Accrual Budgeting Lessons Learned From the IPSAS Model

Transcription

1 Accrual Budgeting Lessons learned from the Harmonised Accounting Model (HAM) in the light of IPSAS By Andreas Bergmann 1 The standard setting process for the IPSAS has so far mainly been based on the relevant IAS, adapting them for the use in the public sector. However, the process has now reached a stage at which topics of a specific relevance for the public sector are being addressed. One of the specific topics on the agenda is budgeting, which has a different role and certainly more importance than in the private sector. One of the issues to be resolved is accrual budgeting. While an accrual accounting has become a generally accepted model in many countries, only a few have gone all the way through to budgeting. In Switzerland the cantons and local governments have been using a modified accrual model that includes budgeting for almost 20 years. This so-called Harmonised Accounting Model (HAM) has recently been evaluated in the light of IPSAS by a research project of Adminet the National Network of Excellence in Public Management. This article is based on this project. It underlines the generally positive experiences and suggests that the main question to be resolved for accrual budgeting is the budgetary treatment of revaluations. The author shows two options, one following closely the constitutional framework and another following closely the principles of the existing IPSAS. 1. Accrual accounting is not new for Switzerland but IPSAS still brings some innovation In Switzerland, like in many other European countries, the regional and local governments have been more progressive than their national counterparts 2. It was in the late 70s, when the Conference of Cantonal Finance Ministers developed the so called Harmonised Accounting Model (HAM), a framework following the principles of accrual accounting. Although the Conference had no legal power to enforce the HAM, all the 26 cantons have since abandoned cash based accounting and introduced the HAM, the last ones in the early 90s. Through the cantonal legislation, the HAM has also become binding for all the local governments. The HAM is strongly emphasizing the Table of Accounts (in German Kontenplan ), forming the Balance Sheet ( Bestandesrechnung ), Profit-and-Loss-Statement ( Laufende Rechnung ) and quite unusual a Statement of Investments or Capital Expenditure ( Investitionsrechnung ). However, it s rather the term used than the content that is unusual. Its content and use are very 1 Andreas Bergmann, Dr. oec. (St. Gallen), CEMS (Lancaster), mag. oec. (St. Gallen); Professor for Public Management at Zurich University of Applied Sciences, Winterthur 2 LÜDER, K./JONES, R.: Reforming governmental accounting and budgeting in Europe. Frankfurt: Fachverlag Moderne Wirtschaft,

2 similar to a Cash Flow Statement, providing information about the operational cash-flow, investments, disinvestments and an increase or decrease in the financial position bottom-line. The main difference between the HAM and accounting standards like IPSAS is not in the structure of the financial statements, but it is in the valuation of assets and liabilities, the consolidation of controlled entities and the disclosures. The HAM does not provide valuation standards reflecting the idea of a true and fair view. The very limited valuation standards available are rather designed to ensure an extremely quick depreciation of all the assets used for the provision of services. Together with the paradigm of a balanced budget the excessive depreciation leads to a large operational cash flow, enabling large investments without an increase in public debt. Valuation under the HAM is following the principles of fiscal policy rather than generally agreed principles of accounting. In respect of consolidation the HAM is rather mute. It neither provides standards for the scope of consolidation, nor for the method of consolidation. This is probably one of the main disadvantages of the HAM. It is clearly seen by the scientific community as well as by the Supreme Court 3 as the main reason for the largest financial scandal in Swiss public sector, which has ultimately led to the default of the Community of Leukerbad. Also disclosures according the HAM are far from being sufficient. Important aspects such as contingent liabilities are not even mentioned in the HAM but are an important part of the financial risk in the public sector. Although Swiss cantons and local governments have been using accrual accounting for many years, the International Public Sector Accounting Standards (IPSAS) are challenging their accounting system. A large study by the National Network of Excellence in Public Management ( Adminet ) and led by the Institute for Public Management at Zurich University of Applied Sciences pointed out considerable differences in the financial information provided under HAM and IPSAS 4. Under IPSAS the amount of information available is much bigger, although the reports are much smaller in size. HRM reports the smallest details about all the accounts, but forgets about anything that is not in the accounts, such as controlled units or contingent liabilities. 3 Decision 2C.4/2000 (03 July 2003) 4 BERGMANN, A./GAMPER, A.: Rechnungslegungsstandards für Kantone und Gemeinden im Rahmen von IPSAS. Zürich: KDMZ,

