Implementation of Accrual Accounting in Australian Government Finance Statistics and The

STD/NA(2002)29

Implementation of Accrual Accounting in Australian Government Finance Statistics and the National Accounts

Introduction

The Australian system for producing Government Finance Statistics (GFS) was changed in the late 1990s from a cash basis to an accrual basis of recording. This followed the adoption of accrual accounting by a majority of Australian State governments, and the concurrent revision of international statistical standards to incorporate accrual recording. As a result, a new conceptual framework was introduced, in the form of an integrated statement of stocks and flows. This new framework allows a more comprehensive assessment of the economic impact of government activity and the sustainability of fiscal policy. It also provides an improved basis for monitoring efficiency in the allocation and use of government resources.
This paper outlines the major changes in Australia's Government Finance Statistics as a result of implementing accrual accounting, and summarises the major implementation issues in both the GFS and National Accounts statistics.

Background

A system of accruals GFS provides details of revenues, expenses, cash flows and assets and liabilities of the public sector. In Australia the public sector comprises units that are owned and/or controlled by the Australian Commonwealth, State and local governments. These units are grouped as follows:

General Government - a sector which includes all of the agencies of Australian government such as departments, agencies, offices and other bodies engaged in providing services free of charge or at prices significantly below their cost of production and non-market non-profit institutions which are controlled and mainly financed by Australian governments.

Public Non-financial Corporations - a subsector comprising public sector corporations which are mainly engaged in providing market non-financial goods and services. Includes corporations which aim at covering most of their expenses from revenue.

Public Financial Corporations - a subsector comprising public sector corporations which are engaged in providing financial intermediation services or auxiliary financial services.
Non-financial Public Sector - a subsector formed by the consolidation of the general Government and Public Non-financial Corporations sectors.
Total Public Sector - the consolidated total of the General Government, Public Non-financial Corporations and Public Financial Corporations sectors.

There are two main accrual-based standards for public sector budgeting and reporting in Australia. They are:

the ABS accrual GFS which is an economic reporting standard for government based on relevant international statistical standards.
the Australian Accounting Standard (AAS31) Financial Reporting by Government, which is the relevant accounting standard for financial reporting by government agencies in Australia.

GFS and AAS are equally valid systems. The conceptual differences between them mainly reflect the economic focus of the former and the accounting focus of the latter.
The ABS system of GFS is designed to provide statistical information on all Australian public sector entities classified in a uniform and systematic way. Since budget year 1992-93, Australian governments themselves have presented some information in their budget documents on a GFS basis. The information presented in the budget documents of each jurisdiction is compiled with the advice and assistance of ABS officers and generally conforms with the standards applied by the ABS. Jurisdictions may present the information based on their interpretation of the GFS classifications, but must provide a reconciliation of this information with information reflecting the ABS decision on these issues. Of course, the ABS also publishes its own GFS, which represent the '"official" estimates.
The ABS has compiled GFS data from 1998-99 on an accrual accounting basis. The accrual GFS framework follows the principles contained in the international standards set out in the United Nations A System of National Accounts 1993 (SNA93) and the International Monetary Funds Government Finance Statistics Manual 2001. The second edition of the IMF Government Finance Statistics Manual was introduced in 2001 and is focused on definitions, classifications, and guidelines for presenting government finance statistics. It complements SNA93 so that GFS can be utilised jointly with other macro-economic statistics.
Through the move towards accrual accounting in Australia in the 1990s, the challenge for the ABS was to develop its own accrual GFS reporting framework since the IMF at the time had not released an accruals manual. The IMF has since released its Manual on Government Finance Statistics, 2001. The conceptual bases of the ABS and the IMF frameworks are identical since they are both derived from SNA93; however, there are minor presentational differences reflecting their somewhat independent development.
The adoption of accrual reporting by Australian governments represents a major development in public sector financial management and reporting of recent years. The ABS move to an accrual based framework for GFS needs to be understood in the context of this gradual move by the various Australian governments (National and State) from cash to accrual reporting during the 1990s. Over this period, Australian government units have progressively introduced various Australian Accounting Standards that have required the adoption of an accrual basis of accounting. The relevant accounting standards are:

Australian Accounting Standard 27 (AAS 27): Financial Reporting by Local Governments.
Australian Accounting Standard 29 (AAS 29): Financial Reporting by Government Departments.
Australian Accounting Standard 31 (AAS 31): Financial Reporting by Governments.

