Tips for government accounting

Accrual accounting is an aid to government survival, a senior accountant said when addressing the annual PNG Institute of Accountants conference in Port Moresby.

David Hope, principal consultant with Skilmar Consultant and Deputy Chair of Public Sector Accounting Centre of Excellence of the Australian Society of CPA’s, told the participants that cash accounting by governments had outlived its usefulness.

Hope said modern governments need to have the benefit of the far broader scope, content and focus or financial information provided by accrual accounting.

Hope argued that while there is significant cost to implementing accrual accounting, this is clearly outweighed by its benefits. The two-day conference attracted more than 500 accountants from PNG and Australia. The theme of the conference was Business Survival Year 2000: Success in the future.

Hope discussed the critical need for governments to use accrual accounting as their system of accounting and financial

reporting.

He also discussed the pressures for changing from cash accounting to accrual accounting, its benefits, the challenges of making the change and the costs of accrual accounting.

To support this argument, Hope said while cash accounting is simple, does not require skilled accounting staff, is easily understood by managers and other staff and it does allow assessment of compliance with cash based budgets, it is readily manipulated by such practices as: • Deferring payments, so that the cash is paid in another accounting period; • Deferring receipting and banking, so that the cash appears to be received in another accounting period; • Make payments, for example, of the end-of-financial year payment frenzy so that budget is made; • Prepayment or deferment of debt payments; • Increasing or reducing transfers to reserve and other funds; • Making payments for operating expenses from funds set aside for capital outlays.

Hope said cash accounting has other

serious deficiencies such as: • Little or no attention paid to physical and non-physical assets or the management liabilities, because of the focus on cash transactions only; • Cash management is focused on spending the budget allocation rather than managing cash to provide for efficient and effective cash flows and investments.

Hope said that accrual accounting on the other hand recognises transactions or events at the time they occur, rather than where a receipt or payment is made.

This allows for the matching of transactions and events in the accounting

that period.

He said revenues are the earnings made during the accounting period, whether or not cash is received, while expenses are the goods or services consumed during an accounting period, irrespective of when payment is made.

Hope said accrual accounting also takes into consideration the resources controlled by an entity and assets which represents future economic benefits controlled by the entity as a result of past transactions. (Post Courier) ■