Readers will recall that two Mondays ago, the Minister of Finance presented to the National Assembly the 2017 Estimates of Revenue and Expenditure in accordance with Article 218 of the Constitution. During the last week, there was the general debate on the Minister’s budget speech, and beginning tomorrow, the Assembly is expected to resolve itself into the Committee of Supply to examine in detail the Estimates. The entire exercise is expected to be completed and the Estimates approved before the beginning of the new year.
Today, we shift gears somewhat by discussing another important subject on the public financial management front. We refer to the accounting and financial reporting framework that governments use in the processing and recording of their financial transactions. This framework, otherwise known as accounting standards, follows a set of rules that are consistently applied during the period of the execution of the budget.
What are accounting standards?
Accounting standards are fundamental principles that an organization follows in recognizing, measuring and recording financial transactions as well as in periodically presenting and disclosing them in a set of financial statements comprising income, expenditure, assets and liabilities. They are in effect codes of practice developed by professional accounting bodies to facilitate uniformity of practice and consistency in the accounting treatment of transactions, and in presenting the results of operations and financial position of the organisation. They also aid comparability among organisations of a similar nature as well as across a wide variety of organisations.
An organisation can become bankrupt in the belief that it is making profits and distributing them to the owners whereas in fact it has been making losses when applying accounting standards. The Enron and WorldCom scandals highlight the importance of strictly following accounting rules. These two scandals have caused the United States to tighten its legislation, especially with the passing of the Sarbanes-Oxley Act of 2002. The Oil-For-Food scandal at the United Nations also resulted in a series of reform initiatives, the most important being the adoption the International Public Sector Accounting Standards (IPSAS).
Accounting standards are not meant to be a set of rigid rules. There may be situations where adherence to a specific standard may not give a fair presentation of the financial statements, or where a particular event or transaction is not covered by an accounting standard. In such circumstances, the exercise of sound professional judgment and/or consultation with professional bodies/individuals will be necessary.
Types of accounting standards
There are three main types of accounting standards that are recognized internationally:
(a) International Financial Reporting Standards (IFRSs) that are applicable mainly to private sector organizations. IFRS are the successor to the International Accounting Standards developed during the period 1973-2001;
(b) International Public Sector Accounting Standards (IPSAS) that are used by governments, intergovernmental organizations, and international organizations. Developed since 1997, they are IFRS-based, with appropriate adjustments to meet the specific requirements of government; and
(c) National standards that are promulgated either by the recognised professional accounting bodies within the country or by legislation.
The United States, India, South Africa and several other countries have developed their own standards. Many countries, however, find it more convenient to adopt the first two types of standards, rather than re-inventing the wheel. In Guyana, the Institute of Chartered Accountants of Guyana has adopted the IFRS, mainly for private sector organizations.
Cash basis of accounting versus accrual basis
Traditionally, countries have used the cash basis of accounting for recording and reporting financial transactions of government. Transactions are recognised as expenditure only when payments are made for the supply of goods and services, and for works undertaken, irrespective of when value is received. Similarly, revenue is recognized and recorded only when cash is received and not when the amounts are due to be collected on the presentation of invoices.
The cash basis of accounting is simple to operate and is relatively inexpensive. It also helps legislators in monitoring and controlling expenditure. However, it suffers from several shortcomings. With the emphasis on cash, proper accountability for other assets, particularly fixed assets and inventories, as well as liabilities, is largely ignored. There is also a tendency of understating liabilities, especially those relating to pensions. In addition, there is often the practice of accelerating expenditure in the closing months of the year to utilize budgetary allocations, or to postpone expenditure to avoid allocations being overrun, thereby facilitating a significant degree of manipulation of the accounts. Further, comparative analysis from one year to the next is difficult, and information about cost is restricted to a mere comparison of expenditure with budgetary allocations.
The other form of accounting is the accrual basis of accounting. This requires transactions to be recorded as expenditure when value is received as opposed to when payments are made. Similarly, recording of revenue is made when goods and services are supplied to customers, as opposed to when payments are received. Detailed accounting rules must be followed, and all income and expenditure as well as assets and liabilities are fully accounted for. Indeed, many of the shortcomings of the traditional cash-based accounting system are obviated using this framework of accounting.
