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Some of the most important claimed benefits are listed below, why they are claimed and the issues with such claims.

Improved Financial Transparency

Accrual accounting provides a more comprehensive view of a government’s financial position by recognizing all assets and liabilities. This transparency helps stakeholders understand the true financial health of the government.

Claimed benefit – Accrual accounting records more information about a government than cash accounting.

Limitations on claimed benefit – Improving transparency requires making information available in a useable format. The argument in this post is that accrual financial reports fail to meet this requirement. Issues include:

• The number of assumptions in valuing assets and measuring economic flows that are inherent in accrual accounting, e.g. measuring pension liabilities, valuing assets, accounting for arrangements such as leases and public-private partnerships, means that there is no single ‘correct’ accounting result. The private sector provides examples of issues hidden within accrual accounting reports that have led to dramatic failures, e.g. Enron, Worldcom, Lehman Brothers. Accrual accounting provides scope for obscuring fiscal realities – either inadvertently or deliberately.
• Most governments budget on a cash basis[2] and therefore cash must be used to compare budget to the actual results. Users of accounts might reasonably ask “what’s the point of accrual accounting if cash is used for budgets and budget comparison?”
• The figures published under accounting rules (e.g. International Public Sector Accounting Standards, IPSAS) will differ from those published by the IMF using the Government Finance Statistics (GFS) methodology, which in turn differ from those used in the UN System of National accounts for statistical reporting. All the differences can be justified and explained, but the lack of consistency inevitably reduces confidence in the figures and therefore the transparency of the reports.

Even a wealthy country such as the UK illustrates practical problems of government accrual reporting. The UK publishes annual accrual based Whole Government Accounts, most recently for the year to March 2023, but there are several issues. Firstly, timeliness – since 2023 there has been a change of government and in any event the information is too delayed to be useful for managerial purposes. The second issue relates to complexity and length – 323 pages of figures and text covering a wide spectrum of activities and entities, a challenge to even the most diligent reader. Thirdly, credibility – the UK Auditor General has disclaimed an opinion on the Whole of Government Accounts because of various issues with the figures, reducing credibility and transparency. Fourthly, there is no linkage of expenditure to non-financial outcomes, or disaggregating expenditure to specific programmes. Finally, there is the issue of consistency with statistical reports on government finances because of differences in scope and methodology. These issues are a factor leading to very limited media interest in the publication of the UK Whole of Government Accounts.

Conclusion on benefit – Whilst accrual accounting increases the information recorded, for most stakeholders this does not result in improved transparency and may even obscure the true situation.

Better Decision-Making

Claimed benefit – By providing a complete picture of financial activities, accrual accounting aids in more informed decision-making. It allows governments to assess the long-term financial implications of their policies and programs.

Limitations on claimed benefit – decisions should be based on predicted future costs and benefits. Historic costs are always irrelevant in any investment decision. Both accrual and cash accounting provide historic information. Furthermore, depreciation is irrelevant in any decision about future expenditure. In making decisions about future resource allocations historic accounting is only useful as source of information to facilitate predicting future cash flows.

Conclusion on benefit – Both historic and accrual accounting are of limited value because of the focus on past events and outcomes

Enhanced Accountability

Claimed benefit – Accrual accounting holds governments accountable for their financial commitments, as it records obligations when they are incurred. This can lead to more responsible fiscal management and planning.

Limitations on claimed benefit – It is correct that more information to enable accountability is available from accrual as compared to cash accounting. However, to make accountability effective requires transparency, which as discussed in the last post is difficult to achieve.

Conclusion on benefit –  The issue of accountability will be further considered in a subsequent post.

Alignment with International Standards

Claimed benefit – Many international organizations, such as the International Public Sector Accounting Standards (IPSAS), advocate for accrual accounting. Adopting these standards can improve comparability and credibility in the global arena.

Limitations on claimed benefit – This argument is tautologous, in effect stating that an advantage of accrual accounting is that it conforms to accrual standards! Furthermore, there is inconsistency between international standards for government accrual reporting. The two main standards are IPSAS and GFS, plus in Europe ESA. The requirements have much in common but there are significant conceptual and practical differences.

Conclusion on benefit – the benefit depends on the perceived value international standards.

Improved Resource Management

Claimed benefit – By recognizing expenses and revenues when they occur, governments can better manage resources and plan for future needs. This can lead to more efficient allocation of resources and improved service delivery.

Limitations on claimed benefit – For commercial entities the accounting model provides a universal input-output model that measures profitability and thus provides a framework for driving better management performance. For governments revenues and expenditures are unrequited and therefore the government surplus or deficit is unrelated to management performance. A government accounting system is not an input-output model and does not measure performance. Transitioning to accrual accounting fails to resolve this fundamental limitation of governments using accounting as a measure of performance.

Conclusion on benefit – Integrating assets and financial records provides more reliable and accessible information on the assets of the entity. Asset registers become integral with the accounting records and are linked to the cost of acquisition. This does facilitate more effective asset utilisation.

Long-term Financial Planning

Claimed benefit – Accrual accounting helps in understanding the long-term financial commitments and sustainability of government programs, which is crucial for strategic planning and budgeting.

