Just imagine – a mid-size listed company, which prepares its accounts on a cash basis, does not account for contingent liabi-lities, or depreciates its assets, or records its debtors and payables, and just prepares its cash flow statement. No investor would even touch such a company. Now ima-gine, that the expenditure of that company is more than 30 per cent of the country’s Gross Domestic Product and the stakeholders are a billion plus – yes, the entity we are talking of is the Government of India.
Historically, while govern-ments across the world used to prepare their accounts under the cash accounting system, over the past decade, many countries like Australia, Canada, Finland, France, Italy, United Kingdom, United States of America among others have moved towards accrual accounting. India has made certain tentative starts with pilot studies in different states and in some departments, but that is very insi-gnificant, compared to the size and volume of the nation’s economy.
There have been some recent announcements indicating that the government would move to an acc-rual basis of accounting within a five year time frame, but this requ-ires coordinated action and sci-entific planning to really be ach-ievable.
Advantages
Accrual-based accounting accounts for expenses and liabilities, incomes and assets, the moment they become due and not when cash is paid. This would lead to a recognition of elements like fixed assets, pre-existing un-recognised assets inclu-ding heritage assets, liabilities, deb-tors, creditors, etc., Depreciation which is never charged on government assets would also be recognised.
Obviously, this would lead to a much more transparent and accurate picture of the nation’s finances, improve budgetary control and accountability (this has to be accompanied with accrual-based budgeting), and enable the government to better financially manage its resources. At the end of the day, adequate management of resources and not merely managing cash flow is the only prudent way, in which, an economic entity can survive.
Information provided by the accrual system would enable the government to measure, control and manage potential obligations and contingent liabilities as well as manage debt and assets and utilisation thereof. Such a system would enable the government to develop transparent performance indicators which along with non-financial indicators and outcomes will be able to convert into key performance indicators for measuring the performance of politicians, bureaucrats, departments etc., This would also very clearly help the government in its perspective planning.
More From This Section
Issues
While there would be many issues on the way, a major issue is that vested interests would not like the degree of transparency mentioned above. There are other very legitimate issues like training and the ability of people in the government to manage the transition to an accrual-based system; significant differences from the commercial basis of accounting like accounting for non-exchange transactions (for example, tax, transfers, subsidies where there is no direct give and take like in purchase transactions), accounting for implicit liabilities like pension obligations, which though incurred in part today, could be funded largely by non-exchange gains in future etc., However, the basic issue is one of mindset, vision and conviction.
Way Ahead
There needs to be a core implementation team at the national level with a time-bound mandate (say one year) for preparing a detailed implementation plan; this team sho-uld significantly draw upon the excellent technical capabilities of the Institute of Chartered Accoun-tants of India (ICAI) and experien-ced chartered accountants (CAs) in the country.
After preparing the basic framework, right down to the village level there should be implementation groups working as per the framework and anchored by a chartered accountant. The anchor should not only oversee but be responsible for training and mentoring.
For this purpose, not only the one and half lacs of CAs in the country, but the very large body of acco-unting technicians and cost accountants should also be used. Such a project would require enormous political commitment because reforms like these which are fundamental, deep seated and with a long lasting impact, unfortunately don’t have any short term visibility or fallout that can be of political advantage.
However, I am confident the politicians of a young India would have a vision, beyond an election-to-election time frame and the conviction to sponsor such a fundamental change.
As a member of the institute which has declared itself to be a partner in nation building, I am sure, all of us would be willing to lend our mite to this reform.
Rahul Roy, Director, Ernst & Young India Pvt. Ltd
E-mail: rahul.roy@in.ey.com
(The views expressed herein are the personal views of the author and do not necessarily represent the views of Ernst & Young Global or any of its member firms)