Introducing Accruals – the Lessons from
Experience
Sandra Kaiser & Bernhard Schatz

14th OECD Annual Symposium - Paris, 3-...
Agenda
Design and concept
Strategic and operational obstacles
Challenges, lessons learned, results
Opening balance sheet
O...
Design and concept
Strategic and operational obstacles
Challenges, lessons learned, results
Austrian Federal
Budget Reform – Legal Basis
Budgetary Principles in the
Austrian Constitution

Efficiency
Focus on
Outcom...
Introduction

Austria undertook a comprehensive budget
reform
Key Elements:
• Medium Term Fiscal Framework
• Budget Struct...
Overview 1st and 2nd Stage
of the Budget Reform

 Budgetary discipline and planning:
binding MTEF & strategy report
 Fle...
Accrual budgeting &
accounting as of 2013
Amendment of the constitution:
New budgetary principles:
impact orientation, eff...
Accrual accounting
and budgeting

Operating Statement
(direct linkage with federal
cost accounting system)

Statement of
F...
Relevance of Accrual
Accounting and Budgeting
As cash provides important information (liquidity) on fiscal
situation:
Accr...
Merits of Accrual Budgeting
Enhances transparency of public finances
Reduces the scope for fiscal illusions
Helps to steer...
Strategic Obstacles
Improving Financial Information for Decision
Making
Medium Term Fiscal Planing needs accrual
accountin...
Annual Budget Statement as of
2013 per Global Budget
Global Budget xx.01 Operating Statement

Budget
n+1

Budget
n

Revenu...
Medium-Term
Expenditure Framework (MTEF)

Heading

n+1 n+2 n+3 n+4

1 General Government Affairs, Court and Security
2 Emp...
Medium Term Fiscal Planning
If you want to plan cash flows for multiannual periods you need an
instrument to monitor defer...
Performance Budgeting

Quality of performance targets depends on underlying
information quality -> resource management
Exa...
Gaining Know How
Fostering the transition between public and private sector
employees
Making public accounts accessible fo...
Strategic approach in reform
development and
implementation I
Intensive study of other countries‘ reform experience: Learn...
Strategic approach in reform
development and
implementation II
Ministry of Finance (MOF) as reform driver and standard set...
Challenges of Accrual
Budgeting
Commitment of political and senior administrative level is key
Skills of stakeholders need...
Challenges of project
management and
implementation
Standard setting:
• by Ministry of Finance, Court of Audit and Federal...
Implementation of the
Austrian Budget Reform
2004

2005

2006

2007

2008

2009

2010

2011

2012

Federal Budget law
2013...
Improving Decision Making
Enhance discussion at point of decision making (going
beyond reports)
• Budgetary discussion in ...
Result-Oriented Management of
Administrative Units
Administrative units are accountable for resources as well
as for outpu...
Operative Obstacles
Operative Obstacles
Be pragmatic
• 80% solutions  improve
• Get a starting point
• Don’t be afraid of reversing solutions...
Being pragmatic
Important task to compile opening balance sheet  starting
point
Define thresholds or broad brush methods
...
Irreversibility
Implement on the highest legal level possible
(constitution, special laws)
Change peoples expectations and...
Importance of stakeholders
Parliament shouldn’t just discuss reports, they should
have to recognize all the information av...
Opening Balance Sheet
Financial Position of the Federal Government of Austria
as of 1.1.2013
Accounting system: 1986 – 2012
Cash budget (with some accrual modifications)
Incomplete accrual accounting system
• No app...
General remarks
The Financial statements shall provide a fair and true view of the
financial position, financial performan...
Opening Balance Sheet
structure

Assets

Liabilities
Net Assets

Non-current assets

Non-current liabilities

Current asse...
Reporting entities in the federal
accounting system
Federal accrual system is obligatory for Federal Level:
• Ministry of ...
Accouting principles I
True and fair view of
financial position
Principle of no
offsetting

Adjusting events

Economic per...
Accounting principles II
True and fair view of financial position
•

Without intentional overevaluation or underevalution
...
The scope/coverage
The goal is to fully report federal assets and liabilities while avoiding
major administrative expenses...
Applied accounting and valuation
methods - assets
Balance sheet item

Method (s)

Property, plant and equipment and
intang...
Applied accounting and valuation
methods - liabilities
Balance sheet item

Method (s)

Payables

Repayment amounts

Provis...
Opening Balance Sheet 1.1.2013
ASSETS
A Non-current assets
A.I Intangible assets
A.II Property, plant and equipment
A.III ...
Pragmatic approach
Multitude of valuation methods (tangible assets)
e.g. historical buildigings, land improvements

