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Accrual Budgeting and Accounting in Government and its Relevance for Developing Member Countries


S L Athukorala and B Reid  (2003)
93 pages (81KB)

What are the disadvantages and advantages of accrual accounting when compared to cash accounting? How should accrual accounting be applied in the Developing Member Countries (DMCs) of the Asian Development Bank (ADB)? These issues are examined in this paper written for the ADB.

A trend in public sector reform has seen the governments of most developed countries adopt some aspects of accrual accounting as the basis for their budgeting and reporting. Recent studies of DMCs of the ADB show that many of their governments are either moving towards, or are considering moving towards, accrual accounting from cash accounting. The paper considers how DMCs can best adopt accrual accounting, and looks at some of the problems that they might face in doing so. It uses the implementation approach of New Zealand as a case study.

The implementation of accrual accounting in DMCs can raise obstacles that developed countries do not face. Implementation can involve significant direct costs in terms of information technology and training, and indirect costs in terms of institutional disruption. Furthermore, circumstances vary between DMCs and the same model of implementation cannot be applied across the board.

  • In DMCs there is often a chronic shortage of accounting personnel in the public sector, therefore capacity constraints can be overwhelming. For instance, the absence of professionally qualified accountants in supreme audit institutions.
  • DMCs do not have the same latitude as developed countries to make mistakes in allocating scarce resources. In a DMC the implications of poor financial management are far more severe.
  • Corruption and vested interests in DMCs can undermine efforts to implement accrual accounting as attempts to improve government transparency and accountability threaten the income sources of politicians and bureaucrats.
  • Reform fatigue in DMCs may impede progress.
  • Limited infrastructure (communication and technological) can reduce options.
  • Conflicting objectives and methodologies of donors may reduce the coherence of reform.

The paper recommends that DMCs undertake accounting reforms in a certain way. It advises that the implementation of accrual accounting cannot be seen as a technical accounting exercise.

  • DMCs should adopt accrual accounting in a realistic and practical manner, as resources and capital allow.
  • They should take a step-by-step approach, beginning with the implementation of the cash accounting standard.
  • The International Federation of Accountants’ International Public Sector Accounting Standards refer to accounting disclosures that can gradually be introduced and are consistent with eventual adoption of accrual accounting.
  • Implementation of accrual accounting needs to involve a culture change in government and be linked with wider public management reforms.
  • The change should to be actively promoted, especially at the level of policy makers and senior officials.
  • For accruals to be worthwhile and successful, the information that accruals bring forth needs to be used to improve decision-making in government.

Source: Athukorala, S.L. and Reid, B., 2003, ‘Accrual Budgeting and Accounting in Government and its Relevance for Developing Member Countries’, Asian Development Bank, Manila.

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