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Introduction

Accounting is the art of recording, summarizing, reporting, and analyzingfinancial transactions. It is the art of communicating financial information about a

business entity to users such as shareholders and managers. The communications

is generally in the form of financial statements that show in money terms the

economic resources under the control of an entity. Through the performance that it

measures, a financial accounting system will show the extent to which the economic

resources of the business have grown or diminished during the year. As such the

detailed financial statements show the current results and the future budgeted

results.

Government Accounting is the process of recording, analyzing, classifying,

summarizing, communicating and interpreting financial information about

government in aggregate and in detail reflecting transactions and other economic

events involving receipts, spending, transfer usability and disposition of assets and

liabililties.The purpose of government accounting are:

To carry out the financial business of the government in a timely, efficient and

reliable manner(e.g. to make payments, settle liabilities, collect sum due by

and collect assets ect...) subject to necessary financial control.

To keep systematic, easily accessible accounting and documentary records as

evidence of past transactions and current financial status, so that detailed

transactions can be identified and traced and all aggregates can be

conveniently broken down to their constituent part.

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To provide periodic financial statements, containing appropriate classified

financial information as a basis for steward ship and accountability and

Decision making

To maintain financial records suitable for budgetary control and the needs of

auditors.

To provide means for effective management of government assets, liabilities,

expenditure and revenues.

Normally an accounting system can be based on one of these two bases. Cash

Accounting System or Accrual Accounting System. The Cash Basis measures cash

flows at the time those flows actually takes place. Whereas Accrual Basis records

expenditure and revenues when they become due, i.e. in many cases before

associated cash flows take place. This is a concept borrowed from private company

accounting system which some government are trying to adopt. In some countries

they are using a mixed basis which is the result of the modification of the accrual

system of reporting (Cash Basis and modified Accurate Basis.)

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The Cash Accounting System.

In the cash accounting system transactions are recorded when there is actual

flow of cash. Revenue is recognised only when it is actually received. Expenditure is

recognised only on the outflow of cash. No consideration is given to the due fact of

the transaction. This system of accounting is simple to understand and as such

needs less skill on the part of the accountant. Its whole focus is on cash

management. The recognition trigger is simply the flow of cash. In cash-basisaccounting, an entity will record expenses in financial accounts when the cash is

actually paid out, and revenue is recorded when cash is actually received, that is

cash is in hand or in the bank account. For example, if someone completed a project

on December 30, 2003, but doesn't get paid for it the amount due will be recorded at

the time of payment the next year and not in the year the project is completed.

The cash accounting system has some advantages and one of the main

reasons the supporters will put forward is the simplicity of the system. By recording

only receipts and payments, the cash accounting system requires no extensive and

complex knowledge. It follows that an understanding of the accounting reports under

a cash accounting basis is much easier to understand and analyse. There are

however some limitations to the systems and these are:

- It does not provide the complete picture of the financial position i.e. information on

assets and liabilities are not available for fixed assets (land, building, machineries,

defence, heritage assets etc.)

- No information about capital work-in-progress like dams, power plants, roads and

bridges etc. is available.

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- It does not give the full information on current assets e.g. accrued income like

outstanding royalty, fees, service charges, tax arrears etc.

- Comprehensive information is not available about government liabilities (pensionary

commitments, interest due, bills payable, depreciation for replacement of assets etc.)

- Unit cost and total cost of services provided by the Government departments like

health, education, water supply, transportation etc. is not ascertainable (as

depreciation, interest etc. are not apportionable)

- It ignores certain transactions by not recording expenditure already incurred but

payment not made e.g. supplies made, salary, telephone charges, overdue interest

etc. and also revenue earned but cash not received e.g. licence fees, services

delivered (electricity, water etc.)

- It gives a wrong picture of income received, as advance tax receipts are recognised

as income.

- No weightage is given to the concept of matching i.e. expenses of a specific period

should be set off against the revenue of the same period.

- No disclosure is made about contingent assets and contingent liabilities which may

turn into committed ones on account of guarantees given or letter of comforts issued

by the government.

- No information is provided about existing net liabilities of public enterprises and

agencies outside the government, although the latter cannot escape such liabilities.

- No disclosures are made about Accounting Policies on the basis of which Financial

Statements are prepared.