Simpli...
Asset valuation - Land
improvements
Asset value: ≈ € 1bn
Roads, railways, airports and port facilities
depreciated cost, o...
Measurement of historical
buildings
Asset value: ≈ € 3.6 bn
no cost figures available, value can not be determined on mark...
Historical Buildings
Reported as heritage assets

Burgtheater € 98.10m

Schönbrunn Palace € 285.7m

Historical Parliament ...
Asset valuation associated entities
(equity investments)
Asset value € 25,2bn
Measurement on the Federal Governments propo...
Pensions

Liablities for pensions displayed in an annex and in fiscal
sustainability report – not as a provision in the fi...
Opening Balance Sheet
Asset valuation - difficulties
Austrian specific problems with complex legal structure
(e.g. streets...
Opening balance sheet –
lessons learned …
spring clean – „aha-experience“
e.g. asset valuation, equity investments
stock t...
Conclusion

Negative value for net assets shows that federal liabilities are significantly
greater than federal assets.
Th...
Future Financial statements

Court of Audit
Very detailed annex
Main additions to opening Balance Sheet:
• Including 2nd L...
Outlook
Next steps –
coherent accounting rules in all government sub-sectors
Federal states and
municipalities - under compulsion
EU (Six Pack, Fiscal Framework Directive, EPSAS)
The perceptions with...
Thank you for your attention!
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OECD Public Sector Accruals Symposium - Sandra Kaiser and Bernhard Schatz

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This presentation by Sandra Kaiser and Bernhard Schatz 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

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OECD Public Sector Accruals Symposium - Sandra Kaiser and Bernhard Schatz

