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The influence of the nature of government

accounting and reporting in decision-making:
evidence from Switzerland
Andreas Bergmann
Published online: 02 Dec 2011.

To cite this article: Andreas Bergmann (2012): The influence of the nature of government accounting and reporting in
decision-making: evidence from Switzerland, Public Money & Management, 32:1, 15-20

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 15

The influence of the nature of

government accounting and reporting
in decision-making: evidence from
Switzerland
Andreas Bergmann
A key objective of government accounting and reporting has been to achieve
accountability and its use in that respect has been well documented, however its use for
decision-making has had less coverage. This article addresses the latter issue,
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providing evidence from Switzerland that the accounting basis used (accrual versus
cash) influences decision-making. This is the result of the effect that the different
approaches have on the nature of the information used for decision-making.
Switzerland was among the first western democracies to adopt accrual accounting at
both state (canton) and local levels of government in the 1980s. The Swiss federal
government followed in 2007. The main examples of the use of accrual information
in decision-making are: the focus on self-financing of investments in order to control
borrowing, as well as the fiscal policy targets of debt reduction and maintenance of
capital. All three require accrual basis information. Therefore accrual basis
information is key in fiscal decision-making in Switzerland.
Keywords: Accrual accounting; cash accounting; fiscal policy; government accounting;
International Public Sector Accounting Standards Board; Swiss government.
Background to accrual accounting in reforms did not introduce full accrual accounting, Andreas Bergmann
government they started accounting for assets and liabilities, is a professor at
The cash basis of accounting was until recently i.e. accounting for things other than cash. It has Zurich University of
used by the majority of governments for financial also been argued that reforms in the 1970s and Applied Sciences
accounting and reporting. This was partly early 1980s in Scandinavia and Switzerland (ZHAW),
because cash expenditure was required in the predate NPM (Lüder and Jones, 2003; Torres, Switzerland, and
macroeconomic models used for fiscal policy 2004, p. 449; Paulsson, 2006, p. 48). Whatever chair of the
decision-making (Musgrave and Musgrave, 1989; the impetus, these 20th-century reforms went a International Public
Stiglitz, 2000; Rosen, 2002). long way towards full accrual accounting in the Sector Accounting
The adoption of accrual accounting by government sector. However, they continued to Standards Board
governments is widely thought to be the result of allow for hidden reserves (FDK-CDF, 1981), as (IPSASB).
new public management (NPM) reforms in the the concept of accrual accounting did not
late 1980s and 1990s (Guthrie et al., 1999; necessarily include the concept of ‘true and fair’.
Caperchione, 2006, p. 10). However, accrual The reforms have one thing in common—
accounting was used by governments much virtually nothing has been published about them
earlier than this—for example some Italian cities in the English language. The standards or rules
were using a form of accrual accounting in the they use are not available in English; indeed, the
15th and 16th centuries. Later evidence comes Swiss handbooks are not even translated into all
from tsarist Russia, where Peter the Great (Peter of the Swiss national languages. Therefore, those
I) introduced an early form of accrual accounting attributing governmental accrual accounting to
at the end of the 17th and the beginning of 18th the introduction of NPM may only be correct in
century (Platonova, 2009, p. 442). Peter I’s relation to the examples explored in the English
accounting reforms were part of a larger reform language literature. This is definitely not the
enhancing economic and financial control in case in every individual jurisdiction. The other
Russia (Platanova, 2009, p. 440). Although these key point is that the early reforms focused on

