SESSION 2010/2011 SEMESTER 2
PUBLIC SECTOR ACCOUNTING
TUTORIAL SLOT: 10.00AM - 11.00AM
PPEPARED BY : GROUP 1
MARTINA BT LATUWO CEA070081
NURFADILA SHAFINA BT MOHD REDHA CEA080131
SITI ZAINON ZAKARIA CEA080158
THENMALAR SANDRESEGER CEA080175
YAP HOONG YUN CEA080199
Nowadays, most of the countries have the awareness towards the benefits of accrual based accounting and increasing day by day they implement the accrual based accounting. Moreover, some countries also have chalked out plans introduce of modified accrual based accounting and others are slowly moving from the cash-basis to accrual basis of accounting.
In Malaysia, cash and modified cash based accounting was adopted by the Malaysian government. As the cited, Malaysian government are also has made a move in implementing the accrual accounting for public sectors. According to paper title "Adoption of Accrual Accounting in Local Authorities in Kedah Darul", this changes are been made due to the awareness of accrual based accounting benefits which generates better quality of financial information and a better way of discharging accountability among the public sectors. As mentioned Malaysia, still moving and just implementing the accrual based accounting on the local government.
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Besides Malaysia, there are many countries converting their systems to accrual based accounting and some are was started early 1990s too. Worldwide it seems that the most progressive accrual accounting implements are regional or local governments, which are usually ahead of central government in terms of accrual accounting reform. Between developed countries the majority of governments use the accrual based accounting system. The scenarios are as follows:
Their government accounting system is based on accrual or modified accrual accounting system. It presents fairly and with full disclosure the financial position. Furthermore, the results of financial operations are conformity with general accepted accounting principles. In April 2001, a new era with full implementation of Resource Accounting and Budgeting (RAB) was introduced. RAB is an accrual based approach to government accounting and budgeting. This term shows UK goes wider than simply adoption of accrual techniques.
Reasons, challenges, and issues in adopting accrual accounting in United Kingdom
The transition to accrual accounting in this country was really started with the health service in 1991. At that time, UK health service sector was highly employ capital intensive. So, there is an evidence show that the transition to accrual accounting at that time is to provide high benefits in term on how to more efficiently and effectively use in these capital assets (Andy Wayne 2008)
Recently, members of the UK parliament have started to complained about the complexity and difficulty in understand the Government's financial reporting. The members claimed that the government's financial statements are too complex as even members with financial background and experience are still facing problem in understand the financial information provided (House of Commons, 2008)
It is the most accomplished nation in the accrual based Government accounting system. The government published the accounts similar to those of private sectors. It introduced accrual accounting in early 1990s and the 1st set accounts on accrual basis for year ending June 1992. These accounts are audited independently and also encourage governments to focus on longer-term consequences of policies.
Reasons, challenges, and issues in adopting accrual accounting in New Zealand
The reformation of accrual accounting have been started on 1980s when there are wisdespread privatization and corporatization of government-owned commercial entities and the deregulation of New Zealand's currency and financial market. Therefore the government sought to increase performance and accountability in public commercial entities by adoption modern management practices. Mark Champoux(2006)
The accrual-based reforms in this country also arguable comprehensively and have significant affect by the government management process and it also difficult to ascertain the true fiscal and economic impact of the reforms.
Australia also has reform to full accrual basis accounting system as other developing countries. A cash based information does not provide an indication of long term fiscal strength and the relationship between revenues, expenses and changes in net worth and trade off between the burdens of current and future taxpayers.(Thuy Mellor,1996). The government accrual reports provide a more complete picture of government finances and assist in accessing the financial performance and financial position of government.
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Reasons, challenges, and issues in adopting accrual accounting in Australia
While in Australia the pressure to increase government efficiency and improve fiscal performance in 1990s was major reason why Australia adopt accrual based system. Beside the comprehensive reforms to implement the accrual based system have been develop by two initiatives which are the Financial Management Improvement Program and Program Management and budgeting. This result on the reform of each government agencies were required to begin budgeting, reporting, and accounting on an accrual basis. Mark Champoux(2006)
The State government merges to the accrual as the general basis of accounting since July 1st 1993. The reform of accounting required massive effort on all the levels. In general observation, the quality of government accounting has been improved considerably. Relevant accounting information is a tool which can be used to solve the present financial difficulties in their country and to make government activities more efficient.
Reasons, challenges, and issues in adopting accrual accounting in Sweden
Sweden also has some difficulties to implement accrual accounting especially in recognition on asset such as military, intangible asset, taxes, transfer and infrastructure. Sweden also faces some challenges when the IPSAS Handbook is not available in Swedish language and cause to make consultation on central level to make view and conclusion. (Andy Wayne 2008)
Countries that in progress moving from cash basis accounting to accrual basis accounting
The central and state governments still undergoing by cash basis system but has plans to introduce to the accrual basis accounting system. The honorable Supreme Court of India in 2001 opinioned that urban local bodies also should adapt from cash to accrual basis accounting. The accounts of Municipal Corporate of Delhi are maintained on accrual basis accounting too.
