The public sector usually uses the traditional cash accounting, which - combined with appropriate systems of supervision over the budget discipline - is aimed at enabling control to be exercised over the use of public funds corresponding to the decision-makers' intentions. Such an accounting policy is applied due to the basic need to register, in a reliable manner, inflows and outflows within the competency of public administration. Therefore, this system differs from the accruals accounting model used in the private sector. Undoubtedly, the cash accounting method also ensures public sector entities the appropriate tools and processes necessary for:
- determining an entity's financial (cash) position as at any given date;
- maintaining reliable records of all the inflows and outflows; and
- providing decision-making bodies with effective State Budget reporting tools and control tools.
Tendency to switch over to accruals accounting in the public sector
In the context of closer monitoring of the State Budget , cash accounting as such shows considerable limitations. Therefore, many countries have come up with the idea of introducing the principles of accruals accounting, together with the attendant systems and processes.
Three factors have contributed to that change:
The public opinion demands of the local authorities clear information on the use of public funds and better financial information which will allow the way in which public sector entities manage their funds to be analysed and also what objectives they achieve by spending these funds. In the context of assessing creditworthiness, the ability to present an entity's finances so that they are clear to banks is also very important.
Cash accounting does not provide appropriate and sufficient information to enable active management and control over resources according to all types of costs. Limited resources necessitate exercising stricter control over expenses, which requires reporting the full cost of transactions, including the cost of assets used for providing services. Hardly ever does the full cost of a service rendered in a given period equal the cash spent in the same time.
Applying the generally adopted methods and techniques of the financial and economic analysis to entities reporting on the basis of information generated by cash accounting is limited or simply impossible. Therefore, benchmarking, which is so useful for evaluating the results of operations, is a lot more difficult in the case of public sector entities. These entities frequently conduct operations which are similar or identical to the activities of a private sector entity, but they cannot be covered by such analysis due to the fact that they apply different reporting policies.
These three factors encouraged nine European countries subject to scientific research conducted by the Euro-CIGAR1 Group to launch draft reforms aimed at setting up an accruals accounting system. International organisations such as the European Commission, OECD and NATO have taken measures to implement the accruals accounting system.
In accordance with accruals accounting policies, all transactions are reported at the time they are conducted, regardless of the timing of the related cash flows. The results of operations are measured on the basis of the revenue earned and the funds used in a given period, rather than on the basis of cash received or paid. This accounting method is more complex, because it tries to evaluate and demonstrate how an entity's management administered the resources entrusted to them and to determine the value of the services which the entity is obliged to provide. In accordance with the accruals accounting policies, in the majority of cases a reporting model consists of a balance sheet (its components: assets, liabilities, and equity), an income statement (its components: revenue, expenses), and a cash flow statement (a breakdown of cash inflows and cash payments during the year).
Despite the fact that the accruals method has been used for a very long time in the private sector, it is impossible to take over all the policies followed by companies and to apply them directly in the public sector. The transition of public sector entities to the accruals method involves several problems which are unique to that sector. It should be borne in mind that there are specific types of assets and liabilities in the public sector which cannot be found in the private sector. They include the following:
- assets connected with the national heritage;
- military assets;
- infrastructural assets;
- social insurance programmes.
The type of methods used for valuing individual assets is extremely important, especially from the point of view of economic analysis.