- It provides room for fiscal opportunism e.g. tax revenues can be collected in excess

during a particular period followed by high incidence of refunds together with interest,

payments can be easily deferred and passed on to the next financial year, revenue

due in the future could be compromised by providing for one time payments.

Due to the above disadvantages, it is not possible to get the real picture of the

government financial performance and position.

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The Accrual Accounting System.

Accrual accounting is an accounting methodology under which transactions are

recognized as the underlying economic events occur, regardless of the timing of the

related cash receipts and payments. Following this methodology, revenues are

recognized when income is earned, and expenses are recognized when liabilities are

incurred or resources consumed. This contrasts with the cash-accounting basis

under which revenues and expenditures are recognized when cash is received and

paid respectively.

Accrual accounting in the context of the public sector would generally imply the

recording of transactions on an accrual basis, and the preparation of accrual-based

financial statements for the government as a whole. Some countries like New

Zealand and Australia have already implemented the concept of accrual

budgeting.Accrual accounting differ from cash accounting in following ways:

a. It records consumption of resources during a period whereas cashaccounting records payments. The accrual accounting, thus, focuses on cost of

resources consumed whereas cash accounting focuses on expenditures incurred

without linking them to the triggering event. Similarly, accrual system recognizes

income as it is earned. This implies that while in cash based system only cash flows

are recorded; in accrual accounting, in addition to cash flows, unpaid consumptions

(payables) and unrealized incomes (receivables) are also recorded.

b. The revenue flows from an output are matched with the consumption of

resources that produced the output. This helps in bringing out the operating

performance of an entity. Cash accounting does not apply matching principle.

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c. Accrual accounting provides a complete measure of an entitys financial

position at any given point of time by a comprehensive presentation of entitys assets

and liabilities

Benefits of Accrual Accounting

Accrual accounting allows Governments to obtain a more realistic picture of

their performance in terms of revenues earned and resources consumed in a period.

It is more difficult for cash accounting to do this because it only records the cash

received and paid in a period regardless of the relevance of that cash movement to

the period in question.

Accrual accounting often therefore facilitates better planning, management and

decision making as well as providing a means with which to assess financial

resilience. Accrual accounting can also facilitate better performance measurement

and therefore performance management. Further it can permit more effective

comparisons of some aspects of financial performance between different

government departments and agencies as well as international comparisons.

Arguments for the accrual basis

The arguments for accrual accounting are as follows:-

Cash accounting does not generate enough useful information. E.g about

payable and receivable.

Only accrual accounting provides adequate information on the full costs of

operation, thus supporting decision-making e.g decisions either to placesubcontracts with private sector contractors or to carry out the work-in house.

Only accrual accounting generates reliable information on the full range of

assets and liabilities.

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only accrual accounting can generate comprehensive financial information

about government e.g a loan which is written off has no impact on a cash

-based statement but under accrual accounting it diminishes net worth.

The Government of Mauritius Accounting System.

The account of the government of Mauritius are prepared on a cash

basis i.e. transaction are recorded only when money are received and paid. Within

the given period, whether or not the receipts and payments are in respect of goods

supplied or service rendered during that period and whether they relate to recurrentor capital expenditure or revenue. The statement of Assets and liabilities does not

include fixed asset, loans, investments other than these made under section 3(4)(a),

8(2)(b), 9(3)(a) and 10 (4)(b) of the finance and audit act. Also all foreign currency

balances are valued at the official rate ruling of the last working day of the financial

year.

The question is can the accrual accounting system be adopted in Mauritius to

be able to make a proper assessment one should consider the requirements and

prerequisites that are necessary to enable a proper transition from cash accounting

to accrual accounting. According to what has been accomplished worldwide, the

main starting point is to already have a Program Based Budgeting implemented with

a comprehensive and elaborate Chart of accounts coupled of course with a

computerized accounting system. This will help to capture data and account them onan accrual basis. Once this is done the other requirements are as follows:-

Collecting accurate information on Capital Assets and their value.

Establishing long-term liabilities.

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Recognising and accounting for Governments receivables

Drafting new legislation and standards for the accrual budgeting system.

Reporting debt and debt management.

