Using Accrual Accounting as an Enabler for better ...€¦ · A comprehensive accruals based...

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Using Accrual Accounting as an Enabler forbetter Management of the Public Finances

Ross Campbell

Director Public Sector, ICAEW


“千里之行，始於足下”

“A journey of a thousand miles starts with a

single step”

Lao Tzu


• The ‘destination’ - reasons foradopting accruals accounting

• The Journey

• Building a government financeprofession

• What we learned in the UK

• Next steps: Clear line of sight &Whole of Government Accounts

• How the accounting professioncan help

Accruals Accounting“The Public Sector Journey”


The objective is well-managedpublic finances!• High quality public accounting is

necessary to deliver:

• Meeting the legitimate expectation ofcitizens

• Taxation that is fair

• Better value for money for publicexpenditure

• High quality public services

• Provide Confidence to investors

• Enable stability and growth

The destination


Financial Management drivers behind adoption

There were a number of perceived problems with cashaccounting:• Insufficient transparency - especially with respect to cost of

ownership considerations

• Unhelpful incentives around the timing of transactions

• There was only a short-term perspective on the impact ofgovernment policies on the public finances

• Poor visibility of the long term management consequences of assetscreated by cash expenditure were


What the UK set out to get

In the UK the expectations for HM Treasury in adopting accrualsaccounting were:

• Resources used as intended

• Full costs of delivering government policies captured

• Future liabilities transparent – to policy makers

• Improved budgeting – taking account of commitments incurred butnot settled at the accounting year end

• Improved asset management – through better understanding ofasset value and conditions

• Greater transparency and better public accountability


A comprehensive accruals based accountingsystem is the final stage on the journey. TheUK journey has had a number of stages:

• Cash accounting to modified cash

• Accruals budgeting

• Basic accruals accounting

• GAAP based accounts

• IFRS

• Clear line of Sight

• Whole of Government Accounts

The Journey


The Journey

A lot of “up-front” work needs to be done to begin the process

• Building political consensus

• Enabling legislation

• Recruitment or training of finance staff (16,000 plus in UK)

• Procurement and set-up of accounting systems

• Processes – including consolidation and audit

• Valuation of assets and liabilities

• Trial runs – i.e. ‘shadow accounts’

The UK took 7 years from the decision to adopt accruals to theproduction of its first set of government accruals-based accounts


The United Kingdom experience

Timeline Event

1994 Political decision to implement accruals accounting

1995-99Work begins – public consultation & drafting legislation

Recruitment, training & systems development

2000 Government Resources & Accounts Act (GRAA 2000)

2001First accruals accounts prepared on a UK GAAP basisand audited in parallel with cash accounts

2002Full implementation of accruals accounting for centralgovernment

2005-06 Government departments adopt IFRS

2007Clear Line of Sight project begins – alignment of budgets,parliamentary estimates and accounts

2010 First Whole of Government Accounts published

2011-12 Clear Line of Sight adopted


The United Kingdom experience

• It took time to build up to the current 16,000 experiencedfinance staff (4,000 qualified chartered accountants)

• A government finance profession had to be created

• It took time to build experience of the accruals approach

• It also took some time to get quality to acceptable levels!

Year No. of qualified audit opinions

1999 30

2000 12

2001 9

2002 6

2003 3

2004 2


• Start Early! It took time to build up skillsand experience

• It was necessary to buy-in expertise forkey senior and specialist posts

• but there is also a need to establish anin-house pipe-line of talent

• Can use training & standards that arealready commercial best practice –no need to ‘re-invent the wheel’

• Build confidence through ‘dry-runs’ or‘pilots’ before going full implementation

• Concentrate then disseminate

• Now setting up a ‘finance academy’

Building the governmentfinance profession


What we learned in the UK

• This is a journey!

• In the end we got where (& what) we expected – but it was alonger trip than envisaged at the start

• The real value comes from the experience of putting thetheory into practice & the associated learning

– Process of implementation develops insight

– Decision makers start to think differently with new information

• There is real value in investing in high quality people

– Strategic Finance (planning) vs. Operational Finance (running)

– Recognise it takes time to build up a cohort of experiencedfinance professionals

– Need to consider succession plans and ‘pipe-line’


What we learned in the UK

There is enormous value in the balance sheet perspective thataccruals accounting provides

Area Benefit

Fixed assets Development of a complete asset register has led toa better understanding of the economic life of fixedassets and reduced capital spend (c. 10%-15%)

Payables &receivables

Commitments can be budgeted for more effectively

Unfunded pensionliabilities

Impact on policy making – greater recognition ofcommitments

Contingentliabilities

Transparency & improved understanding of the levelof risk borne by government and future calls on thepublic finances


Clear Line of Sight

Having brought in accruals it was clear that to get the benefit,budgets and parliamentary approvals also had to be aligned

• Clear Line of Sight (CLoS) was established in July 2007

• Object was to align budgets, parliamentary supply (funding) &accounting

• All entities funded by government now captured in accounts

• All entities report back to Parliament on the same basis as fundswere voted

• Budgets & accounts prepared on same basis to align spendingcontrol with financial management

Implemented in 2011-12, CLoS has led to real improvements intransparency, though some departments are work through theconsequences!


Whole of Government Accounts (WGA)

• The aim of the WGA is to present a comprehensive, accountingstandards based picture of public expenditure and the assetsand liabilities of the public sector as a whole

• In the UK over 5,000 government entities are consolidated intothe WGA, including regional & local government

• A significant benefit over the National Accounts is WGAcaptures comprehensive information on assets & liabilities – forexample state employee pensions & nuclear decommissioningliabilities

• It has had a significant impact on public policy decisions aroundstate control (e.g. Rail Infrastructure) and the provision of longterm social & welfare benefits.


Whole of Government Accounts (WGA)


• Strategic perspective ongovernment financial management

• Understanding the end to endprocess

– How to plan – what is needed & when

– Expert advice & training resources

– Understanding the skills required toimplement and operate

– Knowing the ‘art of the possible’

• Helping policy makers understandthe numbers

– Interpretive analysis – “cause & effect”

– More efficient use of resources

How can the AccountingProfession add value?


Questions?

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