China s Government Accounting Reform: Research Progress, Challenges and Future Plan

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Hector Spencer
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1 China s Government Accounting Reform: Research Progress, Challenges and Future Plan LOU Hong, Deputy Director-General Treasury Department, Ministry of Finance Ministry of Finance People s Republic of China 1

2 Topics Ⅰ Government accounting reform as a means for strengthening public financial management Ⅱ Progress of research on facilitating government accounting reform in China Ⅲ Challenges in promoting government accounting reform in China Ⅳ Future plan for China s government accounting reform 2

government accounting reform in China Ⅲ Challenges in promoting

3 Government Accounting Reform as a Means for Strengthening Public Financial Management 3

4 Establishing a Sound Public Financial Management System in China Public financial management improvements in the context of a public finance framework for China in past two decades. Major reform measures include: Tax-sharing reform between central and local governments Departmental budgets reform Treasury single account reform Government procurement reform 4

5 Status of Reforming Chinese Government Accounting Features of the current system: Designed for monitoring budget management Basically on cash basis Recognition of inadequacy of current system and need to quicken the pace of reform to meet the needs of the new framework of managing public finance 5

Recognition of inadequacy of current system and need to quicken the pace

6 Recognition of the Importance of Government Accounting Reform Importance is recognized and expressed in the policy agenda of Chinese government. Powerful support from the current 5-year planning framework ( ) for National Economy and Social Development: to further promote government accounting reform and to gradually establish a government financial reporting system 6

Powerful support from the current 5-year planning framework (2011-2015) for National Economy

7 Progress of Research on Facilitating Government Accounting Reform 7

8 Major Areas of Activities 1. Intensifying international engagement and exploring international experience 2. Conducting systematic research aiming at formulating a strategic reform plan 3. Improving current system in coordination with other financial management reform measures 8

9 International Engagement Member of the International Public Sector Accounting Standards Board (IPSASB) since 2007 Secondment of staff of Ministry of Finance P.R.C. to IPSASB for several years In-depth studies on selected countries with advanced practices and reform experiences Hosting international seminars for exploration of causes, characteristics and approaches of reforming government accounting 9

to IPSASB for several years In-depth studies on selected countries with advanced practices and

10 Research for a Preliminary Strategic Reform Plan Reform as a major undertaking that requires systematic coordination A series of research on major themes: Defining the scope of government accounting Setting government accounting standards Setting government accounting regulations Establishing a government financial reporting system 10

scope of government accounting Setting government accounting standards Setting

11 Coordination with other Financial Management Reforms Introduction of accrual basis in the accounting treatments of certain transactions and events of the government Introduction of accrual basis in the accounting of hospitals to strengthen financial management Accumulating practical experience for undertaking government accounting reform 11

Introduction of accrual basis in the accounting of hospitals to strengthen financial

12 Challenges in Promoting Government Accounting Reform in China 12

13 Four Major Issues 1. Implementation of accrual basis and theoretical issues in accrual accounting 2. Defining the scope of government 3. Information system support 4. Training government accountants 13

14 Implementation of Accrual Basis Similar to many governments, the Chinese government also takes a prudent attitude towards the degree of accrual accounting Sensitive issues include the treatment of sovereign investment funds, pension liabilities and contingent liabilities Accrual is both a policy and technical issue 14

accounting Sensitive issues include the treatment of sovereign investment

15 Theoretical Issues in Accrual Accounting There are many unresolved issues due to the nature of government, e.g. Effects of non-reciprocity on revenue recognition Timing of recognition of commitment as liability Appropriateness of fair value in valuing government assets Eagerly awaiting IPSAS conceptual framework to provide guidance to practice 15

16 Defining the Scope of Government China has a large number of institutional units of complex characteristics Their mixed features of business, nonprofit and public organizations make their classification as government and public sector entities difficulty 16

features of business, nonprofit and public organizations make

17 Information System Support Government accounting reform affects financial management information system China already has a relatively robust government financial information system However, there remains the challenge of balancing the needs for budget execution and accrual-based financial reporting 17

government financial information system However, there remains the

18 Training of Government Accountants China has a large number of accounting personnel in public sector How to provide them with professional management and continuing education is a very heavy task 18

19 Future Plan for China s Government Accounting Reform 19

20 Basic Approach A step-by-step approach to reform Adhering to the principles of Comprehensive planning Tackling easier tasks before more difficult ones Achieving breakthrough on major issues Gradually pushing forward 20

Tackling easier tasks before more difficult ones

21 Reform Objectives Set up a government financial reporting system Establish accrual-based government accounting standards and regulations Enhance government accountability Increase fiscal transparency Promote long-term fiscal sustainability 21

22 Components of the Future Plan 1. Drafting an overall reform plan 2. Setting government accounting standards and regulations 3. Establishing a government annual financial reporting system 4. Other complementary measures 22

23 Drafting the Overall Reform Plan: Requirements Being an integral part of public financial management Taking into account China s reality and consulting advanced international experience Being scientific, rational and feasible Specifying the feasibility, guiding principles, major measures, supporting measures and implementation steps 23

24 Setting Government Accounting Standards and Regulations: Conceptual Framework The conceptual framework should clarify the fundamental principles of China s government accounting: Objective Main information users Qualitative characteristics Reporting entity Elements of financial statements Recognition criteria Measurement, and Presentation 24

25 Setting Government Accounting Standards and Regulations: Standards and Regulations Setting standards to deal with transactions and events with strong policy implications and technical complexity. Setting accrual-based accounting regulations which Clearly specify scope of applicability Set up a complete chart of accounts Deal with accounting treatments of transactions and events Co-existence of cash-basis budget accounting and accrualbased financial accounting system 25

26 Establishing Government Annual Financial Reporting System Establish a financial reporting system which: Is capable of reporting government assets and liabilities comprehensively Provides reliable, complete and timely information Strengthens financial management Promotes long-term fiscal sustainability 26

27 Other Complementary Measures Implement professional development and continuing education of government accountants to improve their professionalism and competency Advocate the development of government accounting courses in higher education Improve financial information system to provide a strong technical support for the accuracy and timeliness of accounting information 27

28 Thank you! 28

Global Conference on Accounting and Reporting by Governments The global case for transparency

www.pwc.com Global Conference on Accounting and Reporting by Governments The global case for transparency Brian Quinn, World Bank Group The Global Case for Transparency Brian Quinn Director World Bank