Accrual accounting and budgetary accounting reflecting on current reform Flemish local governments (PMC = BBC) cycle

Transcription

1 Faculteit Economie en Bedrijfskunde Page 1 Accrual accounting and budgetary accounting reflecting on current reform Flemish local governments (PMC = BBC) cycle Prof. dr. Johan Christiaens Ghent University Belgium Accounting Research Public Sector UGent EY Registered auditor EY Seminar EY 13th May 2016 UGent 2016

2 Faculteit Economie en Bedrijfskunde Page 2 Agenda 1. Introduction 2. Balance sheet and profit / loss account 3. Accrual accounting 4. Budgetary accounting 5. Reform Flemish local governments

3 Faculteit Economie en Bedrijfskunde Page 3 1. Introduction Since years mid 80: worldwide governmental reforms (Hood, 1991 and 1995): New Public Management (NPM) - Outputoriented instead of input- or processingoriented - Management techniques from entreprises - Quantifying service providing and performance measurement - Transparency - Efficiency and value-for-money audit

4 Faculteit Economie en Bedrijfskunde Page 4 1. Introduction (2) Heterogeneous governmental accounting systems Within countries: Different approaches and rules for national, regional and local governments; musea, schools, health care, Diverging convergence New Public Management Different combinations budgetary accounting accrual accounting Amongst countries: Heterogeneity due to differing reforms and differing subsidizing Different accounting frameworks: for economic info, for oversight bodies, for macro-economic purposes, for world bank, etc. International organisations

5 Faculteit Economie en Bedrijfskunde Page 5 1. Introduction (3) Dissatisfaction about government s Criticism Accounting practices Reporting to Parliament, citizens and stakeholders Need for transparency and reporting financial position and financial performance (accrual accounting) Home made, too heterogeneous Incomplete, often changing

6 Faculteit Economie en Bedrijfskunde Page 6 1. Introduction (4) Cornerstone of New Public Management: Reform of the accounting system and financial reporting Adoption of businesslike accrual accounting next to existing, traditional budgetary accounting (often wrongly named cash accounting ; budgetary accounting is a system of authorizing budgets and recording encumbrances and finally receipts and disbursements to control the public purse whereas cash accounting is only recording receipts and disbursements)

7 Faculteit Economie en Bedrijfskunde Page 7 Why accrual accounting? 1. Introduction (5) External stakeholders Internal stakeholders

8 Faculteit Economie en Bedrijfskunde Page 8 2. Balance sheet Assets Fixed assets E.g. Building Equipment Current assets E.g. Debtors Stock Cash Net assets Debts Liabilities and Net Assets E.g. Long term Short term Suppliers

9 Faculteit Economie en Bedrijfskunde Page 9 2. Balance sheet and profit/loss account Total assets = Total liabilities + net assets Or Total assets Total liabilities = Net assets Balance sheet is like a photo at a certain moment, e.g. as of 31st December 20N0 During the accounting period, balance sheet undergoes changes by financial-economic transactions, also influencing the net assets = Revenues Costs disclosed in the profit/loss account

10 Faculteit Economie en Bedrijfskunde Page Balance sheet and profit/loss account (2) BALANCE SHEET NET ASSETS PROFIT & LOSS ACCOUNT + REVENUES - COSTS

11 Faculteit Economie en Bedrijfskunde Page Accrual accounting Profit & loss account provides an overview of all revenues and costs influencing the net assets over the accounting period, mostly 1 year During the accounting period an entity will face numerous transactions belonging to a number of administrative cycles, e.g. purchasing cycle, investment cycle, cycle HRM, revenues cycle, subsidy cycle, etc. Instead of registering alle transactions directly to the balance sheet / profit & loss account transactions are recorded on accounts

12 Faculteit Economie en Bedrijfskunde Page 12 General ledger 3. Accrual accounting (2) Debet Start Increase Asset account Decrease Credit Debet Liabilities and net assets account Decrease Start Increase Credit Debet Cost account Credit Increase Decrease Debet Decrease Revenue account Increase Credit