© 2012 THE AUTHOR http://dx.doi.org/10.1080/09540962.2012.643050

JOURNAL COMPILATION © 2012 CIPFA PUBLIC MONEY & MANAGEMENT JANUARY 2012
 16
financial decision-making—budgeting and
control of assets.
Regardless of when or where they are used,
accrual accounting reforms have always been
introduced because the information that cash
accounting provided was considered to be
insufficient, either for transparency and
accountability and/or for decision-making
(Caperchione, 2006, p. 10).
In a recent consultation by the International
Public Sector Accounting Standards Board
(IPSASB, 2011), about half of the respondents
signalled support for the proposed combination
of accountability and decision-making objectives,
only about one out of 10 for accountability only,
and very few (two out of 55) just for decision-
making. This is clearly very different to the
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private sector situation.
Advantages of accrual accounting over cash
The trend towards accrual accounting raises two
questions: why were government accounts
traditionally prepared on the cash basis of
accounting, and what are the advantages of
accrual accounting? There is surprisingly little
published discussion about the first question,
while the latter has been extensively covered.
One reason for the historic prevalence of
cash accounting may be simply that politicians,
like private householders, tend to think in terms
of receipts and payments and aim to align the
latter with the former. Perhaps a more
sophisticated explanation is the importance of
government spending in economic theory. In
fact, economic theory is still used as a rationale in
favor of cash information, even in a recent debate
in the European Parliament (2011, article 6a).
The academic literature, rather, focuses on the
advantages and disadvantages of a transition
from cash towards accrual, as this is what is still
on the agenda in many jurisdictions globally
(Khan and Mayes, 2009), although no longer in
the United Kingdom and Switzerland as they
have both completed the implementation of
accrual accounting.
The main advantages of government accrual
accounting given in the literature are:
•Reliable cost and pricing information (Guthrie,
1998, p. 3; Caperchione, 2006).
•Stewardship or accountability for assets and
liabilities (Guthrie, 1998, pp. 3–4; FEE, 2007;
IFAC, 2011, p. 13).
•Information is available faster (Guthrie, 1998,
p. 3).
•The provision of forward-looking information,
for example on the ability to provide the
services on an ongoing basis (Caperchione,
PUBLIC MONEY & MANAGEMENT JANUARY 2012
2006, p. 11; IFAC, 2011, p. 13).
•Similarity to commercial accounting, which
facilitates training and understanding (IFAC,
2011, p. 66).
•Standard-based accrual accounting correlates
well with other public sector financial
disciplines, such as budgeting or cash
management (Vany, 2010).
Disadvantages discussed include the cost of
implementation (Caperchione, 2006; Paulsson,
2006, p. 60; FEE, 2007); increased complexity
(Hepworth, 2003, p. 37; IFAC, 2011, p. 44); the
not-for-profit orientation (Guthrie, 1998, p. 5);
and low use of balance sheet information made
by decision-makers (Guthrie, 1998, p. 5; Paulsson,
2006, p. 55). Some also fear an absence of cash or
liquidity information (Hepworth, 2003), although
accrual accounting obviously still provides this
kind of information, as cash flow statements are
common elements of accrual based financial
reports. Availability of cash information seems to
be critical for the acceptance of accrual accounting
(Kober et al., 2010, p. 252).
Accrual accounting in Switzerland
The history of government accrual accounting
in Switzerland dates back to the 1970s. After
some limited earlier pilots, the Conference of the
State Ministers of Finance (FDK-CDF) started a
comprehensive project to develop a
recommendation for the implementation of
accrual accounting and budgeting. There was
no controversy about including accrual budgeting
in the project—it was assumed that accounting
and budgeting should correspond and therefore
should be on the same basis within a
comprehensive system. The result of the project
was the ‘harmonized accounting model’ (HAM),
with a common accrual basis chart of accounts,
which is also used for budgeting purposes. HAM
includes some basic guidance on recognition
and measurement, but very little on additional
disclosure. However, in the late 1970s limited
guidance was not uncommon, as there were no
international accounting standards around, let
alone international accounting standards for the
public sector. FDK-CDF never claimed that HAM
was a standard—it was always regarded as an
accounting model which was strong on the chart
of accounts. HAM enabled the state (canton)
governments and local governments to
harmonize budgeting and accounting. The Swiss
federal government, however, was not convinced
of this state level initiative and never implemented
HAM. The main reason was the macroeconomic
rationale that government spending is key
information for fiscal policy.
© 2012 THE AUTHOR
JOURNAL COMPILATION © 2012 CIPFA