GFS is mainly sourced from the budget management and/or the underlying accounting systems maintained by these units. At the time of writing, most jurisdictions had adopted accrual reporting for the general government sector. Those jurisdictions that have not yet implemented it provide approximate accrual data to the ABS for GFS purposes. This enables the ABS to compile accruals GFS statistics for the whole of the public sector across all jurisdictions.
For a detailed explanation of the conceptual changes in accruals GFS and the changed nature and presentation of the statistics, the ABS publication 'Information Paper Accruals-based Government Finance Statistics 2000 Cat. no. 5517.0' should be referred to. This paper is available in Acrobat format, from the ABS website

The differences between cash and accruals

The differences between cash and accrual reporting can be grouped into two categories - the recognition of transactions, and the timing of transactions. In cash accounting, transactions are recognised when cash transactions are actually received or dispatched. As a result, those transactions which do not involve cash movements such as provisions and revaluations are not included. On the other hand, accruals reporting includes transactions when economic value changes instead of when cash movements are made. This means that accrual reporting can cover significant transactions which are not included in cash accounting because there are not associated cash flows.
In considering the timing of transactions, under cash accounting transactions are shown in the period in which the cash is actually received or paid. In accrual accounting, transactions are shown in the period in which revenue is earned or expenses incurred, irrespective of the timing of the related cash payment.
Three of the more significant differences between cash and accruals accounting presentations for Australia are the treatment of unfunded superannuation (pension) funds for government employees, provisions for the depreciation of capital assets, and the recording of public debt interest.
Superannuation. The cash framework shows the movements of cash into and out of superannuation funds. The accrual framework records the accruing superannuation expense whether the liability is funded or unfunded, and therefore records the true cost of accruing superannuation liabilities. The type of variables taken into account when Treasuries are calculating changes to the level of unfunded superannuation liabilities include employee numbers, and assumptions on wages growth, future inflation, and the expected rate of return on investments.
Depreciation. The cash accounting framework records capital expenditure in a given period, while in the accruals accounting framework, the operating statement records depreciation of the capital, with the cost of the capital being gradually defrayed across the life of the assets. However, the accruals operating statement and the net lending/borrowing accrual measure is set out so that it continues to provide information on capital expenditure as well as depreciation. The accompanying cash flow statements under accruals also show dissections of capital expenditure.
Public debt interest. Under cash reporting public debt interest is shown as the interest paid during a period. Under the accruals framework, account is taken for any interest accrued, but not yet paid during the period.

The differences between accruals GFS and the National Accounts

The Australian GFS data provide the basis for many components of the published national accounts but there are differences in concept for which adjustments are made in finalising the accounts. These relate to the following categories.
Financial Services. Indirectly charged financial services for both FISIM and non-life insurance are allocated to consuming units within the Australian System of National Accounts. These are not standard GFS items and hence an estimate of government consumption of these services is made in the broader financial services estimation systems. These estimates are added to Government Final Consumption Expenditure and taken into account in estimating the Gross Operating Surplus of Public Non-financial Corporations in the national accounts.
Defence weapons equipment adjustments. Much of Australia's defence weapons equipment is imported from overseas. To ensure consistency between Balance of Payments recording of the flows and National Accounts recording, a timing adjustment is made within Government Final Consumption Expenditure. It is also necessary to adjust estimates of defence gross fixed capital formation derived from accounting systems to treat appropriate items as consumption expenditure consistent with SNA93.
Computer software. The are numerous issues associated with the compilation of GFCF on computer software. The approach taken in the Australian System of National Accounts has been to derive a benchmark based on surveys of public and private units and to use this benchmark in place of estimates emerging through the GFS system. This consistent estimate for all sectors is based on a common conceptual basis. One issue is that reporting government units often expense rather than capitalise expenditure on computer software. Adjustments are made to Government Final Consumption Expenditure, Public Gross Fixed Capital Formation and the Gross Operating Surplus of Public Non-financial Corporations in the national accounts.
Compensation of employees.In the GFS system compensation of employees excludes own account capitalised wages (instead it is recorded under Gross Fixed Capital Formation) and hence understates the level of compensation of employees. This amount can be significant in Australia especially with respect to the construction of roads. At present, GFS data are not used to estimate compensation of employees for the public sector in the national accounts - except with respect to the employer social contributions associated with unfunded pension schemes. Rather the estimates are derived from a specific purpose survey of public sector earnings and employment.
Interest accruals on bonds.Within the Australian System of National Accounts, interest accruals on bonds are estimated using the so-called creditor approach where interest is calculated using prevailing market interest rates rather than the rates determined at the time the bond was issued. These calculations are not undertaken for GFS purposes, which due to the limitations of source data are compiled using the debtor approach. (However, this is currently being reviewed by the various Treasuries).
Consumption of fixed capital. Estimates of consumption of fixed derived in the National Accounts capital stock system are used in place of estimates of depreciation which are collected within the GFS system. This ensures that the national accounts estimates relate to the economic, and not accounting depreciation.

