending/ -32,851 -53,145 -55,956 -41,751 -30,323
borrowing) (d)
(a) Consistent with ABS GFS classification, other employee related expenses are reported under other
operating expenses. Total employee expenses equal wages and salaries plus other operating expenses.
(b) Revaluation of equity reflects changes in the market valuation of investments. This line also reflects
any equity revaluations at the point of disposal or sale.
(c) Largely reflects other revaluation of assets and liabilities.
(d) The term fiscal balance is not used by the ABS.
441
© 2011 The Author
A BAC U S
Table 2
AUSTRALIAN GOVERNMENT GENERAL GOVERNMENT SECTOR BALANCE SHEET
2008–09 $m 2009–10 $m 2011–12 $m 2011–12 $m 2012–12 $m
Assets
Financial assets
Cash and deposits 20 (a) 1,538 1,282 1,769 2,353 2,679
Advances paid 14 21,948 23,873 25,538 25,818 25,148
Investments, loans 15 102,506 100,415 92,308 92,496 93,927
and placements
Other receivables 14 32,708 36,626 38,975 45,944 56,747
Equity investments
Investments in other 18,870 20,177 23,848 30,073 30,098
public sector entities
Equity accounted 224 224 224 224 224
investments
Investments—shares 22,856 24,976 26,753 28,206 29,138
Total financial assets 200,650 207,572 209,414 225,113 237,961
Non-financial assets 16
Land 7,994 7,568 7,579 7,624 7,570
Buildings 18,967 20,227 21,139 22,375 22,791
Plant, equipment and 44,465 47,856 52,175 56,475 60,084
infrastructure
Inventories 6,523 6,921 7,108 7,213 7,614
Intangibles 3,101 3,752 4,179 4,561 4,885
Investment property 168 143 125 109 422
Biological assets 29 30 31 32 32
Heritage and cultural 8,286 8,376 8,419 8,460 8,500
assets
Assets held for sale 552 545 530 522 513
Other non-financial assets 3,003 1,874 1,804 1,485 1,304
Total non-financial assets 93,088 97,292 103,090 108,857 113,716
Total assets 293,738 304,864 312,504 333,970 351,677
Liabilities
Interest bearing liabilities
Deposits held 339 339 339 339 339
Advances received 0 0 0 0 0
Government securities 111,867 169,907 222,487 273,318 300,814
Loans 17 8,170 8,173 8,243 7,956 8,071
Other borrowing 919 851 791 754 706
Total interest bearing 121,296 179,270 231,860 282,366 309,929
liabilities
442
© 2011 The Author
Table 2
CONTINUED
2008–09 $m 2009–10 $m 2011–12 $m 2011–12 $m 2012–12 $m
Provisions and payables

Superannuation liability 18 118,401 122,423 126,499 130,575 134,672
Other employee liabilities 18 9,419 9,725 10,127 10,580 11,085
Suppliers payable 19 3,658 3,639 3,736 3,819 3,861
Personal benefits payable 19 14,222 12,490 12,995 13,900 14,977
Subsidies payable 19 1,586 1,659 1,937 1,991 2,076
Grants payable 19 6,746 6,511 6,481 6,377 6,384
Other provisions and 19 7,653 7,824 8,870 11,955 23,679
payables
Total provision and payables 161,686 164,271 170,646 179,198 196,733
Total liabilities 282,981 343,541 402,505 461,564 506,662
Net worth (a) 10,756 -38,676 -90,001 -127,594 -154,985
Net financial worth (b) -82,331 -135,968 -193,091 -236,451 -268,701

Net financial liabilities (c) 101,201 156,145 216,939 266,524 298,799
Net debt (d) -4,697 53,700 112,245 161,699 188,175
(a) Net worth is calculated as total assets minus total liabilities.

(b) Net financial worth equals total financial assets minus total liabilities. That is, it excludes non-financial
assets.
(c) Net financial liabilities equals total liabilities less financial assets other than investments in other
public sector entities.
(d) Net debt equals the sum of deposits held, advances received, government securities, loans and other
borrowing, minus the sum of cash and deposits, advances paid, loans and placements.
443
© 2011 The Author
A BAC U S
Table 3
AUSTRALIAN GOVERNMENT GENERAL GOVERNMENT SECTOR CASH FLOW

STATEMENT(a)
Estimates Projections
2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m
Cash receipts from

operating activities
Taxes received 269,377 259,436 268,600 291,329 321,374
Receipts from sales of 6,356 7,480 7,723 7,898 7,668
goods and services
Interest receipts 5,014 4,426 4,345 4,291 4,341
Dividends and income tax 3,152 5,663 3,362 2,616 2,456
equivalents
Other receipts 5,328 4,360 3,979 3,937 4,094
Total operating receipts 289,228 281,364 288,008 310,071 339,932
Cash payments for

