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Accrual accounting has become more significant and emphasized in public sector since governments are expected to be effective, efficient and accountable. The establishment of International Public Sector Accounting Standards Board (IPSASB) has encouraged the development in adoption of accrual accounting throughout the world.
DEVELOPED COUNTRY: AUSTRALIA
Australia has adopted full accrual accounting standards that are consistent with IPSAS. Since using accrual accounting, Australia was successful to show budget surplus in every year, to reduce liability and to bring economic growth in real GDP. (Champoux, 2006)
In early 1990s, adoption of accrual accounting in Australia was to increase government competence and improve monetary performance. The adoption of accrual accounting was announced by the national government in 1992 and all departments are required to prepare accrual financial statements by 1994. (Buhr, 2010) The first comprehensive accrual-based financial statement generated by Australia was 1999-2000 budgets. Accrual output budgeting has been fully put in practice also. (Champoux, 2006)
One of the issues identified is the speed of implementation of accrual accounting where the implementation of the accrual accounting could be more efficient and more effective. (Funnell, 1998)
Second issue is the lack of convergence between Australian Accounting Standards Board (AASB) and IPSASB standards. One of AASB statutory functions is to participate in and contribute to the development of a single set of accounting standards for worldwide use. (Buhr, 2010)
Third issue is the benefits brought by adoption of accrual accounting. There is too much emphasis been placed on the preparation of accrual financial statements instead of using the accrual information as a management tools. (Funnell, 1998)
One of the challenges faced is the valuation method of the assets that should be used. Methods applied to measure the value of assets are crucial to determine the successfulness of adoption of accrual accounting. Examples of measurement methods are current purchasing power, current cost accounting and relative price change models. (Funnell, 1998)
Another challenge is the technical skills to prepare and use accrual information. Necessary skills to use the accrual information are vital to achieve the objective of accrual framework. A lot of training and communication activities have to be carried out to succeed the adoption of accrual accounting standards. (Funnell, 1998)
Role of IPSAS
Adoption of accrual accounting standards by Australia is consistent with IPSAS. 'Australian equivalents to IFRS' (A-IFRS) was issued by AASB. A-IFRS was consisted certain amendments to the statement in IASB. The AASB introduced additional requirements for disclosures or implementing for public sector. The changes have caused the standards applied by Australia to public sector become very similar to IPSAS. (Champoux, 2006)
DEVELOPING COUNTY: INDIA
The development in adoption of accrual accounting in India is basically affected by IPSASs. India had take consideration of role, progress, issues and challenges in IPSAS when adopting the accrual basis accounting.
In year 2008, the accrual accounting reformation has been started in India. In year 2009, Government's Comptroller ad Auditor General (CAG) had formed a Government Accounting Standards Advisory Board (GASAB). A report had been submitted to Government of India in which the adoption accrual based system of accounting had been recommended. Twenty one State Governments of India have expressed their willingness to move in the direction of accrual based accounting. (Avinash, 2009)
Various steps has been taken by Indian Government in the development towards adopting the accrual accounting, such as giving instruction to Autonomous Institutions and Universities to prepare their accounts on format basis set by Controller General of Accounts (CGA) which is in line with the requirements of accrual accounting. (Carlin, 2005)
Besides, a committee and the Government Accounting Standards Board have been set up to develop the framework and to examine the technical feasibility of changing the Government accounting system to accrual system. In addition, seminars and workshops have been conducted by CGA of India to facilitate national consensus on the adoption of accrual accounting. (Carling, 2005)
Issues and Challenges
In adopting the accrual accounting in India, there are many challenges faced by IPSAS, especially when moving from modified accrual basis to full accrual basis. For examples, recognition of PPE, intangibles asset and inventory, the recognition of employee benefit liabilities, the recognition of liabilities for conditional funding agreements, the reconciliation of accrual financial statements with cash budgets, the presentation of financial statements and the level of note disclosures. IPSAS also facing some contemporary issues, for example, identifying the requirements of financial reporting in international treaties, agreements and contracts, this make the adoption of IPSAS will become more complicated. (Chan, 2003)
Role of IPSAS
India had adopted the accrual accounting basis with the role played by IPSAS in which it's expected to improve the standard of governmental accounting as well as financial reporting by enhancing their accountability mechanism. Besides, more appropriate presentation of financial performance and position of the government can be provided through IPSAS. By following the IPSAS, India will provide the public a better assessment of the resource allocation decisions made and enhanced its accountability. (Chan, 2003)
As for Malaysian context, Malaysia uses the cash basis method for accounting, as opposed to countries above. Traditionally, cash basis accounting in public sector focused on the control of expenditures. The reform of the public sector has changed the traditional role of accounting to one that aimed on accountability and the efficiency allocation of resources. Therefore, accounting should concentrate upon outputs, performance measurement, efficiency, cost saving, and productivity. (Zakiah Salleh, 2006)
Cash basis accounting is still being used in many countries as it is simple, and most importantly there is no judgment required in determining the cash flows for the period. However, it also has disadvantages. For instance, cash basis of accounting cannot provide information on assets and liabilities and this method cannot match costs with revenues. Besides, cash basis accounting is no longer fulfilling user's satisfaction. (Zakiah Salleh, 2006)
