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Performance Budgeting - Is Accrual Accounting Required?

Author: J Diamond
Date: 2002
Size: 31 pages (1177 KB)

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Summary

Will accrual accounting radically improve public sector performance? What risks do emerging economies face when shifting from cash to accrual-based accounting? Can some of the benefits associated with accrual accounting be achieved while keeping a cash-based system?

Relevant to middle-income or transitional economies which are considering the move from cash-based to accrual accountancy, this IMF Working Paper argues that, following changes in government finance statistics reporting standards, some emerging economies have been too eager to adopt accrual accounting. Accrual systems are most likely to be effective if they are implemented gradually as part of a wider process of public sector reform.

Accounting needs should not be divorced from management needs. Any decision to move from cash to accrual-based accounting should consider management needs and the capacity of the government to absorb the costs of the change over.

• A performance-budgeting model clearly defines the expected performance of agency heads. Decision making is devolved, and accrual accounting allows performance to be measured.

• Accounting systems should serve not lead budget system reform. The adoption of accrual accounting should be seen as a integral part of wider budget system reform.

• Accrual accounting systems are more comprehensive, but their benefits should not be exaggerated. Many of the benefits of accrual accounting can be achieved within cash-based systems.

• Unless basic compliance with the rule of law exists, and some basic controls are in place to ensure fiscal stability, moving to a decentralised model could be quite dangerous.

• Many of the common problems found in cash-accounting systems do not arise from the system but from its abuse.

• Adopting accrual-based accounting has a cost, because of the increased complexity of the system. Even middle-income countries may find the costs of introducing accrual systems too great.

Accounting system reform should follow budget system reform.

• The first stage in any transition is to get the cash accounting system to work, by purging abuses and supplement the cash accounts with adjustments to improve reporting.

• Budget systems evolve through different stages, and are not created overnight. Any change to an accrual system should recognise this, and pass through stages.

• Change over should be adopted gradually, in a phased way. It is not a question of substituting one system for another, but adding accounting requirements to an existing system.

• A move to accrual accounting is necessary to achieve full compliance with the IMF’s Government Finance Statistics Manual 2001 (GFSM 2001).

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Source: Diamond, J., 2002, 'Performance Budgeting-Is Accrual Accounting Required?', IMF, Working Paper No. 02/240
Author: Jack Diamond , publicaffairs@imf.org
International Monetary Fund, http://www.imf.org