Because HAM was a recommendation by
FDK-CDF, the states (constitutionally sovereign
entities in Switzerland) and local governments
took their time adopting and implementing it.
Most had HAM implemented by the mid to late
1980s, but some took up to 15 years. A survey in
2004 showed that implementation was not well
harmonized, leaving the common chart of
accounts and the list of required financial
statements as the only undisputed commonality
between all the states, with other key features
adopted by only about two-thirds of states
(Reichlin-Zobrist and Roos, 2004). Although this
is in accordance to the legal framework of a non-
binding recommendation, it is obviously not in
line with the original intention of harmonization.
HAM was not updated until 2008, when
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HAM2 was issued by FDK-CDF. In the meantime,
the federal government had moved to accruals
and had implemented IPSAS (the International
Public Sector Accounting Standards). In addition,
Geneva and Zurich had almost completed their
IPSAS implementation and a few others had
started implementation projects. Therefore
HAM2 was designed to improve HAM, but also
to create an open platform for those states who
wanted to adopt IPSAS. HAM2 includes all of the
IPSAS presentation requirements and many of
the recognition requirements. Also, in the area
of measurement it generally takes IPSAS as the
benchmark, but allows alternatives, if a state
decides not to adopt IPSAS. Finally, disclosure
requirements are much reduced—but, again,
with the option for the states to adopt full IPSAS.
HAM2 goes beyond IPSAS by mandating the use
of the standards for budgeting, in line with the
Swiss tradition of harmonized budgeting and
accounting.
The common chart of accounts, now also
used by the federal government, remains a
core feature of HAM2 and reflects the
requirements of both IPSAS and GFSM2001/
ESA95. Obviously, this regulatory environment
only leads to a limited harmonization and
impedes comparability. But in a strongly
federal jurisdiction, any further harmonization
would have needed a change in constitutional
authority requiring a mandatory binding
referendum, which was considered by the Swiss
parliament to be too much trouble just for
accounting and reporting. Therefore HAM2
is, again, only a consensual recommendation
by FDK-CDF. However, at least HAM2 is now
a substantially updated guideline for accrual
accounting and budgeting, which is currently
being implemented nationwide. Swiss public
entities either follow HAM2 as a minimum
requirement, or IPSAS.
© 2012 THE AUTHOR
JOURNAL COMPILATION © 2012 CIPFA
17
Fiscal policy targets and key performance
indicators (KPIs)
As well as defining minimum accounting and
reporting requirements for public entities, HAM2
includes a recommendation on fiscal policy targets
and instruments (No. 17) and key performance
indicators (No. 18). The inclusion of these targets
and indicators were included in the 1977 and
1981 versions of HAM. Recommendation No.
17 includes the rationale of a common set of
targets and indicators, as well as a list of three
indicators: net debt ratio; self-financing of
investments ratio; and the interest burden ratio.
Recommendation No. 18 defines the three
key indicators and lists a few other possible
indicators, which, however, are not key and
therefore are not mandatory. Non-authoritative
guidance is given on the interpretation of the
three key indicators, while the guidance for the
calculation of the indicators is authoritative
and features both inclusions and exclusions.
Net debt ratio is defined as the liabilities
minus non-administrative assets divided by tax
revenues. The self-financing of investments ratio
is defined as the cash flow divided by the net
investments. The interest burden ratio is defined
as net interest expense divided by total revenues.
All three definitions require accrual
accounting information—namely liabilities,
different types of assets, investments or revenues
and expenses, rather than receipts and payments.
Arguably, cash information, namely the cash
flow of the entity, is also in the definition of the
key indicators, but in conjunction with non-cash
information such as investments. The cash flow
information is taken from the cash flow
statement—a required statement under HAM2,
together with the balance sheet and the statement
of financial performance.
Self-financing of investments
In practice, the self-financing of investments
ratio is the most important key indicator used by
central government. The evidence for this is the
result of an analysis of the articles published in
the Neue Zürcher Zeitung (NZZ: the leading
business and political newspaper in Switzerland)
between January 1993 and June 2011. As table 1
shows, by far the largest number of articles was
published about the self-financing indicator, with
a total of 533 articles in eight years—this is more
than one article each week. Of course, the articles
are not distributed evenly—most follow
publication of the government’s financial
statements (between March and May) or when
the Swiss budget comes to legislature for approval
(in November or December).
