Accrual and budgetary accounting
Faculteit Economie en Bedrijfskunde Page 1
Accrual accounting and budgetary accounting
reflecting on current reform Flemish local
governments (PMC = BBC) cycle
Prof. dr. Johan Christiaens
Ghent University Belgium
Accounting Research Public Sector UGent – EY
Registered auditor EY
Seminar EY 13th May 2016 – UGent © 2016
Accrual and budgetary accounting
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Agenda
1. Introduction
2. Balance sheet and profit / loss account
3. Accrual accounting
4. Budgetary accounting
5. Reform Flemish local governments
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1. Introduction
• Since years mid ‘80: worldwide governmental reforms (Hood, 1991 and 1995):
New Public Management (NPM) - Outputoriented instead of input- or processingoriented
- Management techniques from entreprises
- Quantifying service providing and performance measurement
- Transparency
- Efficiency and value-for-money audit
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1. Introduction (2)
• Heterogeneous governmental accounting systems – Within countries:
• Different approaches and rules for national, regional and local governments; musea, schools, health care,
• “Diverging” convergence New Public Management
• Different combinations budgetary accounting – accrual accounting
– Amongst countries:
• Heterogeneity due to differing reforms and differing subsidizing
• Different accounting frameworks: for economic info, for oversight bodies, for macro-economic purposes, for world bank, etc.
– International organisations
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1. Introduction (3)
• Dissatisfaction about government’s
– Accounting practices
– Reporting to Parliament, citizens and stakeholders
– Need for transparency and reporting financial
position and financial performance (accrual
accounting)
• Criticism
– “Home made”, too heterogeneous
– Incomplete, often changing
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1. Introduction (4)
• Cornerstone of New Public Management:
Reform of the accounting system and financial reporting
Adoption of businesslike accrual accounting next to
existing, traditional budgetary accounting (often wrongly
named ‘cash accounting’; budgetary accounting is a
system of authorizing budgets and recording
encumbrances and finally receipts and disbursements to
control the public purse whereas cash accounting is only
recording receipts and disbursements)
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1. Introduction (5)
• Why accrual accounting?
External stakeholders
Internal stakeholders
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2. Balance sheet
Fixed assets
‣ E.g. Building
‣ Equipment
Current assets
‣ E.g. Debtors
‣ Stock
‣ Cash
Net assets
Debts
‣ E.g. Long term
‣ Short term
‣ Suppliers
Assets Liabilities and Net
Assets
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2. Balance sheet and profit/loss account
Total assets = Total liabilities + net assets
Or
Total assets – Total liabilities = Net assets
Balance sheet is like a photo at a certain moment,
e.g. as of 31st December 20N0
During the accounting period, balance sheet
undergoes changes by financial-economic
transactions, also influencing the net assets
= Revenues – Costs disclosed in the profit/loss
account
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2. Balance sheet and profit/loss account (2)
BALANCE SHEET
PROFIT & LOSS
ACCOUNT
+ REVENUES
NET ASSETS
- COSTS
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3. Accrual accounting
• Profit & loss account provides an overview of all revenues
and costs influencing the net assets over the accounting
period, mostly 1 year
• During the accounting period an entity will face numerous
transactions belonging to a number of administrative
cycles, e.g. purchasing cycle, investment cycle, cycle
HRM, revenues cycle, subsidy cycle, etc.