On the other hand, accrual accounting can provide relevant and valid information to the users. Accrual accounting requires revenue to be recognized in the period in which economic benefit can be measured reliable. This can improve the quality of decisions. The current basis adopted by the Malaysian government is cash and modified cash system but Malaysian government is now making moves to implement the accrual accounting for public sectors. Malaysian government had realized that accrual basis accounting is able to generate better quality of financial information in order to fulfil the aspect of accountability and better decision making for government. (Zakiah Salleh, 2006)
Issues and Challenges
Government accounting reform to adopt accrual accounting needs political and management support. This high demands required accountability and transparency. Resource support is also critical to successful government accounting reform. Sufficient budgetary support is necessary to acquire software and hardware, and to hire a qualified staff. In many developing countries, the shortage of technical personnel imposes a severe constraint; thus human resources are another obstacle to overcome. Reform involves changing policies and procedures of government accounting. The International Public Sector Accounting Standards Board urges all nations to adopt IPSAS. (Chan, 2006)
Malaysia faces the challenge is to raise the standard of living of their peoples. The success of government accounting adoption mainly depends on political and management support, in addition to the availability of budgetary, human resources, and information technology. IPSAS is a relative newcomer to the club of domestic and international accounting standard-setting bodies. IPSAS-based financial statements are not specifically designed to demonstrate the accountability of subordinates to their superiors, and of the executive to the legislature. IPSAS can make only a limited contribution to institutional capacity building in developing countries. Recently, there are so many corporate financial scandals happened, this situation can also happen in public sector financial reporting. Considering the vulnerability of the government in developing countries to financial misconduct, the reliability of numbers in their financial statements cannot be taken for granted, even if IPSAS are used. This will reduces the amount of public money available to fund public services. (Chan, 2006)
Role of IPSAS
Malaysian Federal Government has adopted the Cash Basis IPSAS, where its 2005 financial statements were prepared following IPSAS Cash Basis. These financial statements were audited and received an unqualified opinion. An emphasis on assuring financial integrity and a shift to accruals can make IPSAS more useful in government accounting reform in developing countries. (Chan, 2006)
NEW PUBLIC MANAGEMENT THEORY AND ARGUMENT FOR ACCRUAL ACCOUNTING
Since the 1980s, new public management was used by governments to modernize public sector. NPM promote greater cost-efficiency and it does not bring any negative side effects on other governments objectives. An important aspect of NPM is the idea to replace traditional cash accounting with accrual accounting principles for financial reporting purposes.
Borrowing cost for public entities will be lower if they implement private sector style reporting practices such as accrual accounting because rating agencies itself are more familiar with accrual accounting. Hence, accrual accounting statement can provide more and better information if compared to when only cash accounting were available (Schiavo and Tommasi, 1999).
Further than that, the author state that public sector financial statements prepared following accrual accounting principle include liability disclosures and consequently provide a fairer and better picture of the government financial health (Diamond, 2002).
Next, with practicing the accrual accounting reporting, it will create the awareness of financial position, as it enable the public sector itself to identify of payment arrears and provide a better overview of the inter-generational financial position (Mellor, 1996).
Accrual accounting is concord with the NPM objective itself, where using accrual accounting which is one of the elements, can increase the effectiveness and efficiency of the public sector. Hence, provide a better information that a very useful for them to make a right decision at the right time and provide a better and improve their control to ensure they achieve their objective as well as what they have budget earlier.
NEW PUBLIC MANAGEMENT THEORY AND ARGUMENT AGAINST ACCRUAL ACCOUNTING
However, while public generally recognized that the accrual accounting basis is superior to the cash accounting basis, some arguments against its difficulties of implementation in the public sector were raised and presented. According to Professor Allen Schick, accrual accounting basis entails complexity on the recognition in revenues especially when it involves the assumptions about future events such as future cash flows into the organizations. These assumptions made are always subject to judgments and hence sometimes lead to accounts manipulation by intentional parties. (Schick, 2002)
Professor also had mentioned that the analysts often rely on the cash flows to assess a firm's performance and condition. It leads to a clearer picture. Accrual accounting basis which concern on future assumptions, can be easily manipulated and this provide a wrong or misleading view on the firm's performance and conditions to the external parties such as investors. (Schick, 2002)
Furthermore, in order to implement this accrual accounting basis, it generally requires fundamental changes in legal and legislation perspectives. Therefore, it is likely to take a longer period for an organization to implement it. It requires a significant amount of time to be invested in educating and consulting the government managers and other interested group such as parliamentarians. (IFAC, 1996)
Moreover, implementing and operating accrual accounting basis could be expensive as there is a need of qualified accountants to manage the system. Clerical staff can operate the cash based accounting system with minimal input from qualified accountants whereas the accrual based accounting requires trained and qualified accountants to implement it. (IFAC, 1996)