13 Faculteit Economie en Bedrijfskunde Page Accrual accounting (3) Steps in accounting progress Start accounting year: Opening balance sheet on the accounts general ledger During accounting year: Recording of transactions: journal entry and posting on the accounts End of accounting year: Provisionary balance of accounts End of year adjustments Definite balance of accounts Treatment of the accounting profit or loss Disclosure of annual accounts: balance sheet, proifit & loss account ans notes

14 Faculteit Economie en Bedrijfskunde Page Budgetary accounting Different aim: Authorization of budgets to spend / to receive Different budgetary accounting principles Revealing budgetary surplus of budgetary deficit, which profit and loss Budgetary accounting always from budget (ex ante) to budget accounts (ex post)

15 Faculteit Economie en Bedrijfskunde Page Budgetary accounting accrual accounting In a government the approval of a budget for purchase goods took place January 20N0 5, th May 20N0 government decides that certain goods will be ordered for estimated amount 2,000 and these coming spendings are warranted Purchase itself takes place 15 th June 20N0 1,900 After performing certain checks, the recognition of the purchase by the treasurer happens 7 th July 20N0 and the payment will be made at the end of coming month

16 Faculteit Economie en Bedrijfskunde Page Budgetary accounting accrual accounting Budgetary accounting (cameralistics) is meant to record these stages whereas accrual accounting is only interested in posting the consequences to P/L and balance sheet as shown in the following table

17 Faculteit Economie en Bedrijfskunde Page Budgetary accounting accrual accounting Stages Budgetary accounting Accrual accounting Stage 1: January Budget approved: goods 5,000 Stage 2: 10 th May Funds warranted: goods 2,000 Stage a: 15 th June Stage 3: 7 th July Recognition of invoice: goods 1,900 Stage 4 = Stage b 31 st August - Cash payment: goods 1, Invoice: Costs Dt Debts Ct 1,900 - Cash payment: Debts Dt Cash Ct 1,900

18 Faculteit Economie en Bedrijfskunde Page Budgetary accounting accrual accounting Budgetary report: January May June July Budget approved 5,000 5,000 5,000 5,000 Funds warranted - 2,000 2, Recognition invoice ,900 Budgetary means still to be spent 5,000 3,000 3,000 3,000 Accrual accounting report: Recognition cost - - Costs 1,900 Debts 1,900 -

19 Faculteit Economie en Bedrijfskunde Page Budgetary accounting accrual accounting Budgetary accounting: Used to be the mainstream accounting and financial reporting system in the public sector Still actively used in different governments / jurisdictions: recording of different phases: approval of budgets, appropriations, encumbrances, disbursements Few information concerning liabilities and the future potential benefits of assets Need for better accounting information Need for accrual accounting

20 Faculteit Economie en Bedrijfskunde Page Budgetary accounting accrual accounting Accrual accounting, particularly IPSAS: Better suited for planning, financial management and decision-making; Provides a greater (internal and external) accountability of the public resources; Improves cost awareness (efficiency); Facilitates asset & cash management; Facilitates the recognition of risks and opportunities; Supports the calculation of governmental fees and charges; Better view on the (financial) impact of public policies;

21 Faculteit Economie en Bedrijfskunde Page Reform Flemish local governments Since 2014, Flemish local governments are obliged to implement the BBC-reform ( Beleids- en Beheerscyclus or further referred to as PMC - Policy and Management Cycle) PMC is management & accounting reform (IPSAS): result-orientedness the expression of objectives multi-annual planning transparency, decentralization, accountability, citizen satisfaction, competition, efficiency and effectiveness

22 Faculteit Economie en Bedrijfskunde Page Reform Flemish local governments Multi-annual Strategic plan Annual Budget Annual Accounts Strategic report Policy report Policy report - Targets - Targets realization Financial report - Financial multi-annual targets - Targets budget - Targets budgetary account - Financial equilibrium - Financial situation - Financial situation Financial report - Operational budget - Investment budget - Cash budget Financial report - Operational budgetary account - Investment budgetary account - Cash budgetary account General accounts - Balance sheet - Statement of revenues and expenses Notes

23 Faculteit Economie en Bedrijfskunde Page 23 Questions?