7.

0 Other Countries Experiences in Accrual Accounting

7.1 New Zealand

The implementation of accrual accounting in New Zealand started during broad economic
reforms, converted the country’s economy to be very open in which previously the economy
being controlled centrally in the non-communist world(Warren & Barnes, 2003). These reforms
started with the outspread privatization and corporation of government-owned commercial
bodies as well as broad deregulation of New Zealand’s currency and financial markets in mid-
1980s(Rodrigo Pereira Monteiro, Associate Professor, & Corrêa Gomes, 2013).

New Zealand’s budgeting practice until 1989 was based on cash accounting system(Mark
Champoux, 2006). New Zealand changed the government’s budgeting system to output-based
systems and also required to use accrual accounting to the entire budgeting and reporting system
with the consent of Public Finance Act 1989(Mark Champoux, 2006). In additional, Public
Finance Act required accrual based performance valuation to ensure the department’s reporting
and budgeting based on accrual measures(NEW ZEALAND TREASURY, 2005). Later in 1992,
New Zealand tabled its initial fully accrued-based comprehensive financial statements, also
known as the Crown Financial Statements(PALLOT & BALL, 1996)

The first New Zealand’s fully accrual-based financial statements is published in 1992(PALLOT
& BALL, 1996). These statements is audited independently and parallel to the GAAP reports of
large corporate (Public Sector Committee 1996 Perspectives on Accrual Accounting, 1996). 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(GAO-08-206 Budget Issues: Accrual Budgeting Useful in Certain Areas but Does
Not Provide Sufficient Information for Reporting on Our Nation’s Longer-Term Fiscal
Challenge, 2007). The accrual accounting has become the principle system for both budgeting in
Parliament and financial reporting by the Crown, and it had continued to be utilized as a
corporate-like performance measure for government entities.
New Zealand has established a strong fiscal restraint since the reforms implementation(Mark
Champoux, 2006). To achieve constant nominal level, New Zealand has more or less tolerated
increases to core budgets of each department. 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, 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.
7.2 Australia

As same case with New Zealand, Australia started implement accrual accounting for the public
sector during board economic transforms (Mark Champoux, 2006). In early 1990s, Australia
stress arose to increment government capability and recover fiscal performance, which results
that Australia’s economic development had been steadier than New Zealand’s economy(“GAO
Performance and Accountability Report,” 2000). These reforms were done in two ways, which is
the Financial Management Improvement Program and the Program Management and
Budgeting(“GAO Performance and Accountability Report,” 2000).

Further, a government management system introduced under the Financial Management and
Accountability Act of 1997 that focuses on performance assessment not unlike those
implemented in New Zealand(Mark Champoux, 2006). Because of the reforms, government
agencies are compulsory begin to used accrual-based accounting, reporting, and budgeting(Mark
Champoux, 2006). Australia published comprehensive accrual basis financial statements for the
year 1999 to 2000 and had fully adopted output based budgeting(Mark Champoux, 2006).
Further, Australia continually expands its accrual basis accounting and budgeting.

Like New Zealand, Australia has demonstrated strengthened fiscal discipline in recent years.
Australia has produced a budget surplus in every year for close to a decade, and it has succeeded
in reducing its net debt from a high of 25% of GDP in the mid-1990s to near debt elimination.41
Its gross financial liabilities have decreased from a high of 43% of GDP in 1995 to 15% in 2005,
the second lowest percentage in the OECD.42 At the same time, Australia has enjoyed economic
growth in real GDP averaging 3.6% annually over the past decade.43 Again, it is unclear to what
extent accrual accounting reforms are responsible for the fiscal discipline and economic growth.
7.3 Key Issues and solutions

 Accrual Accounting and Output Budgeting

The desire to adopted output-based budgeting is the major impetus for the implementation of
accrual based accounting and budgeting in New Zealand and Australia.(Mark Champoux,
2006).There are a number of reasons to believe that the use of such a budget, at least in the form
adopted by Australia and New Zealand, is somewhat unlikely in the U.S. federal government
(Mark Champoux, 2006). With an accrual, output-based budget, the legislature makes
appropriations based upon the aggregate accrual cost of each output. The legislature specifically
avoids mentioned how much is to be spent on the individual expense-generating elements of
each output (PALLOT & BALL, 1996) . The legislature would not specify how much money
would go to salaries, to building costs, to education programs, and so on (Mark Champoux,
2006).

Such a hands-off approach to bureaucracy management seems somewhat inconsistent with the
U.S. appropriations process, at least as a matter of current practice and culture, where the norm is
detailed, line-item budgeting(Mark Champoux, 2006). But even if Congress were willing to
subject itself to such a substantial change in its role in appropriations and agency oversight, it is
not entirely clear that such a system would be constitutional under the Appropriations Clause and
the Non delegation Doctrine. Further, the additional influence of the President complicates the
budget process in ways that a Parliamentary system avoids, making the possibility of an
American output-based budgeting system seem even more uncertain(GAO-08-206 Budget Issues:
Accrual Budgeting Useful in Certain Areas but Does Not Provide Sufficient Information for
Reporting on Our Nation’s Longer-Term Fiscal Challenge, 2007).