Payments for employees -21,412 -23,127 -23,457 -23,778 -24,140
Payments for goods and -56,813 -62,201 -61,828 -64,487 -66,303
services
Grants and subsidies paid -111,812 -127,722 -125,240 -125,660 -128,485
Interest paid -4,078 -5,890 -9,061 -10,257 -11,975
Personal benefit payments -110,393 -102,368 -107,059 -112,216 -120,230
Other payments -3,810 -4,305 -4,268 -4,416 -4,469
Total operating payments -308,319 -325,613 -330,914 -340,813 -355,601
Net cash flows from -19,090 -44,249 -42,906 -30,743 -15,668
Cash flows from

investments in
Sales of non-financial 555 619 258 154 161
assets
Purchases of non-financial -9,469 -11,030 -11,503 -11,138 -9,860
assets
Net cash flows from -8,914 -10,411 -11,245 -10,984 -9,699
investments in
Net cash flows from -7,428 -5,089 -4,761 -6,762 300
investments in financial
assets for policy purposes
444
© 2011 The Author
Table 3
CONTINUED
Estimates Projections
2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m
Cash flows from

assets for liquidity
purposes
Increase in investments -12,483 1,761 6,645 -442 -604
Net cash flows from -12,483 1,761 6,645 -442 -604
assets for liquidity
purposes
Cash receipts from

financing activities
Borrowing 48,124 58,424 54,199 51,601 28,341
Other financing 1,127 411 203 104 82
Total cash payments for 49,250 58,835 54,402 51,705 28,423
Cash payments for

Borrowing 0 0 0 0 0
Other financing -1,836 -1,104 -1,648 -2,190 -2,426
Total cash payments for -1,836 -1,104 -1,648 -2,190 -2,426
Net cash flows from 47,414 57,731 52,754 49,515 25,997
Net increase (decrease) in -501 -257 487 584 326
cash held
Source: Commonwealth of Australia, Budget Strategy and Outlook, Budget Paper 1, 2009–10, pp. 9.3–9.5.
445
© 2011 The Author

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ABACUS, Vol. 47, No. 4, 2011 doi: 10.1111/j.1467-6281.2011.00347.

Why Governments Should Use

In May 2008, the Australian government presented its budget to parliament

1. the nature and purpose of accounting as a financial management information and

ACCOUNTING AS A FINANCIAL MANAGEMENT INFORMATION AND

The purpose of an accounting system is to provide financial information on an

THE NATURE, PURPOSE AND FUNCTIONS OF GOVERNMENT

1. Provision of public goods and services to the community Typical examples of

2. Provision of social welfare services to citizens Governments provide a range of

3. Taxation policies Governments invariably use a range of taxation methods to

4. Macroeconomic management policies Free market economies through history

6. Maintenance of intergenerational equity The ageing of the population, slower

7. Environmental protection policies Governments have a major responsibility to

Government Accountability to Parliament and Citizens

Differences Between Government and Business Operations

many important differences between them. For a government accounting system to

THE PATHWAY TO ADOPTION OF THE GFS ACCOUNTING SYSTEM

Sector-Neutrality of Accounting Standards

PROBLEMS WITH THE APPLICATION OF AAS TO

THE GOVERNMENT FINANCE STATISTICS (GFS)

Nature and Purpose of the GFS System

economic measurement system based on economic concepts throughout and uses a

Outline and Structure of the GFS System

3. Financial statements reporting In Australia three statements are prepared—the

Specification of Key Items

Evaluation of the System

by parliament. Fiscal policies cannot be managed without this information. Fiscal

earlier reviews of government operations) and departmental accountability to par-

The adoption of an accounting system by the Australian government appropriate for

Transaction Data processing Transaction Events Financial

All external Recording, Financial

Cash flow Financial

Source: Barton (1982, p. 46).

Source: Government Finance Statistics Manual, 2001, Figure 401, p. 37.

Transactions affecting net worth Transactions in financial assets and liabilities

AUSTRALIAN GOVERNMENT GENERAL GOVERNMENT SECTOR OPERATING

Note Estimates Projections

2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m

Note Estimates Projections

2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m

Other economic flows

AUSTRALIAN GOVERNMENT GENERAL GOVERNMENT SECTOR BALANCE SHEET

Note Estimates Projections

2008–09 $m 2009–10 $m 2011–12 $m 2011–12 $m 2012–12 $m

Note Estimates Projections

2008–09 $m 2009–10 $m 2011–12 $m 2011–12 $m 2012–12 $m

Provisions and payables

Net worth (a) 10,756 -38,676 -90,001 -127,594 -154,985

Net financial worth (b) -82,331 -135,968 -193,091 -236,451 -268,701

(a) Net worth is calculated as total assets minus total liabilities.

AUSTRALIAN GOVERNMENT GENERAL GOVERNMENT SECTOR CASH FLOW

2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m

Cash receipts from

Cash payments for

Cash flows from

2008–09 $m 2009–10 $m 2010–11 $m 2011–12 $m 2012–13 $m

Cash flows from

Cash receipts from

Cash payments for

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