The Impact of Accrual-Based Public Accounting Harmonization on EU Macroeconomic Surveillance and Governments’ Policy Decision-Making

Abstract

This article sheds more light on the possible advantages (and the critical aspects) of introducing accruals accounting for governments in the context of European macroeconomic surveillance. This would add more balance to the discussion about accrual accounting, which tends to focus on the resource costs involved. The research it describes would, inter alia, show the impact on sensitive policy areas using a statistical analysis from EU countries’ official Government Finance Statistics. It also draws some conclusions on a suggested roadmap for public accounting in the European context.

Keywords:

• accruals
• macroeconomic surveillance
• government’s decision-making
• IPSAS/EPSAS
• GFS

ACKNOWLEDGMENTS

The author thanks Alexandre Makaronidis and John Verrinder for their valuable comments on this article. She also thanks her supervisor Mariano D’Amore and two anonymous reviewers who helped to improve an earlier version of this manuscript. The author alone is responsible for any errors or misinterpretations.

Notes

¹ For the relevant legal text, see: Treaty on the Functioning of the European Union (TFEU), art. 121 and 126 and protocol 12.

² This includes empirical material such as agendas and proceeding of meetings, reports on ongoing projects, and public consultation papers of the organizations which play a relevant role in public-sector standard setting (i.e., IPSASB, Eurostat, CIPFA, CNoCP), other international institutions (i.e., OECD, IMF), and large audit firms with specific expertise in the field of public-sector accounting. The literature review also includes ESA and IPSAS conceptual frameworks, accounting and statistical manuals, recommended practice guidelines, other nonbinding documents, and studies. The author’s participative observation is notably related to participation in a series of seminars and conferences (i.e., OECD accrual symposium, Eurostat conference Toward EPSAS, EGPA, CIGAR) in the field of the research. Notably, the author had the opportunity to have been an observer at the IPSASB and a member of several European Commission (Eurostat) task forces of experts delegated from EU member states as part of the European debate on harmonization of public-sector accounting and development of European Public Sector Accounting Standards (EPSAS).

³ This article refers to the IPSASs, since the IPSASs are the only internationally recognized accrual-based public accounting standards. Nevertheless, it should be noted that in many cases national public accounting standards (which may take the form of GAAP or another form) may follow many or all of the principles of IPSAS in this area or may only be inspired by IPSAS. In this context, it also considers the future EPSAS.

⁴ Under the preparatory stage of the study on “Suitability of IPSAS for EU MS,” Eurostat (the statistical office of the European Commission) needed to acquire a detailed knowledge of the underlying public accounting and auditing systems in member states. For additional information, see: “Overview and comparison of public accounting and auditing practices in the 27 EU Member States” Ernst and Young/Eurostat (2012). On the various accounting models, including the so-called “full” accrual, see also Chan, 2007; Christiaens & Reyniers, 2009; IFAC, 2013; Jagalla, Becker, & Weber, 2011.

⁵ These tables are reported twice per year to Eurostat by EU member states. They contain annual data, including a reconciliation between national-definition budget balances (“working balances”) and statistical deficit data. The tables require that the “official” accounting bases of the working balances are declared.

⁶ COM(2013) 114 released by the Commission on March 6, 2013 (EC, 2013b), OECD (2013), Pina Torres, & Yetano (2009).

⁷ Government finance statistics and National Accounts. On the relationship between national accounting, government budgeting and government accounting see Jones (2000).

⁸ Government deficit (surplus) means the net borrowing (net lending) of the sector of “general government” (S.13), as defined in European System of Accounts (ESA) 2010. For more information see: Council Regulation (EC) No 479/2009 of May 25, 2009 on the application of the Protocol on the excessive deficit procedure annexed to the Treaty establishing the European Community, as amended. The European Union moved to the newest internationally compatible EU accounting framework (ESA 2010) in September 2014.

⁹ There have been critical comments from economists and others that there should be a different focus on which of these measures to look at, and more consideration of the use of headline indicators against more flexible policy making according to the economic cycle and the level of transparency and accountability at both National and European level (Ball & Pflugrath, 2012; IMF, 2012a; Mintz & Smart, 2006). For example, should the measure of government debt change from gross to net (EC, 2014b; IMF, 2012b; Van de Ven et al., 2013). Should public investments be taken into account in the Maastricht-relevant deficit? And moreover, should the measure of deficit and/or debt take account of the cost of maintenance of assets alongside the implementation of accrual accounting?

¹⁰ Examples might include public–private partnerships, securitization operations, and extra-budgetary accounts and funds.

