Should Developing

Countries Adopt
Accrual Accounting?

Paul Boothe
Institute for Public Economics
University of Alberta
Outline
 Motivation
 Cash versus accrual accounting
 Pros and cons of accrual
 Accounting regimes and fiscal rules
 Prerequisites for adoption
 Checklist for policymakers

Institute for Public Economics

University of Alberta
Motivation
 Two perspectives
Public versus private sector
 Tale of two finance ministers
 The goal: good governance

Institute for Public Economics

University of Alberta
Cash versus Accrual [1]
Cash
Traditionally used in public sector
Expenses and revenues recorded
when they are paid or received

Accrual
Traditionally used in private sector
Expenses and revenues recorded
when they are incurred or earned
Institute for Public Economics
University of Alberta
Cash versus Accrual [2]
 When transactions are recorded is
a key difference
 Three examples
Purchase of a capital asset
Public sector pension liabilities
Corporate income tax arrears

Institute for Public Economics

University of Alberta
Cash versus Accrual [3]
Cash Accounting Accrual Accounting

Operational requirements Relatively simple Relatively complex

Links to traditional budget Relatively strong Relatively weak

and revenue systems

Coverage Records only Records estimated

transactions that non-cash
result in cash transactions as
payments or well
receipts
Timing Records only Records the
transactions that estimated future
occur within the effects of current
accounting transactions and
period policy changes
Audit and control Relatively simple Relatively
demanding

Institute for Public Economics

University of Alberta
Accrual Pros and Cons [1]
Pros (Athukorala & Reid, 2003)
Matches National Accounts
Recognizes transactions/events when
they occur rather than when paid
Separates operating and capital
spending
Better information on sustainability
Discloses pension liabilities
Identifies arrears

Institute for Public Economics

University of Alberta
Accrual Pros and Cons [2]
Cons (Wynne, 2003)
Ignores different aims of private and
public sector
Not designed for legislative
accountability
Requires sophisticated analysis and
judgments
Exposes public servants to political
pressure

Institute for Public Economics

University of Alberta
Fiscal Rules [1]
 We know institutions affect fiscal
rules (Alesina and Perotti, 1999,
Poterba and von Hagen, 1999)
 Not much attention yet to
incentives flowing from accounting
regimes
 Boothe (2004)studies influence of
accounting regimes on fiscal rules

Institute for Public Economics

University of Alberta
Fiscal Rules [2]
Boothe(2004) finds:
Fiscal circumstances may make either
cash or accrual regimes more
attractive to policymakers
Impacts of common fiscal rules
change as regimes change
 Regimes may influence the mix and
volatility of spending

Institute for Public Economics

University of Alberta
Fiscal Rules [3]
Basic cash budgeting model:
 Revenue is exogenous
 Expenditures include:
a) transfers
b) services produced by public capital
c) gross capital investment
d) interest payments on public debt

Institute for Public Economics

University of Alberta
Fiscal Rules [4]
Basic accrual budgeting model
Revenue is exogenous
Modifies cash expenditures by
subtracting gross capital investment
and adding depreciation

Institute for Public Economics

University of Alberta
Fiscal Rules [5]
 Cash is more attractive than
accrual in fiscal consolidations
 Balanced budget rules more
‘stringent’ under cash than accrual
 Under accrual, capital investment
can be financed by borrowing
without affecting deficit in short run
 Accrual + balance budget rules
creates bias for capital spending
Institute for Public Economics
University of Alberta
Fiscal Rules [6]
 Critical to recognize that regime
changes nature of balanced
budget rules
 No Canadian gov’t changed fiscal
rule after changing to accrual
 Bias towards capital spending
starting to appear in Canada
 Net debt rule is invariant to regime

Institute for Public Economics

University of Alberta
Prerequisites [1]
 Developing countries face different
public sector environment and
challenges (A&R, 2003)
Capacity constraints (HR and
technology)
Governance/corruption issues
Many urgent priorities

Institute for Public Economics

University of Alberta
Prerequisites [2]
Capacity constraints
Accrual requires sophisticated
professional judgments regarding
physical assets, long-term social
programs
Accrual generally requires more
complex IT systems than cash systems

Institute for Public Economics

University of Alberta
Prerequisites [3]
Governance/Corruption issues
All accounting systems open to some
manipulation
Revenue accruals particularly
problematic when tax collection is an
issue
Costs of long-term social programs
very sensitive to assumptions

Institute for Public Economics

University of Alberta
Prerequisites [4]
When resources for public sector
reforms are limited, must establish
clear priorities
Develop new revenue systems
Reform budget processes
Implement accountability
mechanisms
Transform state enterprises

Institute for Public Economics

University of Alberta
Policymakers’ Checklist [1]
 Does accrual best meet needs in
our public sector?
 Is transition to accrual the best use
of limited reform resources?
 Do we have the HR and IT capacity
to successful implement accrual

Institute for Public Economics

University of Alberta
Policymakers’ Checklist [2]

“Perfection is
the enemy of
the good…”
Voltaire

Institute for Public Economics

University of Alberta