Presentation of the accruals GFS framework

The accruals GFS framework presents information on the expenses, revenue, payments, receipts, and assets and liabilities of the Australian public sector. Generally speaking, GFS includes only those transactions over which a government exercises control under its legislative or policy framework. Details of accruals GFS are presented in three principal statements - operating statement, balance sheet and cash flow statements. Sample statements are included in the Attachment. The ABS and the major stakeholders have agreed to the GFS accrual analytical balances presented in these tables.

Operating statement

The operating statement sets out data for revenues and expenses and is designed to show the composition of these revenues and expenses and the resulting net cost of a government's activities for a given period. It is designed to show the cost of resources consumed by a government in achieving its objectives, and how these costs have been met from a number of revenue sources. The operating statement also shows information on capital expenditure.
The operating statement presents two major fiscal measures - the GFS net operating balance and GFS net lending/borrowing.
GFS net operating balance. This represents the operating result and is the difference between revenue and expenses. It excludes expenditure on the acquisition of capital assets but includes accrual costs such as superannuation entitlements and depreciation. This measure therefore encompasses the full costs of providing government services and presents a fair measure of the sustainability of a government's fiscal position over time and provides an indication of the sustainability of current services by government. The measure can also represent the change in net worth, less the effect of revaluations of financial assets and liabilities and changes in the volume of assets that result from discoveries, depletion and destruction of assets.
GFS net lending/borrowing. Net lending/borrowing differs from the net operating balance in the treatment of capital expenditure. Unlike the net operating balance, net lending/borrowing includes net capital expenditure, but does not include depreciation. A surplus would indicate that a government is saving more than enough to finance its investment spending and is therefore not contributing directly to the current account deficit. As this measure includes the full amount of investment by a government in a period, net lending/borrowing is a good measure of the impact of a government's budget on the economy in a given period, particularly in the current account of the balance of payments.

Balance sheet

The balance sheet presents a government's stock of assets and liabilities, both financial and non-financial at a point in time, and shows the resources over which a government maintains control. The balance sheet is a financial snapshot of a government, taken at the end of a given period. By providing information on the type of assets and liabilities held, the statement shows information on the government's financial liquidity. The balance sheet shows information on the composition of a government's financial assets, on its holdings of fixed assets, and on the extent of government liabilities including borrowings and unfunded superannuation.

The major measures presented in the GFS balance sheet are as follows:

GFS net debt. Net debt comprises the stock of selected gross financial liabilities less financial assets. Net debt is reported in the balance sheet and is the sum of deposits held, advances received and borrowing, less the sum of cash and deposits, advances paid, and investments, loans and placements.
GFS net worth. The net worth measure from the balance sheet provides a more comprehensive picture of a government's overall financial position than GFS net debt. It comprises total assets (financial and non-financial) less total liabilities, less shares and other contributed capital.
GFS change in net worth. This analytical balance measures the change in a government's accumulated assets and liabilities. The total change in net worth can be measured by comparing successive end-of-year balance sheets. That part of change in net worth due to transaction flows can also be seen in the operating statement as the net operating balance.
Net financial worth. This measures a government's net holdings of financial assets and is calculated as financial assets less liabilities. Net financial worth is a broader measure than net debt, in that it includes provisions made as well as holdings of equity. This measure includes all financial assets and liabilities, only some of which are included in GFS net debt.

The cash flow statement in the GFS accruals framework

As a supplement to the accrual-based operating statements and balance sheets, the ABS also publishes cash flow statements as part of its GFS.