accurual accounting

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ACCOUNTING PRACTICES & DEVELOPMENT IN PUBLIC SECTOR

Accrual accounting

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Introduction

• The Malaysian Government has adopted & developed various accounting systems in ensuring effectiveness & accountability in accounting & reporting for public sector organizations

• Among the accounting systems being used are Accrual Accounting, Micro Accounting System (MAS), & Standard Accounting System for Government Agencies (SAGA)

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INTRODUCTION

• Heeks (1998) states that:• “The creation of new information systems

is an essential component in the creation of accountability.

• When a decision is taken, information about the decision & its outcomes must flow to all those to whom the decision maker is accountable

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ACCRUAL ACCOUNTING

• Accrual accounting concept states that: “Revenues are recognized in the period in which the revenues are earned & expenses are recognized in the period in which the expenses are incurred in generating the revenue”

• It is a technique of recognizing revenues & expenses of an organization over a particular period for the purpose of determining profit

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ACCRUAL ACCOUNTING

• It does not require any movement of cash for accounting purposes

• Because accrual accounting makes the distinction between the “receipt of cash” & the “right to receive;” and the “payment of cash” & the legal obligation to pay cash.

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ACCRUAL ACCOUNTING

• However, Jones (2000) pointed out that there is another method called “MODIFIED ACCRUAL ACOUNTING SYSTEM”

• This is a ‘new’ & compromised technique used by most Government for fund reporting on spending activities

• Some Government agencies in the United States & their local authorities have adopted this method

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ACCRUAL ACCOUNTING

• Under the ‘Modified Accrual Accounting System’:

• All revenues are recognized either when they are received in cash or when collection of the amount can be reasonably estimated to be received in the near future

• All expenditures are recognized in the period in which goods & services are received or a liability is incurred

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CASH, ACCRUAL & MODIFIED ACCUAL BASES OF ACCOUNTING

BASES OF ACCOUTNING

Point of Recognition CASH ACCRUAL MODIFIED

REVENUE When cash is When revenue is When measurable received earned & available

EXPENDITURE When cash is When expenses When expenditure paid is incurred is incurred

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APPLICATION OF ACCRUAL ACCOUNTING IN PUBLIC SECTOR

• Currently the Malaysian public sector uses either cash basis, modified cash or accrual basis of accounting in preparing their accounts

• Abdul Samad (2001) states that “these situations exist because there is no specific provisions for public accounting & financial management

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• Neither found in the following rules or regulations:

1. Financial Procedure Act 1957, nor the2. Unclaimed Monies Act 1965, or the3. Pension Fund Act 1991 • Stating the mode of accounting to be

adopted by the Public Sector organizations for preparing their accounts

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• Many countries have begun to change their accounting techniques from cash basis to either modified cash basis, accrual basis, modified accrual basis or a combination of those techniques

• In Malaysia, there is no such body similar to the US Government Accounting Standard Board or to the Public Sector Accounting Standard Board of Australia to look into the pronouncements or guidelines in formulation standards applicable to the public sector as a whole

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• However, Malaysia is still in the process of of studying & analyzing the feasibility for the migration to accrual accounting as that being done by other countries in the world

• Countries such as Canada, New Zealand, Australia & the United Kingdom, have successfully migrated to accrual accounting

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ADVANTAGES OF USING ACCRUAL ACCOUNTING

1. The use of accrual accounting will provide a true financial position of the public sector agencies

• It is believed that accrual accounting can show exactly how much an organization earned rather than how much they have collected in terms of revenue in particular accounting period

• It enables expenses incurred to be matched with revenue earned in the same period

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2. It has been accepted as a standard to measure performance in a similar manner to the Private Sector

• That profit measured implies the level of success in a particular period

• The cash basis merely provide the amount of cash inflows & outflows in a particular period

• Thus restricting the measure of performances among Public Sector agencies & discouraging inter-sector comparisons

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3. The presentation of both an operating statement & a statement of financial position will allow the calculation of performance indicators

• The performance indicators can be used to compare targets with other Public Sector or Private Sector entities

• This is expected to create a more efficient operations in Public Sector entities

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DISADVANTAGES OF ACCRUAL ACCOUNTING

1. Accrual accounting brings about more subjectivity into the accounts & this could distort the accounting information that is being produces

• For example, the use of different depreciation methods would lead to a different amount of depreciation expenses to be charged to a particular accounting period, as well as

• The estimates used in determining the salvage value of an asset & its expected useful life

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DISADVANTAGES OF USING ACCRUAL ACCOUNTING

2. During period of rising prices, the relevance of the accrual concept is rather limited

• For example, during inflation the same quantity of sales made will result in a higher sales value figure compared to sales made during a period of normal prices

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DISADVANTAGES OF USING ACCRUAL ACCOUNTING

3. The cost of switching to an accrual accounting system will be high as it involves more administrative & accounting costs

• All Government assets must be measured & valued before being reported for the first time in the Balance Sheet

• The numerous numbers of Government assets with different types & of different nature would involves a large amount of costs to be allocated & used for measuring those assets

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CHALLENGES IN IMPLEMENTING ACCRUAL ACCOUNTING

1. Accrual accounting does not support the main objectives of accounting for the Public Sector i.e. for stewardship & performance evaluation purposes

– These objectives require Government agencies to report fully, frankly & promptly upon the stewardship of receipts, payments, assets & liabilities

– In addition, such reports must disclose resources used & how resources were used

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CHALLENGES IN IMPLEMENTING ACCRUAL ACCOUNTING

• With regard to accounting for performance evaluation purposes, it can only be achieved by combining the analysis of financial statements with information that has been produces from other available resources

2. The iterative changes in the implementation process involves additional works & require development of new skills by Department finance officers

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CHALLENGES IN IMPLEMENTING ACCRUAL ACCOUTNING

• The time factor & lack of skilled personnel to handle the conversion to accrual accounting in the Public Sector has contributed to the resistance towards the changes required by accrual accounting

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CHALLENGES IN IMPLEMENTING ACCRUAL ACCOUTNING

3. The conversion to accrual accounting will require the Public Sector organizations to identify their fixed assets

• The peculiar characteristics & nature of Public Sector assets may cause difficulties in determining the value of those assets

• In addition, there will also be problems in providing depreciation on those assets

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THE FUTURE OF ACCRUAL ACCOUNTING IN MALAYSIA

• The adoption & use of accrual accounting in Malaysia is seen feasible as the corporatization & privatization of major Government projects have proven to be successful

• Examples include Syarikat Telekom Malaysia, Tenaga National Berhad & Pos Malaysia

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THE FUTURE OF ACCRUAL ACCOUNTING IN MALAYSIA

• Upon privatization exercises, the concept of valuation of assets are needed to comply with the commercial requirements

• Therefore, the Government entities will be compelled by circumstances to produce accounts of acceptable standards for commercial use.

accurual accounting

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