OECD Public Sector Accruals Symposium - Giovanna DABBICCO

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Published on March 6, 2014

Author: OECD-GOV

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This presentation by Giovanna DABBICCO was made at the 14th Annual OECD Public Sector Accruals Symposium, Paris 3-4 March 2014. Find out more at http://www.oecd.org/gov/budgeting/14thannualoecdpublicsectoraccrualssymposiumparis3-4march2014.htm

The potential impact of accrual-based public accounting harmonization on public policymaking from the perspective of national governments. 14th OECD Accrual Symposium – 3-4 March 2014 Giovanna Dabbicco This presentation does not necessarily represent the point of view of ISTAT. The interpretations and opinions contained in it are solely those of the author.

Outline 1. Case studies in Europe – (2). Table 1. Basis of accounting for Working Balance 3. Behavioral change associated with accrual accounting 4. Unfunded pension liabilities – (5). Table 2. Pension expenditure projections 6. Taxes/revenues 7. Management of fixed assets – (8-9). Table 3. Gross fixed capital formation and consumption of fixed capital in GG sector 10. Financial management of accounts payable and receivable 11. Contingent operations of government 12. Open question Giovanna Dabbicco Paris 3-4 March 2014

Case studies in Europe: cash to accruals Central Level (From source E&Y Report 2013) • ES, FR, UK, BE, DK, SE, FI, EE, LT, PL, AT, BG Local Level • ES, UK, IE, BE, NL SE, FI, EE, LT, PL, CZ, AT, MT, BG Social Security Funds • ES, PT, FR, UK, NL, SE, FI, EE, LT, PL, AT, BG Several summary measures related to statistical and accounting reporting/ planning to look at: • Deficit /GDP; Debt/GDP (Maastricht criteria) • Net government debt (UK, Eurostat) • Debt/government revenue (Basel measure) • Debt/export earnings ( Debt-to-exports ratio, IMF, WB) • Programme measures (such as for Greece and Cyprus) • Internal stability growth pact (e.g. Italy) 2 Giovanna Dabbicco Paris 3-4 March 2014

Table 1 - Basis of accounting for Working Balance's measure for EDP reporting by subsectors in EU Member States - Source: EDP notification October 2013 Central Goverment Local Government Social Security funds Accrual AT BE BG CY CZ DE DK EE EL ES FI FR HR HU IE IT LT LU LV MT NL PL PT RO SE SI SK UK Total MS % Cash Mixed Cash Accrual Mixed Accrual 1 1 1 1 1 Cash 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 M 1 1 1 1 Mixed 1 1 1 1 2 19 7 8 12 8 13 9 5 1 7% 68% 25% 29% 43% 29% 46% 32% 18% 4% M. Not available Source: Eurostat – published EDP notification tables. Elaboration on Eurostat GFS database

Behavioral change associated with accrual accounting • How accrual-based accounting influences the acquisition of information and its distribution • Managerial impact of the use of accrual on the interpretation and organization of information Obstacle: legal compliance is often considered more important than financial information and management • Need to strengthen the capacity of parliament and courts of audit Sensitive areas to investigate: • • • • • Unfunded pension liabilities Taxes/ revenues Financial management of accounts payable and receivable (e.g. trade credits) Management of fixed assets Contingent operations of government (e.g. guarantees) 4 Giovanna Dabbicco Paris 3-4 March 2014

Unfunded pension liabilities Complexity of calculation, reliable information ..and changing assumptions, range of imputations, partitions, and rerouting …affect financial position, liquidity implication, misreporting of costs, bias decision making, lack to set up provisions Conceptual issue: asymmetry for governments power to change pension benefits at all times i.e. not realistic balance sheet At national level: • Supportive of long-term decision making, as well as of future government policy in the area • Reduce concerns on the extent of off-balance sheet liabilities of government employer schemes i.e. "recognition better than zero" Macroeconomic level: • Improvement of quality and relevance of national accounts statistics ESA 2010 (Eurostat/ECB Task Force): obligations (and entitlements) on pension schemes under defined (unfunded) benefit schemes have to be reported in a supplementary table (position and flow data). 6 Giovanna Dabbicco Paris 3-4 March 2014