Because adoption of an output-based budget in the U.S. is somewhat unlikely, one of the primary
reasons to fully adopt accrual accounting becomes moot. Indeed, this very point was made by the
GAO in its 2000 report to Congress on accrual accounting, in which it essentially recommended
against implementing a full accrual system similar to that of New Zealand and Australia(Mark
Champoux, 2006). Rather, the GAO, as well as other observers, suggested that management
efficiency and performance evaluations can be effectively implemented in ways that stop far
short of requiring accrual-based and output-based budgeting.
 Accrual Accounting and Future Liabilities

Another impetus for the adoption of accrual basis accounting and budgeting for New Zealand
and Australia is the desire that the budget figures considered by legislators and the public would
more accurately reflect many of the future liabilities ignored under cash budgeting (Mark
Champoux, 2006). In 1970s and 1980s, the total cost was exact due to the cash-budget does not
accounted for future liabilities but in that year the guarantees were redeemed.

In addition to employing accrual measures for an output-based budgeting system, another

motivation to fully adopt accrual accounting in New Zealand and Australia was the desire that
the budget figures considered by legislators and the public would more accurately reflect many
of the future liabilities ignored under cash budgeting.54 Indeed, one event that prompted reform
in New Zealand was the redemption of government guarantees by a variety of industrial actors in
the 1970s and 1980s; the cash-based budget of the time never accounted for these future
liabilities, and so the total cost was inflicted on the budget in the year that the guarantees were
redeemed(Jack Diamond, 2002).

To some extent, New Zealand and Australia have succeeded in using accrual accounting for such
future liabilities, which has made the overall financial statements more accurate in terms of the
actual financial position of the government. Both New Zealand and Australia, for example, use
actuarial and accrual methods to account for future liabilities incurred under government
employee pensions and various types of government-sponsored insurance, and New Zealand also
accrual accounts for most government loans.
The GAO has stated that it assumes the U.S., even should it adopt full accrual budgeting, would
similarly exclude future Social Security obligations as liabilities in the financial statements
because of U.S. GAAP standards.60 As such, it recommended that Congress study other
methods for incorporating social insurance commitments into the budget.61 To the extent, then,
that a motivation for adopting accrual methods in the U.S. federal budget is the desire to more
accurately account for future mandatory liabilities in present financial statements, one must
recognize the difficulties in including social insurance as an accrued liability.
8.0 The Rationale for Accrual Accounting: A Case of Malaysian Public Sector

In 2011, Malaysia government took the challenge to transition its cash accounting into accrual
accounting. Malaysia government attempt to use accrual-based accounting to enhance the
financial management procedures. According to (Andy Wynne, 2004), the implementation of
accrual-based accounting is part of the process of adopting the style of financial statements
practicing by private sector companies into the public sector, which expected to be completed in
five years’ time (Nadiah et al., 2015)

First of all, the main rationale driven Malaysian to implement accrual accounting is enhance
accountability and improve resource management (Funnell Warwick, 2012). It also improved
effectiveness and efficiency of fiscal management(Irvine, 2011). The actual cost of government
spending is reported in a more transparent ways in which improve the accountability. Cash
accounting system unable provide sufficient information regarding the full costing of operation
(Hoque & Moll, 2001) but accrual accounting system can provide adequate and more reliable
information for the full cost of operations and resources used to distribute service to the public
(Funnell Warwick, 2012).

Secondly, the other rationale driven Malaysia to transition into accrual accounting is fact that
accrual basis accounting is convenient to the users. With the use of accrual measures, it helps
Malaysian government to enhance the governance, have improved control over its assets,
improved shareholder’s assurance and confidence and provide more accurate information
(Nadiah et al., 2015). With accurate, authentic and adequate information, the economic resources
will flows more efficient and effective on the government sides.
Thirdly, it provides the best measures of sustainability and ‘intergenerational equity’
implications of fiscal policy. The traditional version of the intergenerational equity concept is
based upon the ‘golden rule’ that taxpayers in each time period should finance all current
expenditure and should make a contribution to the financing of inherited productive assets
commensurate with the benefits they receive from those assets. (Musgrave & Musgrave (1973)
as cited in Robinson 1998: 11)

However, public sector adopted accrual-basis accounting also had criticism. Accrual basis
accounting is not relevant to the economic management of the public sector become the main
critics due to the inherent and underlying differences of public and private sector. For public
sector, economic activity flows from the operation of public policy. For instance, in a democratic
society, the economic activity is derived from the political process in which the people
collectively decides on the employment of collectively contributed scarce inputs obtained
through taxation in its various forms.

Next, the financial position and all assets and liabilities needed to be determine and recognized,
which is not related to the information that has no bearing on decision making. It is because
resources in public sector are acquired and allocated with the political influence rather than the
market and thereby determined preferences in the resources allocation process.

Thirdly, the issue arisen on the accounting for heritage assets. In fact, the issue regarding the
accounting for heritage assets in public sector has been widely debated. However, the debate can
be seen significant in two aspects. First of all, the argument lies a debate on the general
extendibility of the accrual accounting model to all public sector entities and all types of assets.
While some of the public assets are relatively hard to account with the use of accrual accounting,
it is not possible for those assets excluded from the financial statements.
9. Conclusion

In overall, Malaysia government has to properly analyze all the potential benefits and drawbacks
from the implementation of accrual accounting. It is important for Malaysia government to
account for and weighting all the potential benefits and drawbacks in their decision on whether
to transforms to accrual accounting in the public sector which the decision actually has been
made in June 2011. The review and overlook of the progress of implementation accrual measures
must conduct continuously to ensure that the transformation is successful.

Last but not least, accrual accounting could provide numerous problems and obstacles during
the implementation process. In addition, the challenges would arise before and during the
implementation process but also after the implementation, which often refer to the future
challenges faced by government after using accrual accounting. Therefore, Malaysia government
need to be always prepared and patient along the transformation process.
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