Moreover, Public sector officials gearing the challenge of implementing Accrual based accounting should remain focused on the benefits awaiting them. Governments that use Accruals-based accounts take a long-term view of their finances than those that rely on a cash basis. Strong balance sheet management supports low borrowing costs, which in turn gives governments greater flexibility to respond to emerging pressures and absorb fiscal shocks. What seems to be an ever more volatile world, those advantages are well worth pursuing.
Information generated by Accrual based accounting can expel fiscal illusions (i.e. accounting things that give the illusion of change without any substance) and avoid perverse incentives. For example, governments using the Cash accounting system might be tempted to postpone payments to suppliers or lenders to manipulate the transactions in the financial year in which it appears. In doing this, not only is the financial position misstated, but deferring payments result in government facing additional finance costs.
According to the 2018 International Public Sector Financial Accountability Surveys Index, 65% of governments have implemented Accrual based accounting or planning to do by 2023. This means that about 40% of them are currently transitioning to full Accrual accounting system. As it points out, it is ‘a truly momentous global transition’.
Following are the benefits of Accrual based accounting:
1. Adopting ‘net worth’ perspective in setting fiscal rules, remember that what gets excluded gets exploited.
2. Improved asset management by using Accrual based accounting and information to highlight where asset maintenance is inadequate or requires and identify decommissioning/replacement costs. 3. Uses asset impairments to challenge the performance of public sector projects and companies.
4. As well as providing useful information on assets, it shines a brighter light on liabilities, such as pension schemes. If any loopholes are appearing, they should become clear. Accrual accounting system allows governments to make decisions that support their goals without burdening future generations with unmanageable debt.
5. Directs fiscal policy institutions to assess contingent liabilities and produce recurring risk reports.
6. Using Accrual based accounting as the baseline for intertemporal balance sheets and fiscal sustainability reports.
7. Planned to align the bases for budgeting, reporting and forecasting, as working from comparable bases will provide more accurate current data that can improve forecasts.
8. Implementing Accrual budgeting to put finance as decision-making, while embedding performance management across government.