3 While there is a general consensus for a development of the HAM in accordance with IPSAS in respect of the presentation of the reports, consolidation and disclosures, it is very controversial whether the HAM should also follow IPSAS in the field of valuation and as suggested by Harringer - thus dropping its focus on a sound fiscal policy Valuation under IPSAS and Fiscal Policy The International Public Sector Accounting Standards have so far 6 been based on International Accounting Standards 7 and adopted to the needs of the public sector. Standards for specific issues in public sector, such as social policy obligations or non-exchange-transactions, are only now being drafted by the Public Sector Committee and its steering committees. Among the public sector specific issues is fiscal policy and thus the budget. While the budget is part of the management accounting, rather than the financial accounting, in private enterprises, things are quite different in the public sector. Unlike in private enterprises the budget needs to be approved by a body outside the management, generally the parliament. In most countries, including Switzerland, an approved budget is required for any kind of discretionary spending 8. Obviously there is also a requirement to base financial reports on the budget and show any differences between the actual results and the budget, as well as any changes to the budget during the term. Comparing the debate on the budget with the debate on the financial statement clearly reveals that the budget is politically much more important than the financial statement. Given the greater importance of the budget in the public sector, the Public Sector Committee (PSC) is currently considering to set a standard about budgeting. This is proposed in a PSC research paper by Jesse Hughes 9. However, it is a controversial issue whether such a standard is within the mandate of the PSC, an accounting standard setting committee. But also the possible content of such a standard is controversial. In many countries the budget is set up or at least presented in different ways from the financial reports. This is especially the case with output or outcome based budgets (OBB) HARRINGER, R.: Reform der öffentlichen Rechnungslegung und Finanzpolitik, 2004 (unpublished); different opinion: BERGMANN, A./KÄLIN, U.: Das öffentliche Rechnungswesen im Umbruch: Materielle Harmonisierung durch Rechnungslegungsstandards notwendig. In: Schweizer Treuhänder, Zürich, 9 (2003), S. 747 ff. 6 IPSAS 1 to 20 7 as in the year other countries are even more restrictive and require an approved budget for any kind of spending 9 HUGHES, J.: Budget Reporting. New York: IFAC, This paper is written in June 2005, before the July PSC meeting. The budgeting issue is on the agenda for this meeting. The results will be considered in the presentation at the EGPA conference. 3

4 3. The Swiss Experience with Accrual Budgeting Unlike the national government, with the introduction of the HAM all the 26 cantons have also introduced accrual budgeting. The administration generally prepares a budget for the profit-lossstatement and the investment statement, which both have to be approved by the body with the constitutional budgeting power. This is generally the parliament on the cantonal level and in larger cities, but a reunion of all the citizens in smaller communities. There is generally no budget for the balance sheet, although it is technically possible to calculate a forecast based on the Profit-and- Loss- and the Investment-Statements. The constitution generally states that the budget must be balanced, at least through one business cycle. Financial acts in all the cantons state a minimal depreciation rate. These two constraints in theory force the parliament to adjust spending for operation and investment to the equity financing available, i.e. profit and depreciation. The Profit-and-Loss-Statement and the Statement of Investments work together very similar to a cash flow statement in the private sector. In Table 1 there is an unbalanced situation in which public debt will increase. Table 2 shows a surplus situation that allows the government to pay back a part of the accumulated debt. Table 3 denotes the equilibrium situation in which both operating and investment expenses may be covered by the revenue available. Statement of Investments Profit-and-Loss Statement Net-investment (1st Level) Financing (2nd Level) Cost Revenue investment spendings subsidies and disinvestment expenses depreciation equity net- net- financing profit investment investment debt financing revenue Table 1: Investment financed by depreciation, profit and debt 4

