Magazine article CMA - the Management Accounting Magazine

Does Fixed Assets Accounting Make Sense in the Public Sector?

Magazine article CMA - the Management Accounting Magazine

Does Fixed Assets Accounting Make Sense in the Public Sector?

Article excerpt

There are a number of arguments, for and against. But support for a change is gaining ground.

When fixed or capital assets, such as land, buildings and equipment, are acquired by governments, they are generally not set up as "assets" on government balance sheets - instead they are recorded as expenditures. This has been consistent with the traditional cash accounting and parliamentary funding systems of government.

In recent years, there has been a gradual move to accrual accounting in the public sector such that many government financial statements are now prepared on either a modified cash or modified accrual basis; the categorization depending on how far along one is on the path from cash to full accrual accounting. In most jurisdictions this simply means that, as well as payments, expenditures are also recognized for goods and services received but not yet paid for at year-end. In some jurisdictions, it also means recognizing various financial assets and liabilities at year-end, such as accounts receivable and employee pensions.

The remaining major difference with private sector accounting in virtually all state/provincial and national governments - with the notable exception of New Zealand - is the treatment of long-life assets that are not for resale, or what I will describe for the purpose of this column as fixed assets. There has been much debate on this issue - primarily between those who feel that fixed assets accounting would be more businesslike, and those who feel that parliamentary and fiscal control is more effective on an expenditure than an expense basis. In the balance of this column I will summarize some of the principal arguments of both sides.

The most important argument of those supporting the status quo is that the parliamentary control and debt management process is best maintained on the basis of current and anticipated money flows. They fear that, if non-financial assets were introduced into the process, it would cause confusion. This fear is particularly pronounced in light of the severe annual deficits and debts of most governments. For example, if the amount currently spent on the acquisition of long-life, non-financial items became an asset rather than an expenditure, the financial picture would look brighter as the annual deficit - the difference between annual expenditures and revenues - would be correspondingly smaller. But this would just be an illusion as the money requirements of the governments would not have changed one iota; borrowing needs would be exactly the same.

Their other argument is that government is not engaged in a commercial operation. Therefore, its fixed assets are not acquired today in order to contribute to the earnings of a number of future periods. …

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