  1. 1. Introducing Accruals – the Lessons from Experience Sandra Kaiser & Bernhard Schatz 14th OECD Annual Symposium - Paris, 3-4 March 2014
  2. 2. Agenda Design and concept Strategic and operational obstacles Challenges, lessons learned, results Opening balance sheet Outlook 2
  3. 3. Design and concept Strategic and operational obstacles Challenges, lessons learned, results
  4. 4. Austrian Federal Budget Reform – Legal Basis Budgetary Principles in the Austrian Constitution Efficiency Focus on Outcomes Transparency True and fair view 4
  5. 5. Introduction Austria undertook a comprehensive budget reform Key Elements: • Medium Term Fiscal Framework • Budget Structure • Performance Budgeting (as of 2013) • Accrual Accounting and Budgeting (as of 2013 in alignment to IPSAS) 5
  6. 6. Overview 1st and 2nd Stage of the Budget Reform  Budgetary discipline and planning: binding MTEF & strategy report  Flexibility for line ministries through full carry-forward possibilities without dedicate it Result-oriented management of budget managing bodies Performance Budgeting incl. Gender Equality New budget structure: „lump-sum budgets“ Accrual budgeting and accounting 6
  7. 7. Accrual budgeting & accounting as of 2013 Amendment of the constitution: New budgetary principles: impact orientation, efficiency, transparency, true and fair view Integration of accruals in a general framework of financial management New Balance of Managerial Flexibility and Accountability Improved Management of finances and performance by integrated approach New budget structure: „lump-sum budgets“ MTEF, fiscal rules and sustainability reports Accrual budgeting and accounting Result-oriented management of state bodies Performance Budgeting, Controlling and Reporting 7
  8. 8. Accrual accounting and budgeting Operating Statement (direct linkage with federal cost accounting system) Statement of Financial Position Cash Flow Statement (Balance Sheet) 8
  9. 9. Relevance of Accrual Accounting and Budgeting As cash provides important information (liquidity) on fiscal situation: Accruals do NOT detract cash. But provide ADDITIONAL perspectives: Use of resources (operating statement): Part of the annual budget and subject to parliamentary budget decision Parliament votes on two perspectives: cash + operating statement – Accrual Budgeting makes accruals relevant! Comparison of assets and liabilities (annual balance sheet): Submitted to Parliament by Court of Audit. 9
  10. 10. Merits of Accrual Budgeting Enhances transparency of public finances Reduces the scope for fiscal illusions Helps to steer public finances according to fiscal reality Makes it harder for stakeholders to ignore future budget challenges Can enhance accountability of decision-makers 10
  11. 11. Strategic Obstacles Improving Financial Information for Decision Making Medium Term Fiscal Planing needs accrual accounting Performance budgeting needs cost accounting Gaining Know How on accrual accounting within public administration 11
  12. 12. Annual Budget Statement as of 2013 per Global Budget Global Budget xx.01 Operating Statement Budget n+1 Budget n Revenues from operating activities and transfers Revenues from financing activities Revenues Personnel expenses Operating expenses Transfer expenses Expenses on financial activities Expenses …thereof variable expenses Net balance Legally binding Global Budget xx.01 Cash Flow Statement Actual n-1 l Budget n+1 Budget n Actual n-1 Receipts from operating activities and transfers Receipts from investment activities Receipts from repayments of loans Receipts Personnel and operating expenditures Expenditures from transfers Expenditures from investment activities Expenditures from loans Expenditures …thereof variable expenditures Net cash balance Comment: On global budget level, total expenses (operating statement) and total expenditures (cash flow statement) are legally binding. 12
  13. 13. Medium-Term Expenditure Framework (MTEF) Heading n+1 n+2 n+3 n+4 1 General Government Affairs, Court and Security 2 Employment, Social Services, Health and Family 3 Education, Research, Art & Culture 4 Economic Affairs, Infrastructure and Environment 5 Financial Management and Interest  Budgetary discipline and planning: binding MTEF & strategy report which explains the ceilings of the MTEF but not individual appropriations. 13
  14. 14. Medium Term Fiscal Planning If you want to plan cash flows for multiannual periods you need an instrument to monitor deferrals  Accrual Accounting Medium Term Fiscal consolidation needs cut of structural cost  Accrual Accounting Enhancing Resource Responsibility needs management information  Accrual Accounting 14
  15. 15. Performance Budgeting Quality of performance targets depends on underlying information quality -> resource management Example: • Ministry of Transport: • Outcome objective: Enhancing traffic security • Operative objective: 650 technical on road assessments • Activities: providing staff and technical assement trucks 15
  16. 16. Gaining Know How Fostering the transition between public and private sector employees Making public accounts accessible for broad academia, auditors and other stakeholders Know How results in confidence 16
  17. 17. Strategic approach in reform development and implementation I Intensive study of other countries‘ reform experience: Learning about do‘s and dont‘s, intercultural aspect to be considered Making the reform process irreversible: Key elements in constitutional amendments, detailed legislation at a later stage Reform design and implementation through own staff: Keeping external consultancies to a minimum, building and strengthening internal know-how Pragmatic reform design: Reducing complexity, less is more, no 100% perfectionist approach Ensuring a pilot phase for sufficient testing 17
  18. 18. Strategic approach in reform development and implementation II Ministry of Finance (MOF) as reform driver and standard setter Winning interest and support on political level Getting key players on board: • Politics and Parliament: • “Advisory Council Budget Reform” with representatives of all political parties, regular meetings and discussions with MOF • Keeping the reform out of political controversy • Court of Audit: Shared interest with MOF as “friends of the tax payer”, • Federal Chancellery: Responsible for coordination, controlling and evaluation of performance, while MOF coordinates the resources • Line Ministries: Continuous involvement, training phase for preparation of the new “budget world” 18
  19. 19. Challenges of Accrual Budgeting Commitment of political and senior administrative level is key Skills of stakeholders need to be enhanced (civil servants; politicians; media; interested public) → Extensive training required Complexity threatens transparency → Relevance and accurateness need to be balanced → Less can be more Standardization → Which standards? → Consideration of public specifics → Who is legitimized to set standards? IT-support: crucial to very closely link technical and IT-issues in order to assure that the new system works adequately 19
  20. 20. Challenges of project management and implementation Standard setting: • by Ministry of Finance, Court of Audit and Federal Chancellery • Information of Parliament Budget transition: • Cash-related budget elements are based on previous budget model • Completed by non-cash elements (depreciation, provisions) • Technical process of adjustment between MOF and line ministries Opening balance sheet: • Use of information of „old accounting system“ • Data gathering for new elements started 2010, „old“ data updated New accounting system: • IT-system is crucial • Tests and concurrent operation in 2011 and 2012 20
