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Cash-based sovereign accounting: recognising a cost only when cash changes hands. Accrual-based: recognising a cost when it’s incurred in the first place.
Accruals measurements can be a base for recognition of long-term and contingent liabilities which may not show up on a cash-flow statement. In other words, in a crisis of weak balance sheets – does a government know what its balance sheet even looks like?
Of course it is a talk about deficits and cash-flow all the time in the crisis. How long can Greece go without official loans, or what effect will Bankia have on Spain’s deficit (or debt), etc.
But much EU sovereign deficit reporting is only partly accruals-based at best. In fact, not only do many government accounts remain highly cash-based, they seem to cling to it like the proverbial drunk to a lamppost, more for support than illumination.
More recently, an IMF staff note has put the ‘fiscal illusion’ of cash-based deficits back in the spotlight, and the latest stock-flow adjustments for government debt figures from Eurostat show how governments can manipulate future liabilities to report lower deficits in the present.
The EU Council Directive is setting out the “Six Pack” of fiscal rules agreed in November 2011. The “Six Pack” has since fallen into the background of the crisis. But there is a mention of possibly bringing International Public Sector Accounting Standards, IPSASs, to all 27 EU states.
The interesting thing about IPSASs is that they’re based on IFRS and IAS, though adapted for public sector reporting. This means they are at heart accrual-based.
That’s where the IFAC comes in. Under its chief executive, Ian Ball, IFAC has long pushed for full sovereign accrual accounting. It’s also under the IFAC’s auspices that the IPSASB promotes IPSASs.
It’s an interesting comparison with the forming of the “Six Pack” two decades later. New Zealand acted as part of a ‘broader set of micro-economic reforms’, all designed to wring better performance from government, Ian Ball says. One way to think about this is that there’s a difference between reporting on an accrual basis, and moving things like actual budgeting and appropriations to this basis too.
In the United States, the Government Accountability Office (GAO) has argued for some time against a move to fully accrual-based accounting. "Although accrual budgeting can provide more information about annual operations that require future cash resources, it does not provide sufficient information to understand broader long-term fiscal sustainability", the GAO said in a 2007 report to Congress.