Basilio Ribeiro de
Carvalho Soares, S.Sos, M.Acc
The Accounting
Standard has been widely used in several countries in the world. Each country
certainly has its own accounting Standard that is regulated by its own
Accounting Standard Board. In general, there are two accounting methods which
are used by either public sectors or private sectors to report the income and
expenses in their cash books. These two accounting methods are called as Cash
Basis and the Accrual Basis. This article will focus on the accounting practice
in the Timor-Leste’s public sector.
The Accounting Cash Basis Method is defined as a method that recognizes revenues and expenses at the time when the cash is actually received or paid out (Investopedia 2015). For instance, the Government of Timor-Leste, has a plan to establish the grand project in Oecusse which is called Autoridade da Região Administrativa Especial de Oe-cusse Ambeno (ARAEOA), a pilot social market economic model, led by Dr. Mari Alkatiri, to accelerate inclusive economic development in Oe-cusse (MoF Media Release 2015). The budget for this project has been approved in the 2015 General State Budget and the plan has been designed and the project will be started in these following months ahead within 2015. Under the cash basis, after approving the budget the expenditures for this project shall not be immediately recognized as expenses until the payment is made out by the government to the ARAEOA. However, let says for instance, if the accrual basis is adopted, after approving the budget, the expenditures for the ARAEOA project will be recognized as liabilities in the government’s balance sheet.
Unlike the Cash – based accounting system, accrual accounting requires income to be recognized in the cash book at the time when the revenue is earned or recognized but not physically received, and record the expenditures when liabilities are incurred but not paid out.
The issue is which accounting method is best suited to the public sector in Timor-Leste? Should it be Cash basis or Accrual Basis?
The full cash basis has been traditionally used by the public sector in many countries to record their cash book but over these last decades there has been a discussion whether those countries that have used the full cash basis have to transform to the Accrual Basis and whether the transformation to the Accrual Basis will give any benefit or not.
Furthermore, there is an ongoing trend to shift from the cash basis into the accrual basis in the public sector in many countries. It is no doubt that the accrual-based accounting method provides more comprehensive financial information compared to the Cash Basis for the decision making in the financial sector. For instance, both Australia and New Zealand governments have declared that they had adopted the Accrual Accounting system more comprehensively than others. In general, an accrual system is seen as a way of increasing budget transparency, especially in terms of its ability to account for long-term assets and liabilities, and also as a tool for increasing government efficiency through performance-based management (Champoux 2006).
The government of Timor-Leste is currently adopting the International Public Sector Accounting Standard (IPSAS) Full Cash Basis. However, there will be a potential concern in the future that there is a possibility to move the accounting practice in the public sector from the cash basis to the accrual basis method. Why this concern may probably occur?
The National Parliament has approved the loan from the external lenders such as World Bank, JICA and ADB. When the loan is incurred, there is a confusion whether the event when the transaction is made or the loan is incurred shall be recorded under the Accrual Basis or shall it be kept recorded under the Cash Basis. Theoretically, under the Cash-based accounting, the revenue is recorded when the cash is physically received. However, when the loan is incurred, and in fact the loan has been incurred, shall be recognized as the liabilities of the government, and thus this event shall not be recognized under Cash – based financial report. Under Cash based method, a great disadvantage is that it does not recognize assets, debtors and liabilities (Ibanichuka & James 2014). James and Ibanichuka also emphasizes that the other limitations according to IFAC (2002) on cash basis of accounting is in the absence of full and complete information about the liabilities, contingencies and commitments, government and other users of government financial report cannot make realistic assessments about government’s financial position. As a consequence, the government will not be able to effectively assess both the impact of past decisions on future financial position. Cash basis of accounting is also observed to be the commonly used in the public sector which has some limitations and setbacks that affects financial transactions such as poor budget implementation, mismanagement of public fund etc (Ibanichuka & James 2014). Thus, the liabilities in any forms shall be recognized under Accrual based method.
Is the Accounting in public sector in Timor-Leste ready to be transformed to the Accrual basis?. Adriana Turon and Alexandra Mutiu, Associate Professors from University Babes Bolyai Romania, asserts that “According to the Accrual Based Method the emphasis is on efficiency, so it is recommended that the public sector should introduce the set of financial statements applied in the private sector, which is made according to accrual accounting.” (Tudor & Mutiu).
Another question that needs to be examined is whether the Timor-Leste government’s budget execution under Cash based method, over these last three years, had been executed efficiently.
Efficiency is defined as a level of performance which describes how far an institution is expected to increase its output and to achieve the expected outcomes without absorbing further resources. For instance, a machine, at a given cost, will be considered as efficient, if it can produce a large amount of quantity of outputs compared to other equipment. The budget execution of the government of Timor-Leste for the fiscal year 2011, 2012 and 2013 respectively have shown that the amount of the expenditures incurred are greater than the revenues (non-oil revenues) received during for the each fiscal year (Annual Audited Financial Report Ministry of Finance 2011, 2012, and 2013). This indication eventually leads this nation to the shortage of the fund every year. However, this shortage of the fund is covered by the Petroleum Fund so that this deficiency of the budget execution can be resolved.
