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More OECD countries have adopted accrual accounting however IPSAS adoption remains low

A report by the International Federation of Accountants (IFAC) and the Organisation for Economic Co-operation and Development (OECD) highlighted that while adoption of accrual accounting by OECD countries has increased, few have adopted International Public Sector Accounting Standards (IPSAS).

The report stated that 25 (73%) of the 34 OECD countries have adopted accrual accounting for their public finances management, compared to only a quarter of these countries doing so in 2003. Of the countries which have not yet implemented accrual accounting, only three countries (9%) namely Greece, Portugal and Slovenia are currently considering transition. Six countries (18%) - Germany, Ireland, Italy, Luxembourg, Netherland and Norway - are still using cash based accounting.

Asked if reluctance to adopt accrual accounting was a source of concern, IFAC CEO Fayez Choudhury responded: “I think it is noteworthy that these countries that have yet to adopt accrual accounting often require many other organizations within their jurisdictions, such as regional and local public sector entities, as well as state-owned enterprises to fully report in accordance with established, high-quality financial reporting standards. So, they certainly see the value in accrual based accounting.”

Asked what might prevent countries to adopt accrual accounting for the public sector, OECD senior policy analyst Delphine Moretti who coordinated the report, pointed at the cost and complexity of implementation. “For Norway, Netherlands and Germany there have been several studies in the past about adopting accrual accounting and these studies which have been led by academics and officials from the finance ministry and all other people have led to the conclusion that the cost would be high and benefits were unclear so they decided not to go for it.” she said.

Looking at Germany specifically, which is often used as an example of a large economy reluctant to move to accrual accounting for public finance, Moretti said the question had been submitted to the parliament but it concluded that it had very high level of transparency already with the current practices and the current budget documentation. Therefore they didn’t feel the need to change accounting.

Despite a strong interest in accrual accounting, the report highlighted that only 28% of countries have adopted IPSAS while 9% used IFRS as the main references to the development of their national accounting standards.

However Choudhury argued:  “Many jurisdictions adopt IPSAS by an “indirect method” via local law or regulation. This reflects the prerogative of sovereign governments. Therefore, the influence of IPSAS cannot be simply assessed by just looking at the number of direct adopters.”

As countries adopt their own adapted systems of accrual accounting, practices vary from country to country and the report highlighted three types of accrual accounting adoption.

First, countries, such as New Zealand, that have adopted accrual accounting as the basis for their fiscal policies, budgeting, financial management and reporting.

Second, countries, like Japan, produce financial statements on the basis of accrual as supplementary information to the cash-based accounts.

And third, countries which prepare accrual-based financial statements as their main official accountants and in addition they prepare cash-based annual financial statements for budgetary purposes.

According to Moretti one explanation for persisting differences in government accounting systems is tradition. “There are some differences in the coverage and function of the budget and public accounts, or the role of parliaments between Continental tradition countries like France, Spain or Italy and Westminster tradition countries such as the UK of course, but also Canada, Australia and a number of other countries,” she said. “So because of these differences, you may end up with different practices with regards to budget presentation and the financial statements.”

The report on OECD countries can be accessed here.

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