Review: IMF Technical Note on Transition to Accrual Accounting
No subject elicits controversy in Public Financial Management circles than accrual accounting. Is there are “true value of government”? Are the benefits of accrual accounting worth the effort in the government context? What are the incentives for politicians to expose the real long-term costs for popular programs? Abdul Khan and Stephen Mayes of the IMF have taken on this subject in the Technical Note, “Transition to Accrual Accounting.”
We’ve had some very energetic discussions about accrual accounting at the FreeBalance International Steering Committee and ICGFM meetings. Yet, many PFM thought leaders are strong advocates of accrual accounting. Nevertheless, there remains some skepticism about the benefits of full accrual.
The Technical Note begins with the Government Financial Statistics (GFS) standard followed by a summary of countries using different accounting methods. This is not the strongest introduction to the benefit of accrual accounting. For one thing, accountants remain suspicious of economists and statisticians. And, there seems to be a very liberal definition used to classify countries as supporting “full accrual”.
The value of accrual accounting of providing a “broader measure of the burden of government financial commitments” than cash accounting is tackled in section 3. The authors make some compelling arguments. And, there are some very interesting use cases that put a face on the problem of accounting on a cash basis.
The discussion of accrual budgeting by the authors is a bit distracting. The authors are able to describe some of the difficult issues related to transitioning from a cash basis. They highlight the difficulty of assessing Public Private Partnerships (PPPs) – a subject that gained some controversy in the last ICGFM Conference.
The Technical Note describes the need to unify the budget and accounting classifications in the Chart of Accounts in order to support accrual accounting. There are many benefits to unifying the COA, the least of which is a pre-condition to accrual accounting. It is needed for effective budget planning and control even on a cash basis of accounting.
The authors have identified the three key pre-conditions for transition – acceptable cash-based system, political ownership and technical capacity. The stages for transition to accrual accounting are identified. There could have been more advice about these stages. For example, governments can move from full cash to modified cash to modified accrual And, the extent to accounting for assets and liabilities can be broadened over time in accrual accounting.