The HM ‘Treasure's Island’: The Application of Accruals-based Accounting Standards in the UK Government

Abstract

Since the 1990s, UK has been progressively adopting a governmental accounting reform purporting to interpret and mimic accounting standards and practices from the private sector. Since 2009, the UK set of accounting standards applicable to the whole of governmental entities is based upon the HM Treasury's official interpretation of the international accounting standards initially designed for commercial enterprises, the latter standards having extensively inspired the International Public Sector Accounting Standards. This article analyses some representational concerns raised by its application of a balance sheet accounting approach to the public administration, pointing to consolidation perimeter, current value measurement of assets and liabilities and the case of public–private partnerships. This theoretical analysis develops relevant implications for representation and control of public spending and borrowing in UK and in general.

Keywords:

• public accountability
• accruals and cash basis accounting
• non-business accounting and economics
• governmental accounting theory and standards
• UK
• nature and role of non-business entity
• IPSAS
• IFRS

JEL Classification:

• D73
• E62
• H61
• M40

Acknowledgements

Yuri Biondi is Tenured Senior Research Fellow of the Cnrs and research director at the Financial Regulation Research Lab (Labex ReFI). He wishes to thank Jane Broadbent, Sheila Ellwood, and Richard Laughlin for comments, while Dr Sumita Shah (ICAEW) and Prof. Rowan Jones (Birmingham University) early provided suggestions and references. He further acknowledges fruitful discussions at conference presentations: Mari Kobayashi (Waseda University), Tadashi Sekikawa (JICPA, former IPSAS Board Member), Kenji Izawa (Ernst &Young, current IPSAS Board Member), and the participants of the seminar organized by the Public Sector Research Institute of Waseda University, Tokyo, on 13 November 2012; Ileana Steccolini (Bocconi University), Enrico Guarini (Milano University), Maria Francesca Sicilia (Bergamo University), and the participants of the XVIII IRSPM (International Research Society of Public Management) Meeting, Prague, 10–12 April 2013; David Heald (Aberdeen University), Pam Stapleton (Manchester University), Andy Wynne, and the participants of 14th CIGAR (Comparative International Governmental Accounting Research) Conference, Birmingham, 2–3 September 2013, Usual disclaimer applies.

Disclosure Statement

No potential conflict of interest was reported by the author.

ORCID

Yuri Biondi http://orcid.org/0000-0002-5545-5550

Notes

1 http://www.ifac.org/public-sector/about-ipsasb (accessed on 8 May 2012).

2 One case of reference is that of ‘Balmoral High School' in Ireland (‘PFI school', 2007). Signed in 2000 for a nominal investment of £17.7m, this partnership started in January 2002 and ended in August 2008 due to falling enrolments. Although the school shut down, the government continues to pay an annual charge of £1.3m and will do so until 2025–2026 under the terms of the contract. This partnership was kept off balance sheet under the official interpretation of UK GAAP, but is now on balance sheet under the official interpretation of IFRS (applied since 2009).

3 By consolidation perimeter, we mean both the boundary and the coverage, or scope of consolidation.

4 This representational background justifies the title of our article, since the current accounting model depicts UK Treasure as the owner of UK Island.

5 We refer to the concept of ‘true and fair view’ in its general sense, pointing to faithful representation consistent with facts, events, and users’ needs.

6 The appendix provides a numerical illustration of this case. Government may issue debt also to cover payments, including interest charges, over time.

7 We can then define them as ‘general interest generating activities’ by analogy with the ‘cash generating activities’ introduced by the IFRS for the private sector.

8 This net balance should remain consistently positive if the whole of current expenses (including interest charges) are covered by taxation (current fiscal revenues). It should reverse to parity if taxation eventually pays for all the expenses, comprising current and capital spending. See Appendix for a numerical illustration.

9 For the sake of simplicity, we will leave aside here the macroeconomic and theoretical connection of public borrowing (and debt issuance) with money creation. Readers can compare with HM Treasury (2011b, 3.4, p. 12).

10 The NAO (2011b) listed the significant bodies excluded in Figure 12 (p. 35). Further difficulties and uncertainties were stressed regarding the elimination of intra-government transactions and balances; see NAO (2011b, pp. 38–41).

11 In this way, the ongoing actual contributions flowing in and out these funds disappear from the accounting representation (NAO, 2011b, 12.2.4 (b)).

12 For further information, see HC Public Accounts Committee (2011), Oral Evidence, Q39, Q42 and Q48 (pp. 7–8).

13 Biondi et al. (2011) have a similar analysis of leases. Please note that the time misalignment in available data (November 2011 for partnership contracts and March 2011 for consolidated accounts) only allows a rough calculation, which is nevertheless sufficient to show the magnitude of the problem.