5 Statement of Investments Profit-and-Loss Statement Net-investment (1st Level) Financing (2nd Level) Cost Revenue investment spendings subsidies and disinvestment net- net- equity investment investment financing expenses depreciation profit revenue payback debt Table 2: Investment financed by depreciation and profit. Surplus used to pay back debt Statement of Investments Profit-and-Loss Statement Net-investment (1st Level) Financing (2nd Level) Cost Revenue subsidies and expenses disinvestment investment spendings depreciation revenue net- net- equity investment investment financing profit Table 3: Equilibrium; investment financed by depreciation and profit In practice, this system has not totally prevented an increase in debt over time, but it has certainly kept its growth rate smaller in comparison to national government and also many foreign countries. The debt of the national level in 2003 is almost four times the amount it used to be in 1980, while the combined debt of the two lower levels is only 2.5 times the amount of Obviously there might be different reasons for this development, but especially the case of the local governments, which have virtually no possibility to cut taxes before investments are paid in full and, indeed, have almost no increase in real terms, gives a strong indication in this direction. 5

6 EFV AFF AFF AFF Schulden von Bund, Kantonen und Gemeinden ( ) Mio. Franken 250' ' ' '000 50'000 Gemeinden Kantone Bund E 2002 E 2003 B 2004 Table 4: Public debt by the state, the cantons and the municipalities 11 One of the main results of the study on the impact of IPSAS on the HAM is that depreciation according to the HAM is not in line with IPSAS 12. It is far too large in the first years after an investment into assets that will be used for longer periods, i.e. buildings or roads, but too small in later years. The view offered by the HAM is not true and fair in the light of IPSAS, but it provides a sound fiscal policy that makes sure, that spending is not on the account of future generations. The depreciation over a short period of time under HRM ensures that investments (i.e. the construction of buildings, roads etc.) have to be financed by the generation taking the decision to invest. Technically, accrual budgeting is unspectacular. Traditionally, there used to be a line-by-line presentation for the Profit-and-Loss- and the Investment-Statement. The body with the budgetary power used to approve them unit after unit (i.e. ministries, agencies etc.) and within a certain institution line-by-line. More recently many but not all the cantons and also a few local governments have moved to output-based-budgeting. In this case the output and total spending level of a certain unit is approved, rather than the financial budget line-by-line. However, the sum of all the output-based-budgets is presented in a HRM-style Profit-and-Loss- and Investment- Statement. OBB has only changed to focus within the institution, away from line-by-line details to outputs and total spending. 11 Eidgenössische Finanzverwaltung, Finanzausgleich und Statistik, öffentliche Verschuldung BERGMANN A./GAMPER, A. (2004) 5 6

