Public Sector Governance and Accountability Series: Budgeting and ...

184 Paul Boothe
One of the leading proponents of the move to accrual accounting has
been the OECD. In 2002, the OECD Journal of Budgeting was launched,
containing articles on budgeting and on reporting best practices. Accrual
budgeting and accounting figure prominently in the OECD’s review of best
practices. An example is the best-practice advice dealing with accounting for
capital assets:
Non-financial assets will be recognised under full accrual-based accounting
and budgeting. This will require the valuation of such assets and the selection
of appropriate depreciation schedules. The valuation and depreciation methods
should be fully disclosed. (OECD 2002: 13)
By 2003, Blöndal (2003) estimated that 5 of 28 OECD member countries
had adopted full accrual accounting and 2 more had adopted modified accrual
(that is, no capitalization or depreciation of assets). Moreover, 3 of 28 had
adopted accrual budgeting, with an additional 3 using modified accrual.
Rationale for Adoption of Accrual Accounting
After reviewing the differences between cash and accrual accounting, it is
useful to examine the rationale provided by the proponents of accrual
accounting. Blöndal (2003: 45) outlines the case in favor of accrual accounting
for the public sector:
The objective of moving financial reporting to accruals is to make the true cost
of government more transparent; for example, by attributing the pension costs
of government employees to the time period when they are employed and
accumulating their pension rights rather than having this as an unrelated
expenditure once they have retired. Instead of spikes in expenditures when
individual capital projects are undertaken, these are incorporated into the
annual operating expenditures through an allowance for depreciation. Treating
loans and guarantee programmes on an accrual basis fosters more attention to
the risks of default by those who have been granted them, especially if there is
a requirement for such default risks to be pre-funded. Outstanding government
debts can be designed in such a way that all interest expenditure is paid in a
lump sum at the end of the loan rather than being spread through the years
when the loan was outstanding. All of these examples show how a focus on cash
only can distort the true cost of government.
Thus, the key benefit of accrual accounting is to allocate the revenues
and expenses of government correctly over time. All of the examples Blöndal
cites are ones in which both cash and accrual accounting will recognize the
relevant expenses and revenues, but at different points in time. In his view,