The accrual basis of accounting is superior to cash basis of accounting since it gives a complete picture and provides a fairer presentation of the financial statements in terms of results of operation and financial position. It also facilitates greater transparency and enhanced accountability. Both the IFRS and IPSAS are accrual-based standards. Many governments, inter-governmental bodies and international organisations have recognized the limitations of the cash basis of accounting and are in the process of gravitating, or have already gravitated, towards accrual accounting consistent with IPSAS. For example, New Zealand, Australia, USA, UK, Canada, Colombia and France as well as several intergovernmental organizations, including the Commonwealth Secretariat, the European Community, INTERPOL, NATO, OECD and the United Nations System organisations, have all adopted full accrual accounting consistent with IPSAS.
The implementation of IPSAS is not without its challenges, especially as regards the identification and valuation of fixed assets (property, plant and equipment), inventories, receivables and liabilities such as pensions. For example, by Resolution 60/246 dated 7 July 2006, the General Assembly of the United Nations approved the adoption of IPSAS. However, it was not until 2014 that IPSAS was fully implemented throughout the United Nations system, comprising 24 organisations. IPSAS currently has 39 standards, and to aid the smooth transition from the cash basis of accounting to full accrual accounting consistent with IPSAS, a cash basis IPSAS entitled “Financial Reporting under the Cash Basis of Accounting” was issued in January 2003. This standard establishes requirements for the preparation and presentation of a statement of cash receipts and payments as well as supporting policy notes. It also includes encouraged disclosures to enhance transparency and accountability.
The cash-basis IPSAS comprises two parts. The first part, which is mandatory, sets out the requirements that must be complied with and includes the preparation of a consolidated statement of cash receipts, payments and balances; a statement of comparison of budget with actual amounts along with explanations for variances (budget execution statement); and accounting policies and explanatory notes.
The second part of the standard is optional and requires the identification of additional accounting policies and disclosures that an entity is encouraged to adopt to enhance its accountability and the transparency of its financial reporting. It also includes explanations of alternative methods of presenting certain information, such as:
(a) statement of cash assets and fund balances;
(b) statement of outstanding invoices (liabilities);
(c) statement of unjustified advances and loans;
(d) statement of contingent liabilities;
(e) non-financial disclosure notes; and
(f) notes to the financial statements.
An IPSAS standard that is of special interest is IPSAS 24 – Presentation of budget information in financial statements. This requires a comparison of budgeted amounts with actual amounts arising from the execution of the budget to be included in the financial statements of entities that are required to make publicly available their budgets and their related income and expenditure. The standard also requires reconciliation with the statement of cash flows.
Accounting standards and the Government of Guyana
The Government of Guyana uses the cash basis of accounting that it inherited from colonial times. However, Section 56 of the FMA Act requires the Minister of Finance to promulgate appropriate accounting standards to be employed by officials responsible for the maintenance of the accounts and records. In accordance with the Government’s Public Financial Management (PFM) Action Plan to be found at the website of the Ministry of Finance, the Accountant General’s Department was required to analyse IPSAS requirements by December2015. Discussions with the Accountant General indicated that the Government is committed to implementing IPSAS, beginning with the cash-basis IPSAS, and that preparatory work has already commenced.
Other aspects of IPSAS implementation, as reflected in the PFM Action Plan include:
(a) Phased implementation of IPSAS by December 2016;
(b) Training of trainers at the Ministry of Finance via on-line training courses by July 2017;
(c) Training of trainers in the wider Public Service by October 2017; and
(d) Developing circulars on IPSAS implementation by December 2017.
There is no doubt that the implementation of IPSAS is a step in the right direction and one looks forward to its full implementation as early as possible. Given our own peculiar problems, it is a wise decision to adopt a phased approach, beginning with the cash-basis IPSAS. However, we should aim to include the non-mandatory requirements of the standard in order to enhance transparency and accountability.