¹¹ For example, using a combination of cash basis and accrual basis.

¹² On a geographical analysis of broad management styles identified in the literature and influence on accounting reforms in local governments, see Pina and Torres (2003) and Pina et al. (2009).

¹³ On this, see for example the Austrian case (Steger, 2010) as well as Barton (2011); Caperchione, Christiaens, and Lapsley (2013); Chan, Jones, and Lüder (1996); Christiaens and Reyniers (2009); and Jones and Lüder (2011).

¹⁴ i.e., users, preparers, public accountants and auditors, and standard setters.

¹⁵ European Statistics Code of Practice (EC, 2011).

¹⁶ EC (2013b).

¹⁷ Eurostat Conference “Towards Implementing EPSAS” held in Brussels on May 2013. On the EU as source of coercive isomorphism, see Oulasvirta (2014a).

¹⁸ See discussion (and interview with the Chair) at Task force EPSAS June 12–13, 2014 (EC, 2014c). Some authors and experts have questioned the limitation to statistical reasoning behind the EPSAS proposal (for instance, see Jones & Caruana, 2014).

¹⁹ For the purpose of this article, the concepts and definitions refer to European System of Accounts (ESA 95). An upgraded methodological framework (European System of Accounts, 2010) has just been introduced, but with no significant change on these principles (See EC, 1996, 2013c).

²⁰ See Art. 3 of Directive 2011/85/EU; EC, 2013b. The budgetary accounts are designed to register and monitor the State budget operations with the same accounting rules for revenue and expenses. National accounts is extended substantially to a larger field of analysis, as a quantitative representation of the operations and results for the whole economy. For a review of the differences between National accounts/GFS and IPSAS (accrual accounting) (see Dabbicco, 2013; IPSASB, 2012b).

²¹ This condition is particularly relevant for the reconciliation of accounting measures with statistical measures (see Dabbicco, 2013).

²² Of course, adoption of accrual accounting should overcome the obstacle of those thinking that detailed disclosure of the execution of the budget is the only significant issue (i.e., the argument that legal compliance is more important than financial information and management). Linked to this is the consideration of strengthening the capacity of parliament and courts of audit to analyze accrual-based information (Blondal, 2004; EC, 2012b, 2013b; Hassan, 2013; IFAC, 2012a; Steger, 2010).

²³ This also includes dealing with the difficulties related to recognition of certain types of assets and liabilities that do not exist in the private sector, such as heritage assets, military assets, and government pension schemes (on this, see Blondal, 2003).

²⁴ i.e., market value, and related fair value, replacement cost, net selling price, value in use, and more for liabilities, cost of fulfillment, cost of release, and assumption price.

²⁵ In 2011, unreported arrears (unpaid bills) were revealed in Spain mostly related to health expenditure. This situation now has been clarified, but statistical authorities have requested changes in the public accounting system to ensure this situation will not happen in future (see EC, Eurostat, 2012a, 2013a, 2014c).

²⁶ This is in the context of budgetary surveillance in Europe where it is considered important for fiscal sustainability and medium-term public finance needs to not just take into account debt levels but also implicit liabilities (notably pension expenditure) and potential liabilities.

²⁷ See IPSAS 19.

²⁸ Some interviews with a member of the EPSAS Task force conducted during 2014 confirmed such reasoning. It has also been noted that even when using accrual methods of recording, the effects of changes in legislation or economic activity tend to have a delayed impact on tax revenue (see EC, Eurostat, 2014d).

²⁹ See the points made in Verrinder and Dippelsman, Eurostat/ECB (2008). Most of the pension schemes managed by governments in Europe are based on the pay-as-you go principle, whereby current contributions finance current benefits. The author is grateful to two interviewees for providing help and advice in this complex area.

³⁰ Some argue for alternative ways to a balance sheet approach in providing such information, i.e., fiscal sustainability reports or notes to financial statements (Oulasvirta, 2014b). However, this may also need to consider comprehensiveness of the reported fiscal measure and the need of standardization (and comparability) among countries.

³¹ See Biondi (2014), Oulasvirta (2014b) on the case of Finland; Ministry of Economy and Finance of Italy (MEF) (2010, p. 5) on Italian public finances and accounting reforms.

³² Koen and van den Noord (2005).

³³ EC (2012b, 2013b), Christiaens and Reyniers (2009), Steger (2010), Pina et al. (2009), Oulasvirta (2014b).

³⁴ Which aims for improvement of transparency, external accountability, high-quality reporting, and planning fiscal systems in member states.