2015 EU (27 countries) Belgium Bulgaria Czech Republic Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United Kingdom Elaboration on : Short Description: Table 2 - Pension expenditure projections (baseline scenario)- % of GDP Years 2007-2060 2020 2025 2030 2035 2040 2045 2050 10,3 10,5 10,9 11,4 11,8 12,1 12,2 10,9 11,8 13 13,9 14,4 14,6 14,7 8,6 8,4 8,4 8,6 9 9,5 10,1 6,9 6,9 7 7,1 7,6 8,4 9,4 10,2 10,6 10,5 10,6 10,5 10,4 10 10,1 10,5 11 11,5 11,9 12,1 12,2 6,2 5,9 5,8 5,6 5,4 5,4 5,3 4,3 4,6 5 5,4 5,8 6,4 7,1 12,2 13,2 14,8 17,1 19,4 21,4 23 9,2 9,5 10,1 10,8 11,9 13,2 14,6 13,5 13,6 13,9 14,2 14,5 14,4 14,3 14 14,1 14,3 14,8 15,2 15,6 15,4 7,8 8,9 9,8 10,8 11,7 12,8 14 4,8 5,2 5,6 5,9 6,1 6,1 5,9 6,5 6,9 7,6 8,2 8,7 9,1 9,6 8,9 9,9 12,1 14,2 16,6 18,4 20,7 10,9 11 10,9 11 11,4 12,2 12,7 9,1 9,3 9,1 9,3 9,7 10,5 11,3 7,2 7,8 8,4 9,3 10 10,3 10,3 12,8 13 13,4 13,8 13,9 13,9 14 9,6 9,7 9,7 9,4 9,3 9,2 9,1 12,1 12,4 12,6 12,6 12,3 12,5 12,8 8,5 8,8 9,4 10,4 11,5 12,6 13,7 10,6 11,1 12 13,3 14,7 16,1 17,3 6,3 6,3 6,9 7,3 7,8 8,3 8,8 11,8 12,6 13,4 13,9 13,9 13,6 13,4 9,5 9,4 9,4 9,5 9,5 9,4 9,1 6,8 6,9 7,2 7,6 7,8 8 7,9 2055 12,3 14,7 10,8 10,2 9,6 12,3 5,3 8 24 15,5 14,2 14,7 15,5 5,8 10,4 22,1 13,2 12 10,3 14 9,1 13,3 14,8 18,2 9,4 13,3 9 8,1 2060 12,4 14,8 11,2 10,8 9,3 12,5 5,2 8,4 24,3 15,6 14,1 14,2 16,8 5,6 11 23,7 13,7 12,7 10,4 13,9 9 13,1 15,3 18,6 9,9 13,3 9,2 8,6 Source of Data Economic Policy Committee The pension expenditure indicator includes gross public pensions (i.e. before taxes and compulsory social security contributions) as a percentage of GDP. It is the sum of different categories of pension benefits, some of which (for example, disability pensions) may be paid to people who have not reached the standard retiring age. The projections are made on the basis of Eurostat's population projection - EUROPOP2008 - and commonly agreed underlying economic assumptions that have been prepared by the European Commission (DG ECFIN) and the Economic Policy Committee (Ageing Working Group). 12,5 14,7 11,3 11 9,2 12,8 4,9 8,6 24,1 15,1 14 13,6 17,7 5,1 11,4 23,9 13,8 13,4 10,5 13,6 8,8 13,4 15,8 18,6 10,2 13,4 9,4 9,3

Taxes/ Revenues Complexity: • • different categories of taxes (on income, corporation taxes, VAT, taxes on products) different collection systems (taxes withheld by employer, rolls procedure, creditors’ own declarations to the administrative Authority, etc - whose timing and procedures are governed by laws ). • But degree of complexity varies with the categories ….Correctly identifying the principle of accrual: • • Unknown taxable income until declaration calculation, revenue not declared on their due dates, partial declaration, tax amnesties Adjustments necessary for pending due payments in subsequent fiscal years, refunds due to taxpayers, pending entitlements that are unlikely to be collected Inform performance measurement • Clearer link between the revenues and the underlying activity to be founded/planned timing, risks of uncollectable taxes • but opponents argue there is no direct relationship (non exchange transactions) • need a more harmonized fiscal system at national and international level and a good information system Giovanna Dabbicco Paris 3-4 March 2014

Management of fixed assets Development and maintenance of a more complete asset register • ensuring a complete and correct balance sheet, though some benefits possible without a move to full accruals accounting (e.g. asset register) Better assessment of service lives and impairment • important for planning, understanding the maintenance requirements of assets and assessing assets’ performance, resource mobilization and allocation Exploring how combined National fiscal policy, on both fiscal rules and capital accounts impact on accounting and fiscal practices…: Accounting practice under Maastricht Treaty might be seen more as a cash modified approach, investment is still expensed • This might be a bias to lead countries on adoption of accrual • Medium term forecasts impacted by those practices made under (cyclically adjusted) budget balances Risk of manipulating cash data • for investment policy, moving reported capital expenditure artificially between years . …If there is no systematic data on other accounts payables, this can’t be reflected in the accounts Giovanna Dabbicco Paris 3-4 March 2014

Management of fixed assets - contd Reducing discretionarily investments to reduce debt and deficit, pushing debt (and deficit) off balance sheets through public corporations not consolidated, greater using of private sector under public-private partnership (PPP) • impact the growth, especially if R&D and infrastructures are involved, decline of services Accrual may give a key tool to identify this behavior with the information provided on capital stock development, notably when investments are below depreciation. Financing distortion, long term expenditure covered by short term debt i.e. trough unpaid invoices Adoption of accruals accounting would overcome this distortions? • Investment depreciated over its service life. In a investment growing situation, it would reflect the costs of such investment in the future and not as a direct impact immediately Giovanna Dabbicco Paris 3-4 March 2014