The analysis of NZZ articles also confirms
PUBLIC MONEY & MANAGEMENT JANUARY 2012
 18
that the self-financing of investments ratio is the
most frequently used KPI for state and local
governments in Switzerland. Articles in NZZ on
the self-financing of investments outnumbered
the second most frequently used KPI by more
than five times. This dramatic supremacy of one
indicator can to some degree be explained by its
prominence in HAM. Another reason is its
relevance to state and local governments. As
their debt levels are low and decreasing
(Emissionszentrale Schweizer Gemeinden, 2011),
interest payments are not a major issue for Swiss
state and local governments. NZZ’s interest in all
three accrual style KPIs, including the large
numbers of articles on self-financing of
investments, suggests that accrual accounting
information is definitely instrumental in fiscal
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debates in Switzerland.
Self-financing is an indicator that is also used
by supervisory bodies when analysing local
entities’ financial statements and all state and
local level financial reports present and discuss
this indicator. The 1981 version of HAM was
quite prescriptive stating that ‘more than 60%’ of
investments should be self-financing. HAM2
argues that this figure should now be increased.
Although HAM2 does not prescribe specific
targets, it argues in recommendation No. 18 that
‘in medium term the average self-financing of
investments should be not much less than 100%’,
leaving some room for adjustments during the
economic cycle.
The focus on self-financing investments has
effectively limited debt levels of state and local
governments. Requiring more than 60% of
investments to be self-financing implies a goal of
fully self-financed operations and, beyond that,
to self-finance at least part of the investment in
assets such as property, plant and equipment or
infrastructure. In theory, depreciation and
impairment losses may still lead to debt levels
which exceed the value of the assets and lead to
a situation of negative equity, but this usually
only happens if periods of strong investment
activities, partly debt financed, are followed by
an economic downturn with large deficits. More
often, governments can amortize the relatively
Table 1. Analysis of the HAM KPIs discussed in the Neue Zürcher
Zeitung (for Swiss government).
HAM KPIs No. of articles published
between January 1993
and June 2011
Self-financing of investment ratio 533
Net debt ratio 101
Interest burden ratio 34
PUBLIC MONEY & MANAGEMENT JANUARY 2012
moderate debt quickly or maintain a steady
investment stream without increasing debt levels.
However, maintaining such high levels of self-
financing requires a lot of fiscal discipline and is
therefore discussed regularly in budget debates.
While the self-financing target is generally
accepted, parliaments have the power to adjust
both cash flows and investments in the budget
process. Cash flows can be adjusted by increasing
or decreasing tax rates, investments by approving
or cancelling projects. In Switzerland, all levels
of government raise their own taxes and define
their own tax rates. Competition with
neighboring entities can limit discretion in such
decisions, but it is the self-financing key indicator
that links cash flows and investments and
influences the respective fiscal policy decisions.
Fiscal policy targets
Reduction of debt
Switzerland’s self-financing policy target limits
government debt. Although it does not require
any net reduction of debt, the debt financing rule
naturally limits the potential increase of debt
levels. Increase in debt is limited to less than the
increase of the underlying asset value due to
acquisition or construction of property plant
and equipment. A mere increase in valuation of
the underlying assets, in contrast, does not allow
for increases in debt. Therefore, nominal
borrowing is limited by the availability of real
collaterals. This does not prohibit increases of
debt, but makes them relatively difficult. This
limitation becomes even more obvious once public
infrastructure has reached adequate levels and
does not need substantial improvement. This is
largely the case in Switzerland, although over
the past 10 years the country has had a relatively
high growth of population, with an average
annual growth rate of almost 1% from 2001 until
2010 (Swiss Statistics, 2011), which might require
new infrastructure.
However, from 2005, public sector entities
in Switzerland have seen a decrease in debt—
both gross and net financial liabilities. At the
end of 2004, gross liabilities were at 58% of
GDP; at the end of 2010, they were at 42 %
(OECD, 2011). In absolute terms, the debt of
all three levels of government was reduced
from 246 billion to 211 billion Swiss francs, in
a time of a severe global financial crisis. The
largest part of this reduction came from the
federal government, but state and local
governments also reduced debt, both in
absolute terms and as percentage of GDP
(Federal Financial Administration, 2010, p. 108;
Emissionszentrale Schweizer Gemeinden, 2011,
p. 6). There are two main reasons for this:
© 2012 THE AUTHOR
JOURNAL COMPILATION © 2012 CIPFA