7 Financial reports prepared by the end of the one year budget term are following the same framework. Beside the actual results, they state the budget, the results of the preceding year and the differences actual to budget and actual to the year before. Units applying OBB also present their reports in an output-based perspective, while the aggregate results are shown in a Profit-and-Loss- Statement, Statement of Investments and Balance Sheet. 4. Implications of IPSAS to Budgeting under HAM The study by the Swiss Network of Excellence revealed three main results 13 : The structure of financial reports under IPSAS is substantially different from the ones under HAM. It s much more focused one critical issues rather than supplying a large number of details. The financial situation and performance under IPSAS is substantially different, mainly due to differences in consolidation and valuation. The latter also leads to differences in depreciation and thus in the profit-and-loss situation. The disclosures under IPSAS offer information that is risk relevant and remains undisclosed under HAM. This leads to the conclusion that the introduction of IPSAS would improve financial reporting, although financial reports under HAM have already reached quite a high standard compared to cash based reports in many countries. While differences in respect of the consolidation and the disclosures are not so relevant in the context of budgeting, the structure and valuation is definitely an issue. There are basically two options how to deal with these differences: a) To follow closely the Swiss constitutional framework, focussing on fiscal policy and balanced budgets (as explained in Chapter 3) b) To follow closely the IPSAS framework, focussing on a true and fair view of the financial reports. Let s first consider the structure. The constitutional framework obviously does not require a specific structure of the budget. But it requires that both operational and investment spending is (throughout the business cycle) financed by the revenue rather than debts. While the requirement for the operational spending can easily be followed in the Profit-and-Loss-Statement, the 13 BERGMANN, A./GAMPER, A. (2004) 1 ff. 7

8 Investment Statement is needed to show that a combination of operational profits and depreciation are sufficient to finance investment spending. While there is a Profit-and-Loss-Statement under IPSAS, there is an Investment Statement in its framework. However, the Investment Statement is very similar to the cash flow statement according to IPSAS 3. While the sum of operational profit and depreciation is close 14 to the indirect calculation of the cash flow under IPSAS, the investment and financial operation are a common part of the Cash Flow Statement under IPSAS. Obviously there are very little differences between the Investment Statement under HAM and the Cash Flow Statement under IPSAS. It s rather a question of names and graphical presentation than one of accounting issues. Thus, there is no contradiction between the options a and b. The constitutional framework can be met by using the IPSAS framework. Secondly, let s consider valuation. The constitutional framework requires a fast depreciation, in order to avoid intergenerational shifts of burden. For buildings, to mention only one important asset, ten percent of the book value have to be depreciated every year (non-linear depreciation). Like this about two third of the value of building are depreciated within the first ten years or about 90 percent within twenty years. This is certainly more than what is allowed under IPSAS, because both options offered by IPSAS 17, market value or linear depreciation would lead to larger time values and smaller depreciation amounts. Obviously this will not challenge the constitutional framework as such. However, it leads ceteris paribus to smaller amounts of depreciation and larger amounts of profit (or smaller deficits). Still following the constitutional framework this wouldn t change the amount available for operational and investment spending. However, while depreciation is not available for discretionary political decisions, profit is in the hand of politicians. It might for instance be used for tax cuts rather than for investment spending. This obviously makes a difference in fiscal policy, although it doesn t damage balanced budget rules. But it could possibly reduce the capacity effect of depreciation and make less funds available for further investment, rather than the replacement of existing assets. It depends on the political opinion whether this is good or bad. Option (a) implies a political decision in favour of (investment) spending and against tax cuts. However, also under option (b) such a decision is still possible. But the decision needs to be made for every budget period and not only once when setting the constitutional rules. Option (b) might thus shift power to the parliament. But it isn t fundamentally challenging the constitutional rules. 14 There is a difference in result, because the indirect calculation of the cash flow not only includes depreciation but also other non-cash-relevant cost and profits (e.g. an increase in provisions). The calculation under HAM is a simplified formula, which is not correct, but quite common also in private companies. 8

9 5. Conclusion The study by the National Network of Excellence clearly reveals, that accrual budgeting under HAM isn t in contradiction to IPSAS. There are a number of differences, but only the difference in valuation causes major difficulties. While HAM overstates depreciation and thus ensures high spending levels which are rather financed by taxes than debt, valuation rules according to IPSAS would lead to smaller depreciation and consequently increase the amount available for discretionary fiscal policy decisions. However, this might also result in a shift to tax cuts and finance spending through debts. But this tendency should rather be restricted by fiscal policy guidelines which focus on the debt situation, than by a continued use of biased Financial Statements. As soon as this valuation bias is identified by the political actors, its positive influence on fiscal policy is supposed to vanish, anyway. 9