The government has to be more efficient in executing its budget before moving to the accrual based method which is quite comprehensive and the complexity is quite significant. As a fact, over the last past few years the budget approved could not be efficiently executed. The emphasis of Inefficiency here is the budget approved that could not be fully executed had been carried over to the subsequent financial years and also, the outcomes of the budget execution does not significantly affect to the people’s life. For instance, in 2014, in order to boost the Timorese Tourism sector to the world, the government through Ministry of Tourism ran a program called Miss Tourism. This program was not included in the Ministry’s plan and the fund for this project was not prepared within their budget, but the Ministry suddenly, in the middle of the fiscal year, initiated to run this program. Consequently, the Ministry had to use the fund from another program that had been included in their working plan. If the budget was executed properly according to their working plan, the efficiency of the budget execution would be in place and thus this would benefit to the people.
If under cash based method the government’s expenditure is not efficiently executed, then the question is how the government will enhance its efficiency in budget execution under accrual based method which has a complexity. Accrual based can be implemented when the efficiency of budget spending and the fiscal discipline under full cash basis are in place. Therefore, the efficiency of the state expenditure needs to be fixed and the government needs to improve its current cash based accounting system.
Furthermore, the government of Timor-Leste has to initiate in setting up its own National Accounting Board. The function of this board is to set up its own National Accounting Standard that complies with the international Accounting Standard for both Public and private sectors. It is true that the uniform reporting standards will lead to the decrease of cost of capital because internationally accepted standards will expand the base of global funding without the penalty of additional reporting costs. In 1971, the members of accounting profession realized that it is important to create International Accounting Standard to response the global corporation and market needs (Sawani). Furthermore, Sawani in her findings stated that although the implementation of International Accounting Standard is significant, there are several challenging factors that influence to implement the IAS in a country, for instance, Social and Cultural values; political and legal systems, business activities and economic condition, capital market and form of ownership (Sawani).
In terms of economic condition as described by Sawani is the structure of capital markets. There are several studies that have been made regarding the effect of capital markets on accounting standards. Capital formation through public financing, private investment or foreign private investment are necessary ingredients for economic development. All the relevant financial information to motivate private investment or validate public financing relies on accounting data. Accounting data is pivotal in creating a level of confidence for working capital market structure. Thus the structure of capital markets influences the nature of accounting standards in different countries. For example in Germany, most of the financing for capital markets came from creditors, mainly banks, this is reflected in accounting goals. The main purpose of financial reporting in Germany is protection of creditors and capital maintenance. However, in the U.S., where the capital market is equity based, the main purpose of financial reporting is the protection of investors. The dominance of equity financing in the U.S. created an accounting structure concerned with fair presentation and full disclosure but in Germany, accounting is concerned with calculating distributable income, i.e., making sure creditors get their payment (Sawani).
It is important to consider that in the absence of the National Accounting Standard Board and the National Accounting Standard, who will be in the position to regulate and to oversee both public and private sectors in implementing the International Accounting Standard in the country. It is obvious that the International Accounting standards are oriented to serve the needs of investors and capital markets (Ibanichuka & James 2014) which contradicts to the Timor-Leste’s context. The Strategic Development Plan, designed by the government, is oriented to serve the people’s interest and to increase the national economic growth rather than the investors’ need. The National Accounting Standard Board mission will assist to develop and promote high quality accounting and financial reporting standards that are consistent with international best practice for the benefit of users, preparers, auditors and the public in Timor-Leste.
Another point that has to be examined is that it is also essentially important to change the mindset of the politicians who are recognized as the main stakeholders for the Accounting in Public sector. These stakeholders seemed not concerning the profitability and the financial position of the government but they seemed to be much concerned with the budget implementation.
To sum up, the government is not in the position ready yet to adopt the accrual basis as this country still has inadequate resources, expertise, poor infrastructure as well as the poor system. The government needs to improve its existing cash basis accounting and to gradually adopt the accrual basis that complies with the IPSAS accrual basis. Furthermore, as an initial phase that needs to take into the consideration is that the government shall improve the function of cash accounting so that the major weaknesses such as inefficiency of budget expenditure can be gradually tackled out. The next step would be the establishment of the Timor-Leste Accounting Standard Board where the main function of this board is to oversee and to assist both Private and Public Sectors on how to prepare the Financial Report that complies with the International Financial Reporting Standard (IFRS). The last stage after the board is in place as well as the budget executed efficiently, would be the implementation of the accrual system on a gradually basis and the initial adoption should be in a simple form as the government has already incurred the loan from external institution.