Reasons, challenges, and issues in adopting accrual accounting in India
According to "E-Communique of Committee on Public Finance & Government Accounting", the main criticism in their current system which is cash basis there have lack of transparency and not meaningful of cash management and resource allocation. The systems that have been used are lack informality to measure the norm and inadequacy. So, they move to reform adopting accrual basis. However, the major barrier to accounting reform is the government themselves. They have to change their management in aspect of proper training and education in order to reform to the accrual accounting basis.
With assistance from international consultants, a number of countries in Africa such as Ghana, Tanzania, Uganda, and Zimbabwe have adopted public financial management laws in recent years. Under these laws, government's financial statements required to be prepare accordance to generally accepted accounting practice (GAAP). In other words, accrual basis of accounting should be adopted in preparation of government's financial statements. However, these new practice may not have been realized by the members of the parliament. Due to this, these countries are still lack in progress in actually implementing accrual accounting. (Andy Wayne, 2008)
Other Countries that not yet adopt accrual accounting
Some of the countries of the largest economies in the world such as Germany and Italy have yet to introduce the transition from cash basis accounting to accrual basis accounting. Besides, Japan also has decided not to introduce such changes. In 2003, the Dutch governments decide to drop its plans to transit to the accrual basis because of the high costs involved. (Andy Wynne, 2004).
Role played by IPSAS in transition of cash basis accounting to accrual basis accounting
IPSAS are set of professionally developed, high quality, global Accounting Standards that provide guidance for both cash basis accounting and accrual basis accounting. The adoption of IPSASs by governments will improve both the quality and comparability of financial information reported by public sector entities around the world. Other than that, to moving the financial reporting to accrual, IPSAS is used as guidance on this transition. It is because IPSAS are tailored for the public sector and its use is considered best practice for public sector entities. Therefore, it can standardize and achieved the harmonization of national requirements.
New Public Management
According to Christensen and Laegreid (2001), New Public Management has become a trend, its theory have become universal and being acceptable and applicable everywhere regardless of the different circumstances of different countries of the world. Its ideas focus on the introduction of private sector management techniques and application of competitive market behavior. As a result, most of the countries has adopt the accrual basis of accounting in public sector which substitute previous practice of budget reports prepared on the cash basis (Andy Wynne 2003).
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Argument by various authors for accrual accounting
According to Christians (1999), "There is only one general theory can explain the causes of accounting reforms in governments." however still no explanations why every government are different in terms of accounting practices even though they stem from a central tendency of reforming. Current governmental accounting reform aims to improve the New Public Management by adopt accrual accounting (Christians, 1999). Besides, other reason of adopting accrual accounting is because lack of a conceptual governmental accounting framework other than business accounting. Yet, some authors agree that this development cause problems to New Public Management.
According to Zeljko Sevic (2004), accrual accounting has a positive impact on the better management at the departmental level as well. In general, this accounting treatment provides useful information to all possible users such as stakeholders but it must be looked in more far and wide perspective. Information produce from accrual accounting method is for accountability on top of decision making purposes. So if it's been used in government, accrual accounting will provide a better overview of the financial activities and the financial position of governments. So, adoption of accrual accounting systems will be seen as 'new process of financial management'.
What have been addressed by Blondal (2003) is "Don't emphasized that accruals is a 'magic bullet' for improving the performance of the public sector." So, it doesn't mean that once accrual accounting concept has been adopted by it will clearly give a better performance of public sector. In fact, it's been used to assist for better management and performance in public sector either in financial as well as non financial performance.
Arguments by various authors against accrual accounting
In contrast, there are numbers of authors argue that accrual accounting is not appropriate for public sector. For example, George Jones (1997) has a view that the introduction of accrual accounting by the UK Government is not appropriate. He has argued that adoption of accrual accounting by UK Government was one type of false governing notion. The governing required the government to develop set of programs that driven by the specific objectives. He stated that this is not appropriate because the government activities should focus on managing networks within constraints, regulating relationships, and not to achieve set objectives.
According to McKendrick 2003, the adoption of accruals accounting in public sector is valid for developing countries, but it may not suitable for less developed countries. In additions, in recent years, there are some concern expressed in developed countries that doubt about the achievement and impacts of adoption of accrual accounting. Furthermore there is some evidence show that the adoption of accrual accounting does not meet its expected gain.
Tom Rowles (2004) has suggested that primary reason that leads to rise of set of arguments that hold accrual accounting is irrelevant to the public sector is several fundamental differences in the nature of economic decision making between the two sectors. According to Barton (2000 and 2002), the recognition of heritage asset under accrual accounting is not appropriate since they are 'public goods'. Government decides to provide these infrastructure and facilities because it can be more effectively and efficiently in provide these facilities to the citizen than the private sector.
Besides that, Robinson (1998) also rejects relevance of adoption of accrual accounting to the public sector and suggested that partial accrual accounting is more relevant. He argue that the adoption of accrual accounting is inconsistent with elementary economics, which state that the relevant cost for economic decision making are variable and avoidable costs.