•A constitutional debt brake was introduced in
2003.
•The federal government introduced accrual
accounting—2006 being the first year in which
the financial information was restated in such
terms, and 2007 the first year accounting
information was prepared entirely on an
accrual basis. This increased the focus on the
balance sheet and particularly the liability
side.
The target was an increased focus on debt. The
debt brake was probably the more important
initiative because of its constitutional imperative
(Beljean and Zurbrügg, 2009), but the
improvements in accounting and reporting
supported the general direction of fiscal policy,
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which was focused on debt reduction. The debt
brake also uses accrual accounting information.
Maintenance of capital
While the tradition of the KPIs, namely self-
financing of investments, is closely linked to the
history of accrual accounting, capital maintenance
is another concept which is tied to accrual. HAM
introduced the notion of equity as an element of
financial reporting, as part of the introduction of
the balance sheet. HAM, being an accounting
model rather than a traditional accounting
standard, specifically addressed equity—or the
lack of it. It explains how entities should tackle
negative equity, i.e. when liabilities exceed assets.
Essentially, it requires that negative equity needs
to be eliminated within five years and that any
surpluses should exclusively be used for this
purpose. There have always been public entities
in Switzerland facing such a situation, perhaps
the most prominent one being the city of Zurich.
States, for instance Bern, usually had a bit more
discretion dealing with negative equity, since
HAM was only a recommendation to the states
and therefore they had to power to bend the
rules at least for a limited period of time. However,
the existence of HAM made it difficult for states
not to address a negative equity problem and
resolve the situation.
The implementation of IPSAS more recently
has changed the perception of capital/equity
substantially. I use the term ‘capital/equity’, rather
than just one or the other, to emphasize that it is
the capital characteristic of equity which is
considered—and yet the term ‘capital’ is used
only for equity, unlike in the German language
where it is also used for liabilities.
While the original HAM was clearly focused
on the issue of negative capital/equity, under
IPSAS the interest in a positive capital/equity
situation increased. The state of Zurich’s
© 2012 THE AUTHOR
JOURNAL COMPILATION © 2012 CIPFA
19
government, one of the early adopters of IPSAS,
now defines fiscal sustainability as the ‘medium-
term balance of revenues and
expenses…Medium-term balance is achieved if
the equity at the end of the economic cycle is at
least the same as at the beginning of the cycle’
(Kanton Zürich, 2007, p. 29; translated into
English by the author). In fact, the equity of this
state is substantial, although it takes financial
risks, such as running a large commercial bank
(Zürcher Kantonalbank, with assets of more
than 110 billion Swiss francs). In this situation, a
target of maintaining capital may indeed
supplement the more traditional fiscal targets
focusing on deficit and debt. Using IPSAS, and
therefore adhering to fair presentation, is
obviously also making the equity number much
more reliable. However, in some cases, for
instance the state of Zurich, it is higher than
before the implementation of IPSAS. This could
make it more likely to become a political target
for financially-risky operations or for tax cuts.
Therefore, the state of Zurich government has a
target of maintaining capital at its current level.
Apart from the use of accrual basis KPIs, the use
of capital/equity as a fiscal policy target is yet
another example of how accrual accounting
information is used for decision-making.
Conclusion
The nature of the approach to the production of
accounting information influences decision-
making. There is evidence that accrual accounting
was used long before the emergence of NPM,
and that the use of accounting information for
decision-making drove accrual implementations.
Examining the use of accrual accounting
information in the case of Switzerland shows that
the accrual basis is a prerequisite for the most
important key performance indicator—self-
financing investments, which is referenced in
public debates about fiscal policy. More recently,
under IPSAS, governments also started setting
fiscal targets based on capital/equity—another
example of accrual basis information. The regular
use of such information confirms that accrual
accounting information is used in decision-
making, which is often seen as the second objective
of accrual accounting after accountability and
transparency. The prominence of decision-
making, both in the historical context and the
contemporary Swiss case, suggests that decision-
making is by no means of minor importance. A
peculiarity of the Swiss case is the almost
undisputed use of the accrual basis for
budgeting—which is still very controversial and
not widely observed internationally. But, again,
the observed emphasis on decision-making is a
PUBLIC MONEY & MANAGEMENT JANUARY 2012
 20
sound explanation for the use of accrual
budgeting in this country.
It is very possible that there would be similar
findings in other economies with a long tradition
of accrual accounting. The Swiss case also shows
that the introduction of accrual accounting on its
own does not immediately lead to the use of such
information, but further steps, such as the
definition of KPIs or fiscal targets which are
based on accrual, are needed to make good use
of accrual based accounting information. Further
research in other jurisdictions should therefore
include the entire public financial management
system, as evidence of the use of accrual
accounting information can be found outside
the very limited pure accounting function.
Obviously, such related systems also require
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some time to be implemented and therefore
evidence of such systems is perhaps more likely
to be found where accrual accounting is well
established.
Finally, it became very clear over the last
episode of the global financial crisis that
thorough control of government finances,
especially debt, is critical for the entire
economy, as well as the political and social
environment. Switzerland is only the 19th
largest economy (World Bank, 2011), but the
imperative to get government financial
management right is even clearer for larger
economies. This study shows that accrual
financial information is a vital contributor to
sound government financial management.
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