Limitations on claimed benefit – Accrual accounting does recognise some future liabilities, e.g. pensions. On the other hand, there is no recognition of future assets, e.g. the tax revenues to pay future pensions.

Conclusion on benefit –  The added value of accrual accounting for long term financial planning is limited.

Assertion 2: the change to accrual accounting is difficult and requires time and resources

Moving from cash to accrual accounting for a government is a complex and lengthy process. Issues include:

• Deciding on the accrual accounting rules – whether to adopt International Public Sector Accounting Standards (IPSAS) or bespoke national standards. Institutional arrangements will be required for updating standards.
• Defining the scope of the new accounting system, the entities to be consolidated and methodology for information gathering.
• Traditional government cash accounting process record invoices when paid Accrual accounting requires goods and services to be recorded as a liability immediately the goods or services are received, and this approach is reflected in the workflow of most commercial accounting software. Such a fundamental change to government procedures may require amended legislation, new financial instructions and training.
• An inventory is required of existing government assets and liabilities, including leased assets and public-private partnerships in accordance with accounting standards. Contingent liabilities should be identified to report financial risk.
• A new chart of accounts is required to include assets and liabilities. The IMF Government Finance Statistics (GFS) manual provides a model chart of accounts, but this does not fully meet the requirements for International Public Sector Accounting Standard (IPSAS) reporting, and management will certainly require a more detailed expenditure analysis. A further challenge is to link the chart of accounts to the budget classification (discussed in next post).
• The new accounting systems will need to be integrated or interfaced with other financial systems, for example, debt, revenue and payroll systems in accordance with accrual principles.
• The outline above lists just some of the challenges of implementing accrual accounting. The transition to accrual will be a major project requiring high level political support and substantial resources. If the transition also involves implementing new accounting software the challenge is even greater. Training requirements will be substantial and must identify the different requirements for accounting staff, managers and the users of the new accounting information. The training must be available into the future for new, promoted, or transferred staff.

To summarise, implementing accrual accounting is major exercise that requires commitment, resources, planning, management and time. As an example, the UK took over 10 years for the transition to accrual accounting. A phased approach is likely to be necessary.

Assertion 3 – accrual accounting creates a problem when budgets are cash based

Government fiscal strategies are about the balance between government debt, revenues and expenditure. Fiscal strategies define the budget parameters for taxation and spending in terms of cash flows. This is a key reason why government accounting has for so long and in so many countries remained cash based.

Even where countries have moved to accrual accounting most have continued to budget on a cash basis because of the linkage to fiscal strategy, familiarity with cash information, ease of understanding, and the use of cash expenditure controls. Currently only a few countries have implemented accrual budgeting, for example New Zealand, the UK.

There are several issues when cash budgets are used with accrual accounting.

• The mechanics of accrual accounting means that detailed cash flow information is subsumed within accrual revenue and expenditure information – line-item[3] cash flow information is not available under accrual accounting.
• This lack of detailed cash flow information creates problems for budget management, budget execution and comparisons of budget to actual outturns. Some counties refer to a parallel system of ‘budget accounting’ to address this problem, with the inherent issues of two parallel accounting systems.
• A further issue is a cash-based budget classification and an accrual-based chart of accounts. There will be obvious incompatibilities, for example in the way capital expenditure is recorded.

There are several solutions to the problems created by cash budgets and accrual accounts. The most comprehensive is to keep two sets of accounting records, one on an accrual basis and the other a cash basis, e.g. using a cash sub-ledger. This approach increases complexity, staff and management workload.

A simpler solution adopted by most countries is to assume current revenues and expenditures approximate to cash payments and receipts and then manually adjust for non-cash items such as depreciation and revaluations. There are obvious problems to this approach. For example, if there are major changes in working capital because of payment delays cash payments will no longer approximate to accrual expenditure.

Ultimately the only complete solution is to implement accrual budgeting on the same basis as accrual accounting. The difficulty is that accrual budgeting must be implemented by budget staff who may not be familiar with the arguments for an accrual approach. Convincing and training budget staff to adopt an accrual approach will be required.

Experience is that when deciding to move to accrual accounting the problems of retaining cash budgets are inadequately considered and therefore there is inadequate planning to address the resulting issues.

Assertion 4 – most countries will eventually implement accrual accounting

Given the arguments advanced in the previous posts the conclusion that most countries will in the long run implement accrual accounting may seem counterintuitive, but there are good reasons why governments will eventually transition to accrual.

1. Effective financial management must embrace all economic flows, assets and liabilities. Anything less is incomplete. The double entry accrual accounting model uniquely meets the requirement for comprehensive and integrated financial information.
2. Achieving transparency and accountability requires access to full information as provided by accrual accounting. The problems of achieving transparency will always be a challenge, but without information there can be no accountability. It is challenging to provide concise and comprehensible information about complex issues. The task of the accountant is to meet the challenge to provide transparency.
3. At a practical level commercial off the shelf accounting software assumes accrual accounting. To use sophisticated software for cash accounting is not only wasteful but means workflows do not operate as planned. Adapting software to non-standard workflows increases cost and complexity, risks of delays and additional costs.
4. The existence of a body of standards for accrual accounting encourages countries to comply with international norms.
5. The practical advantage of having asset records integrated with accounting records should not be underestimated. This enhances credibility and enables more effective utilisation of assets.