The New Zealand Experience

The adoption of accrual accounting in New Zealand took place amid broad economic

reforms that, in the span of only a few years, transformed the countrys economy

from being one of the most centrally controlled in the non-communist world to being

very open. Those reforms began in the mid-1980s with the widespread privatization

and corporatization of government-owned commercial entities as well as a broad

deregulation of New Zealands currency and financial markets. Shortly thereafter, the

government sought to increase performance and accountability in its remaining

public commercial entities by adopting modern management practices, such as

giving stronger personnel authority to chief executives (entity heads) and also

implementing performance-based executive evaluations. Until 1989, New Zealands

budgeting process was based upon a cash accounting system. With the passage of

the Public Finance Act of 1989, New Zealand redefined the governments budget

process, making it output-based, and also required that all budgeting and reporting at

the department level use accrual methods. An output-based budgeting process,

generally speaking, emphasizes the use of output (product) cost information as a

managerial tool and more specifically as the basis for a purchaser/provider (quasi-

market) model of budgeting. In other words, government agencies and departments

are viewed as producing outputs (for instance, maintenance of armed forces, prison

management, etc.), which Parliament then purchases, so to speak. As such, the

departments must use accrual-based projections and reports so that Parliament can

know the full costs of the outputs and compare costs with private suppliers if

possible. In addition to requiring department reporting and budgeting based on

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accrual measures, the Public Finance Act also implemented accrual-based

performance assessments. New Zealand produced its first fully accrual-based

combined financial statements in 1992, known as the Crown financial statements.

These statements are independently audited and very much resemble the GAAP-

compliant reports of large corporations. In 1994, the Fiscal Responsibility Act

expanded the accrual system even further and required that the government

articulate its fiscal strategy and report progress towards its objectives on an accruals

basis. Since that time, accrual accounting has been the principle system both for

budgeting in Parliament and also for financial reporting by the Crown and it has

continued to be utilized as a corporate-like performance measure for government

entities. The accrual-based reforms in New Zealand are arguably the most

comprehensive that any country has undertaken to date. While it is indisputable that

the reforms significantly affected the government management processes in New

Zealand, it is difficult to ascertain the true fiscal and economic impact of the reforms.

The GAO reports that, in general, most observers seem to agree that the accrual

measures have provided better information for purposes of asset management and

cost calculations. Additionally, many believe that the accrual measures haveproduced much greater fiscal discipline, especially in as much as legislators and

other government officials can more easily ascertain the fiscal sustainability (or lack

thereof) of government programs. Indeed, since implementing the reforms, New

Zealand has in fact demonstrated strong fiscal restraint. In terms of budgeting, New

Zealand has more or less tolerated increases to core budgets of each department at

only a constant nominal level. Remarkably, New Zealands gross financial liabilities

has decreased from 65% of GDP in 1993 to 23% in 2005, while the OECD as a

whole has increased from 66% to 76% in the same time period. The country has also

reported budget surpluses in nearly every year since the early 1990s. As a result,

New Zealands net debt has decreased significantly, from approximately 52% of

GDP in 1992 to near 10% in 2005. During the same time, New Zealand has enjoyed,

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for the most part, moderate to strong economic growth, averaging around 3.3%

annual growth in real GDP over the last decade. To what extent any economic

success can be attributed to New Zealands major reforms and, more specifically, to

its use of accrual accounting, is highly unclear however.

Conclusion

So as far as the New Zealand Experience is concerned and although it is not

possible to accurately attribute the performance of the economy of New Zealand to

the new system of accrual basis, it is reasonable to say that the transition may

represent some advantages for Mauritius especially in terms of the following:

Cash accounting does not generate enough useful information e.g. about

payables and receivables

Only accrual accounting provides adequate information on the full costs of

operation ,thus supporting decision-making e.g. decisions either to place

subcontracts withprivate sector contractors or carry out the work in house

Only accrual accounting generates reliable information on the full range of

assets and liabilities

Only accrual accounting can generate comprehensive financial information

about government e.g. a loan which is written off has no impact on a cash

-based statement, but under accrual accounting it diminishes net worth.

However as we have seen previously, the concept of accrual basis requires better

trained and more skilled personnel. It will be well advised first of all to make an

assessment of the capacity of the staff to respond to these changes without

disrupting the smooth running of the organization as a whole.

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