Posted by Julie Cooper[1]
Governments that adopt cash-basis reporting should not limit the recording of actual transactions to when only cash is received or paid. The International Public Sector Accounting Standards (IPSAS) cash-basis mandates all cash receipts and payments to be reported in General Purpose Financial Reports (GPFRs). It also encourages disclosures on payables, borrowings, receivables, and property plant and equipment as useful information for users of these reports. However, information on receipts and payment is insufficient for effective control and decision-making over the allocation and use of scarce resources.
The main purpose of management accounting is to provide complete, timely, and accurate information for various stakeholders. This enables them to make informed decisions about the allocation and use of resources during budget preparation and execution. Accounting for management purposes differs from the preparation of GPFRs. Transactions should be recorded on the receipt of source documentation such as the invoice. Recording transactions only when cash is received or paid, as reflected in a bank statement, for example, is inadequate for effective decision-making purposes.
Government decision-makers need to know what payments are owed and when they are due, including payments that are due to be paid in the future. They also need to know what revenue is expected to be received as well as what has already been received. If decision makers focus only on what has been paid there is a risk that government agencies will spend above the approved budget limits thus leading to a potential build-up of expenditure arrears. If they focus only on what revenue has been received, they may not put sufficient effort into the collection of revenue.
Governments also need to impose strict controls during budget execution to ensure all expenditure transactions are made in accordance with the approved budget. This is best done by processing transactions through a Government Financial Management Information System (GFMIS). To ensure the GFMIS is an effective budget management tool, all transactions must be recorded as they occur in real time. The control functions of the GFMIS will check if there is sufficient budget available for a transaction and will then print a check or generate an Electronic Funds Transfer (EFT) as payment to the vendor. The payment instrument will subsequently be cleared by the bank and appear on the bank statement. This process ensures that expenditure reports are complete, timely, and accurate.
If transactions are only recorded after they are cleared by the bank, then there is no effective control over budget execution through the GFMIS and the check or EFT generation function of GFMIS cannot be undertaken. Under that scenario, it could be argued that the GFMIS plays a limited role as a budget management tool.
The IPSAS cash-basis standard only mandates the disclosure of cash and cash equivalent transactions in the annual GPFRs. Cash equivalents include all undeposited negotiable instruments (such as checks), bank drafts, money orders, and certain certificates of deposit. The IPSAS cash-basis recognizes that some cash instruments will not be cleared at the bank and that the bank balance recorded in GFMIS may differ from the bank balance of the bank on the date of preparing GPFRs. The purpose of the bank reconciliation is to explain the differences between these two balances.
The IPSAS cash accounting standard requires only that cash receipts and payments be reported in the annual GPFRs but does not prohibit the recording of all transactions in the GFMIS. However, when this standard has been adopted, it is often understood to mean transactions can only be recorded when cash is received or paid. In this case, it is common in many developing countries to see filing cabinets full of expense claims waiting to be recorded in the GFMIS only when the payment is made. This interpretation of cash-basis accounting is fundamentally flawed because it:
- denies decision-makers access to essential information about budget execution;
- may lead to the build-up of expenditure arrears;
- lacks transparency;
- circumvents the control functions of the GFMIS;
- could be a deliberate misrepresentation of actual expenses incurred; and
- leads to the creation of parallel systems such as invoices in filing cabinets that are often recorded on spreadsheets.
Adopting IPSAS cash basis accounting for external reporting purposes does not prohibit an entity from recording information on receivables and payables, or any other transaction that supports decision-making for effective and efficient budget execution. Indeed, such accounting is essential for decision-making and effective budgetary control. If a government only records those transactions that appear on the bank statement, then all effective controls in their GFMIS become redundant and any expected enhancement to budgetary control is lost.
In sum, public sector accountants and auditors and PFM advisors must understand the difference between the requirements to produce financial management reports that are useful for decision-making and the requirements mandated in IPSAS cash-basis GPFRs. Whether a government chooses to adopt cash or accrual accounting (or something in between) for external financial reporting purposes, management accounting should focus on information that supports effective and efficient execution of the budget and stewardship of public resources.
[1] International Development Advisor, Public Financial Management Expert, Certified Practicing Accountant and Chartered Accountant Australia and New Zealand.
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