• Instead of registering alle transactions directly to the
balance sheet / profit & loss account transactions are
recorded on accounts
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3. Accrual accounting (2)
General ledger
Asset account Credit Debet
Start Increase
Decrease
Liabilities and net assets account Credit Debet
Decrease Start
Increase
Cost account Credit Debet
Increase Decrease
Revenue account Credit Debet
Decrease Increase
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3. Accrual accounting (3)
•Steps in accounting progress
Start accounting year:
Opening balance sheet on the accounts general ledger
During accounting year:
Recording of transactions: journal entry and posting on the accounts
End of accounting year: Provisionary balance of accounts
End of year adjustments
Definite balance of accounts
Treatment of the accounting profit or loss
Disclosure of annual accounts: balance sheet, proifit & loss account ans notes
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4. Budgetary accounting
• Different aim: Authorization of budgets to spend /
to receive
• Different budgetary accounting principles
• Revealing budgetary surplus of budgetary deficit, which
≠ profit and loss
• Budgetary accounting always from budget (ex ante) to
budget accounts (ex post)
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4. Budgetary accounting – accrual accounting
• In a government the approval of a budget for purchase
goods took place January 20N0 € 5,000
• 10th May 20N0 government decides that certain goods
will be ordered for estimated amount € 2,000 and these
coming spendings are “warranted”
• Purchase itself takes place 15th June 20N0 € 1,900
• After performing certain checks, the recognition of the
purchase by the treasurer happens 7th July 20N0 and
the payment will be made at the end of coming month
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4. Budgetary accounting – accrual accounting
• Budgetary accounting (cameralistics) is meant to record
these stages whereas accrual accounting is only
interested in posting the consequences to P/L and
balance sheet as shown in the following table
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4. Budgetary accounting – accrual accounting
Stages Budgetary accounting Accrual accounting
Stage 1: January
Budget approved: goods
€ 5,000 -
Stage 2: 10th May
Funds warranted: goods
€ 2,000 -
Stage a: 15th June
-
Invoice: Costs Dt 1,900
@ Debts Ct 1,900
Stage 3: 7th July
Recognition of invoice:
goods € 1,900 -
Stage 4 = Stage b
31st August
Cash payment: goods
€ 1,900
Cash payment: Debts
Dt 1,900 @ Cash Ct
1,900
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4. Budgetary accounting – accrual accounting
January May June July
Budgetary report:
Budget approved 5,000 5,000 5,000 5,000
Funds warranted - 2,000 2,000 100
Recognition invoice - - - 1,900
Budgetary means still
to be spent 5,000 3,000 3,000 3,000
Accrual accounting
report:
Recognition cost - -
Costs
1,900
Debts
1,900
-
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4. Budgetary accounting – accrual accounting
• Budgetary accounting:
– Used to be the mainstream accounting and financial
reporting system in the public sector
– Still actively used in different governments / jurisdictions:
recording of different phases: approval of budgets,
appropriations, encumbrances, disbursements
– Few information concerning liabilities and the future
potential benefits of assets
– Need for better accounting information
Need for accrual accounting
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4. Budgetary accounting – accrual accounting
• Accrual accounting, particularly IPSAS:
– Better suited for planning, financial management and decision-making;
– Provides a greater (internal and external) accountability of the public resources;
– Improves cost awareness (efficiency);
– Facilitates asset & cash management;
– Facilitates the recognition of risks and opportunities;
– Supports the calculation of governmental fees and charges;
– Better view on the (financial) impact of public policies;
– …
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5. Reform Flemish local governments
• Since 2014, Flemish local governments are obliged to
implement the BBC-reform (‘Beleids- en Beheerscyclus’
or further referred to as PMC - Policy and Management
Cycle)
• PMC is management & accounting reform (IPSAS):
– result-orientedness
– the expression of objectives
– multi-annual planning
– transparency, decentralization, accountability, citizen
satisfaction, competition, efficiency and effectiveness
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5. Reform Flemish local governments
Multi-annual Strategic plan Annual Budget Annual Accounts Strategic report Policy report Policy report
- Targets - Targets realization
Financial report
- Financial multi-annual targets - Targets budget - Targets budgetary account
- Financial equilibrium - Financial situation - Financial situation
Financial report
- Operational budget
- Investment budget
- Cash budget
Financial report
- Operational budgetary account
- Investment budgetary account
- Cash budgetary account
General accounts
- Balance sheet
- Statement of revenues and
expenses
Notes
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Questions?
…