Despite the issues identified in earlier posts, the conclusion is that for governments accrual accounting is the way forward, but with important caveats:

• implementing government accrual accounting is a complex exercise requiring substantial investment and resources that for many countries are simply not available within government.
• The benefits from implementing accrual accounting need to be evaluated against the costs and reforms prioritised within a wider programme financial management modernisation.
• To reap the full benefits of accrual accounting budgets also need to be accrual based.
• Many of the benefits of full accrual accounting can be realised by implementing partial accrual approach recording liabilities, financial assets and related flows. Partial accrual can be seen as a stepping stone to full accrual or an end in itself.

The conclusion is that whilst eventually most countries will implement full accrual accounting it is not necessarily the highest priority government financial management reform. An intermediate stage of partial accrual accounting (sometimes referred to as modified or simplified accrual) should be considered as an appropriate strategy within a phased approach.

References

There are many articles on the debate about accrual accounting for governments that can be found using an AI search engine such as Perplexity. The following list identifies some key publications.

• “Global Report on the Use of Accrual Accounting for Fiscal Management” World Bank Prosperity Insight Series (2024) https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099030125153013298
• “Accrual Budgeting: Opportunities and Challenges” IMF eLibrary, Chapter 11 (2024) https://www.elibrary.imf.org/display/book/9781475531091/ch011.xml
• “IPSAS Implementation: Current Status and Challenges” ACCA Global (2024) https://www.accaglobal.com/uk/en/technical-activities/technical-resources-search/2017/october/ipsas-implementation–current-status-and-challenges.html
• “Negative Effects of the Adoption of Accrual Accounting in the Public Sector” Emerald Insight (2022) https://www.emerald.com/jpbafm/article/35/6/1/234211/Negative-effects-of-the-adoption-of-accrual
• “Accrual Accounting in Public Sector Emerging Economies” Taylor & Francis (2023) https://www.tandfonline.com/doi/full/10.1080/09540962.2023.2200968
• “New Report: Ideal Accounting Practices for Government Transparency” IFAC & ACCA Joint Report (2020) https://www.ifac.org/news-events/2020-02/new-report-reveals-ideal-accounting-practices-governments-deliver-transparency-their-citizens
• “Accrual Accounting for Effective Government in China” Science Direct (2022) https://www.sciencedirect.com/science/article/abs/pii/S104523542200004
• “International Public Sector Financial Accountability Index” CIPFA 2025 https://www.ifac.org/knowledge-gateway/discussion/international-public-sector-financial-accountability-index-2025
• “Stepping Stones to Accrual Accounting” CIPFA https://www.cipfa.org/policy-and-guidance/reports/international-public-sector-financial-accountability-index
• “An Efficient Technical Solution or an Ideologically Contested Approach – The Balance Sheet for Business Style Accrual Accounting in the Public Sector” Andy Wynne 2000 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2019530
• “Why Cash-Based Budgeting Still Prevails in an Era of Accrual-Based Reporting in the Public Sector” Christoph Reichard, University of Potsdam, and Jan van Helden, University of Groningen, 2016 https://afgr.scholasticahq.com/article/25483-why-cash-based-budgeting-still-prevails-in-an-era-of-accrual-based-reporting-in-the-public-sector
• “Has New Public Financial Management had its Day?” Julie Cooper, Tim Youngberry, IMF PFM Blog, 2025 https://blog-pfm.imf.org/en/pfmblog/2025/01/has-new-public-financial-management-had-its-day
• “How valuable is ‘Public Sector Net Worth’?” Julian Jessop UKICE 2023 https://ukandeu.ac.uk/how-valuable-is-public-sector-net-worth/
• “Is Accrual Accounting an Appropriate Reform?” Noel Heworth IMF PFM Blog 2025 https://blog-pfm.imf.org/en/pfmblog/2025/03/is-accrual-accounting-an-appropriate-reform
• “Is the move to accrual based accounting a real priority for public sector accounting?” Andy Wynne ACCA 2004 https://bambangkesit.wordpress.com/wp-content/uploads/2011/02/accrual-based-accounting-bab-4.pdf
• “Public accounting reforms in the Western Balkans and European Neighbourhood” SIGMA 2022 https://books.google.co.uk/books/about/Public_Accounting_Reforms_in_the_Western.html?id=bTyfzwEACAAJ&redir_esc=y
• “Practice-Relevant Accrual Accounting for the Public Sector: Producers’ and Users’ Perspectives” Hassan Ouda , Palgrave Macmillan, 2022
• “The actual implementation of accruals accounting” Ciaran Connolly and Noel Hyndman, Universities of Ulster and `Belfast, Accounting, Auditing & Accountability Journal Vol. 19 No. 2, 2006 https://arwihasthoro.wordpress.com/wp-content/uploads/2017/10/semlit-7-the-actual-implementation-of-accruals-accounting-caveats-obed-miagoni.pdf

© Michael Parry 2025