The Implementation of Accrual Accounting in the Public Sector New Zealand's Experience

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1 The Implementation of Accrual Accounting in the Public Sector New Zealand's Experience Mark Hucklesby National Technical Director Grant Thornton New Zealand

2 Session outline Putting accrual accounting for public sector entities into context The New Zealand story Lesson learnt along the way Closing remarks

3 Putting accrual accounting for public sector entities into context

4 Many would say it began with Luca Pacioli the father of accounting

5 Public sector accounting is an international story

6 Ultimately is it an expense or an asset?

8 Why accrual accounting? Allocate revenues and costs to period Presenting fairly, but also being prudent Match revenue and expenses Remove distortions Avoid artificial fluctuations in profit or loss Codify practice, seek general acceptance

9 Hicks on Income - Definition "The amount which a man can consume during a period and still remain as well off at the end of the period as he (thought he) was at the beginning" John Hicks (1946)

10 Hicks on Income Definition #2 "The amount that an entity can consume in a period and still expect to be able to consume the same amount in each ensuing period" John Hicks (1946)

11 So a conceptual structure for the public sector should have The Accounting Equation Definitional elements Assets As a result of past events Present resources That will provide future economic benefits Less Liabilities As a result of past events Present obligations That will involve economic sacrifice Equals Equity Movement in Equity in Period = Net Income in period

12 The New Zealand story

13 Collaboration and commitment

14 In the 1970s our Prime Minister was an accountant!

15 World record holder!

16 In the 1980s NZ went free trade and open market

17 In the 1990s it was all about accountability

18 In the 2000s we then made IFRS "sector neutral"

19 And actively supported the International Public Sector Accounting Standards Board (IPSASB)

20 Which bring us to 2009 Sector neutrality was not working well for NZ IPSAS standards was working on a conceptual framework and standards that would provide suitable guidance for public sector entities Three development principles were confirmed Public accountability Economic significance Separation of ownership and management

21 In 2016 New Zealand now has An independent Crown Entity the External Reporting Board to create standards A specific set of accrual based standards for the public sector has been build around an entity being a Public Benefit Entity (PBE) Four tiers of reporting (3 are accrual-based and 1 is cash-based) and they are triggered by operating expenditure thresholds

22 Lessons learnt along the way

23 IPSASB v IASB Sector Neutrality Characteristics of the public sector Service delivery objective broader information needs Involuntary transfers and non-exchange transactions Importance of the approved Budget Nature and purpose of assets in the public sector Longevity of the public sector Regulatory role of public sector entities

24 The challenge for the public sector People are calling for : Decrease Volume/Complexity Increase Relevance to User Needs

25 IPSAS adoption in Switzerland

26 What resulted? A country of 8.4 million people has now adopted IPSAS and accrual accounting Short form condensed public sector financial statements based on accrual accounting read by approx 1.5 million people Long form financial statements read by only 1,500 people!

27 The lessons learnt from Switzerland Invested in a brand new ledger system (SAP) Categorised over 35,000 financial statement elements Resulted in better debates with Parliament MPs had to be trained up on accrual accounting No shift in power to Government departments away from Parliament Budgets also needed to be on an accrual basis

28 So what has New Zealand learnt?

29 Accrual accounting is challenging Both local government and Central government need to move together The importance of the statement of service performance to assess non-financial outcomes Social policy obligations (including pensions) are very challenging to assess and report Need for comprehensive valuation guidelines Working with the Office the Auditor-General

30 The value of audit Long audit report and identification of 5 key audit matters all linked to accrual accounting Recognition of tax revenue Valuing property, plant and equipment Valuing long term liabilities Valuing financial assets and financial liabilities, and Accounting for the effects of the Canterbury earthquakes

31 Closing remarks

32 Session recap Putting accrual accounting for the public sector into context The New Zealand story Lessons learnt along the way Closing remarks

33 "Don't be afraid to take a big step if one is indicated. You can't cross a chasm in two small jumps!" David Lloyd George

34 Thank you!

Disclaimer This presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form.

35 Disclaimer This presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenter and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered.

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