Dutch Private Sector and Local Government Accounting Regulations: A Comparison
Bac, Aad D., Journal of Public Budgeting, Accounting & Financial Management
ABSTRACT. This paper addresses the Dutch Regulations on Government Accounting as far as local governments are concerned. These regulations have undergone several changes in the past. The actual set of regulations has been developed with the Dutch private-sector-accounting-legislation as a reference. In 1931, the first serious local government accounting regulations came into place. The transfer from modified cash accounting into accrual accounting in 1985 was an important reform and the continued adaptation of the regulations to private sector accounting in 1995 constituted the state of the art, which will be analyzed. This will be done by a comparison between private sector accounting legislation and local government accounting regulations and an explanation of the still existing differences. A next adaptation is expected in the near future. Comments will be placed in the light of the desirability of some further changes.
Dutch local-government-accounting regulation was introduced in 1931. Since then it has undergone a gradual development and it has now reached a high consistency with private sector accounting regulation. Financial reporting has to answer requirements as to the quality of information. Because the private sector and the public sector have important different characteristics, it is in the perspective of quality of information impossible that legislation for the private sector can be implied in the public sector without adaptation. Nevertheless harmonization is useful for users. So it can be stated: "Harmonize where possible but differentiate where necessary."
The aim of this paper is to give insight in the backgrounds as well as the essentials of the still existing differences between private sector accounting legislation and local government accounting regulations. This study begins in 1931 and follows developments in the municipal area because the municipal regulation is older than the provincial rules. Not until 1947 the provinces did get their accounting regulation and in 1995 one set of rules for municipalities and provinces was made up. In order to prevent confusion, this article will not enter into provincial issues until the common set of rules is at stake.
The first Dutch municipal accounting rules were promulgated in 1931, because the activities of municipalities had increased in diversity and in size during the preceding decades. Furthermore, there was a need for possibilities to aggregate the figures of individual municipalities, to totals per policy area for the whole of the municipalities of the Netherlands. This was important for estimations of the impact of the financial policy and management of all the Dutch municipalities on the Dutch economy. This total impact, together with that of the provinces and the national government, influenced the development of the Dutch national economy. The beginning of the 1930s marked a period of increasing attention of the macro-economic impact of government involvement in the national economy.
The preceding decade had shown local government involvement in non-core-business activities of a business-like type, like water distribution, and gas and electricity production and distribution. Other examples were port-management and marketplace-management. For these types of activities accounting systems comparable to those in business were allowed.
For the core activities of local government, a cash accounting system was introduced which intended to harmonize the accounting conduct of the community of Dutch municipalities. The cash accounting system of that period differentiated between a current account and a capital account. For investments accounted for in the capital account, specific loans were taken for exactly the amounts of the investments concerned. In this way the capital account balanced each year. The interest and redemption on loans was accounted for in the current account. …