Table 3 - Gross fixed capital formation and consumption of fixed capital in General Government sector in EU MS- % of GDP- Years 2009-2012 2009 2010 2011 2012 Consumption of fixed capital Belgium 1,67 Bulgaria 1,44 Czech Republic 4,29 Denmark 1,94 Germany 1,79 Estonia 2,04 Ireland 1,64 Greece 2,17 Spain 1,77 France 2,63 Italy 1,98 Cyprus 0,63 Latvia 3,48 Lithuania 2,87 Luxembourg 1,89 Hungary 3,40 Malta 2,15 Netherlands 2,75 Austria 1,28 Poland 1,81 Portugal 2,13 Romania 2,59 Slovenia 1,83 Slovakia 2,73 Finland 2,25 Sweden 2,36 United Kingdom 1,04 Gross fixed capital formation 1,70 4,95 5,10 2,04 1,75 5,07 3,75 3,13 4,47 3,41 2,53 4,21 4,29 3,89 3,93 3,14 2,28 3,76 1,19 5,22 3,01 5,29 4,61 2,33 2,83 3,52 2,70 Consumption of fixed capital 1,68 1,51 4,24 1,92 1,73 2,10 1,67 2,42 1,89 2,65 2,02 0,65 3,47 2,72 1,80 3,37 2,13 2,77 1,28 1,79 2,16 2,24 1,97 2,67 2,18 2,27 1,04 Source: Eurostat – Elaboration on Eurostat Sector accounts database Giovanna Dabbicco Paris 3-4 March 2014 Gross fixed capital formation 1,64 4,59 4,33 2,23 1,66 3,88 3,48 2,27 3,99 3,12 2,09 3,79 3,72 4,55 4,12 3,39 2,10 3,64 1,11 5,62 3,76 5,70 4,46 2,60 2,49 3,48 2,46 Consumption of fixed capital 1,72 1,47 4,19 1,91 1,71 1,96 1,61 2,77 1,92 2,69 1,98 0,73 3,20 2,48 1,82 3,29 2,14 2,78 1,24 1,73 2,26 2,38 2,10 2,65 2,15 2,29 1,06 Gross fixed capital formation 1,76 3,40 3,66 2,16 1,67 4,13 2,48 1,64 2,96 3,13 2,03 3,55 4,25 4,36 3,79 3,06 2,48 3,34 0,98 5,71 2,61 5,42 3,59 2,30 2,52 3,40 2,15 Consumption of fixed capital 1,76 1,53 4,16 1,92 1,73 2,06 1,48 3,23 1,98 2,73 2,00 0,72 2,52 2,40 1,92 3,33 2,14 2,83 1,24 1,73 2,37 2,21 2,60 2,23 2,33 1,09 Gross fixed capital formation 1,80 3,26 3,20 2,56 1,55 5,43 2,04 1,70 1,71 3,14 1,85 2,74 4,39 3,67 3,83 3,43 3,07 3,34 0,99 4,58 1,66 3,21 1,92 2,61 3,53 2,17

Management of accounts payable and receivable No systematic and comprehensive reporting under pure cash accounting Accruals better and more transparent approach to the use of resources in public management by policy-makers Practice of deferring payments without accounting invoices and/or using improperly trade credit instruments • i.e mis-measurement of the debt and deficit Adverse economic effects • • access to finance for SMEs potential for corrupt procurement practices assist to stimulate macroeconomic growth Two country-cases: • Italy cash data for investments, does not systematically report other accounts payable for investment (progress more recently) • Spain investments on accrual basis and report related other accounts payable (though other reporting difficulties have been found in the past) Eurostat is collecting and publishing data on stocks of trade credits and advances Giovanna Dabbicco Paris 3-4 March 2014

Contingent Liabilities Liabilities potentially arise from outstanding guarantees: issue for transparency of the exposures of governments which can impact their financial position • in Government balance sheet (as well off balance sheet) Accrual accounting requires to set up provisions (liability uncertain in timing or amount) and to record contingent liabilities Macroeconomic statistics do not recognize provisions and contingent liabilities, • Eurostat has started to collect data on contingent liabilities more systematically. Information in national accounts, but data collection complex and not complete. Accrual would help in building up on this issue. • particularly relevant for liability which uncertainty in timing or amount impacts the measure of debt, gross and net Giovanna Dabbicco Paris 3-4 March 2014

Open question During a period of economic crisis, is cash accounting more (not less) appreciated? • Solvency of governments at stake. • Borrowing from official lenders increases • Note approach in Europe to use combination of (fast) cash data together with accruals (statistical) data in 'programme' countries. Giovanna Dabbicco Paris 3-4 March 2014

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