Introduction

Accounting is the art of recording, summarizing, reporting, and analyzing

financial 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-basis
accounting, 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 cash
accounting 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 entity’s financial
position at any given point of time by a comprehensive presentation of entity’s 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 place
subcontracts 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 recurrent
or 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 on
an 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 Government’s 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 country’s 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 Zealand’s 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 Zealand’s
budgeting process was based upon a cash accounting system. With the passage of
the Public Finance Act of 1989, New Zealand redefined the government’s 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 have
produced 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 Zealand’s 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 Zealand’s 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 Zealand’s 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 with private 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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