  21. 21. Implementation of the Austrian Budget Reform 2004 2005 2006 2007 2008 2009 2010 2011 2012 Federal Budget law 2013 Screening of international Benchmarks IT Testing phase of both systems (accrual and cash) Federal Budget Law 2013 inkl. Budgetary Framework Trainings and Education of Employees Implementation of IT Changes/System Accounting and Asset Management Decrets Opening Balance Sheet Decret System of Accounts Decret Preparation: 5 years Implementation: 4 years Total Reform: 9 years (2004-2012) 21 2013
  22. 22. Improving Decision Making Enhance discussion at point of decision making (going beyond reports) • Budgetary discussion in parliament is about performance targets, accrual figures and cash figures (both have legally binding appropriations) • Every project which needs approval of the MOF is assessed for its performance relevance (financial, SME, environment, economy, gender, administrative burden, social and youth impact) 22
  23. 23. Result-Oriented Management of Administrative Units Administrative units are accountable for resources as well as for outputs and outcomes  improved integration of financial and performance management Administrative units must be granted necessary budgetary flexibility and decision-making competences Incentives for public managers for an efficient use of resources: Possibility for building-up of reserves, end-of-the-year flexibility, autonomous decision-making within certain ceilings/limits Multi-annual performance contracts on resources and output/outcome objectives 23
  24. 24. Operative Obstacles
  25. 25. Operative Obstacles Be pragmatic • 80% solutions  improve • Get a starting point • Don’t be afraid of reversing solutions Make it irreversible • Part of public documentation (budget!) • Make it accessible (close to common standards) • Get unanimous consent Train all stakeholders • • • • Public Administration Parliament Media Citizens 25
  26. 26. Being pragmatic Important task to compile opening balance sheet  starting point Define thresholds or broad brush methods Design processes to improve (dialectic elements, e.g. court of auditors) 26
  27. 27. Irreversibility Implement on the highest legal level possible (constitution, special laws) Change peoples expectations and minds Mandatory set of minimum standards Educate public administration (bottom up) 27
  28. 28. Importance of stakeholders Parliament shouldn’t just discuss reports, they should have to recognize all the information available at the approval vote Media should have full information to provide citizens with full picture on financial position Informed public should be able to engage in discussions about possible discussions 28
  29. 29. Opening Balance Sheet Financial Position of the Federal Government of Austria as of 1.1.2013
  30. 30. Accounting system: 1986 – 2012 Cash budget (with some accrual modifications) Incomplete accrual accounting system • No appropriate valuation rules • No management impact • IT-infrastructure in place • Some practical experience of staff with accruals Cost accounting • Implementation in central units of the ministries from 2000 – 2005 • No steering function 30
  31. 31. General remarks The Financial statements shall provide a fair and true view of the financial position, financial performance and cash flows of an entity (IPSAS 1). This requires information on assets and liabilities in addition to information on cash flows and financial resources. Sustained positive growth in public finances requires the utmost clarity about the financial consequences of decisions. Opening Balance Sheet: first financial position with full transparent presentation of federal assets and liabilities. Reference standard: IPSAS (International Public Sector Accounting Standards) 31
  32. 32. Opening Balance Sheet structure Assets Liabilities Net Assets Non-current assets Non-current liabilities Current assets Current liabilities Total = Total 32
  33. 33. Reporting entities in the federal accounting system Federal accrual system is obligatory for Federal Level: • Ministry of Finance • All line ministries • All federal agencies  Standard setting by MOF and Court of Audit Separate reporting: • Regional level (9 provinces/states) • Local level (> 2300 municipalities) • Off-budget corporatisations Efforts to develop an aligned framework for regional and local level 33
  34. 34. Accouting principles I True and fair view of financial position Principle of no offsetting Adjusting events Economic perspective Opening Balance Sheet Materiality Reliability 34
  35. 35. Accounting principles II True and fair view of financial position • Without intentional overevaluation or underevalution Economic perspective • Economic ownership of assets vs. legal form (federal assets were included in the opening balance sheet if the federal government is the economic owner - entity, that controls, in particular possesses and uses the asset, has the power to dispose and bears the risk of loss and destruction) Materiality • Recognition and measurement was performed based on materiality. It depends on size and type of the items Reliability • The opening balance sheet was prepared using reliable information. The accounting procedure of the opening balance sheet is based on the standard federal chart of accounts. Accounting policies were applied in a reasonable, verifiable and neutral manner. Adjusting events (events after reporting date) • Were taken into account, when became known between 1 January 2013 and the date on which preparation of the opening statement of financial position was completed. Principle of no offsetting/gross presentation • Each asset and liability was measured individually 35
  36. 36. The scope/coverage The goal is to fully report federal assets and liabilities while avoiding major administrative expenses as far as possible: The “Austrian Opening Balance Sheet Regulation” provides a number of exceptions and simplifications to reduce administrative burden without reducing the quality of the information it contains. Flat-rate and comparative parameters were used Measurement alternatives were permitted (if this was the only way to perform reliable measurement) Use of external experts was avoided, due to building up measurement expertise within the administration. No full consolidation Off balance sheet commitments (employee benefits) – see separate slide 36
  37. 37. Applied accounting and valuation methods - assets Balance sheet item Method (s) Property, plant and equipment and intangible assets Depreciated or amortised cost Land Acquistion cost, appraisal reports, land raster method Land improvements Depreciated cost, specified reference values or average values Buildings Depreciated cost, appraisal cost, average cost of buildings with similar function, etc Cultural assets Cost, appraisal reports, fair value Securities and other financial assets Nominal value Equity investements Federal Government‘s proporionate share of the estimated net assets Receivables Nominal amount, non current: present value Financial instruments Nominal value, derivates: fair value Inventories Cost, first-in-first-out principle Cash and cash equivalents Nominal value 37 37
  38. 38. Applied accounting and valuation methods - liabilities Balance sheet item Method (s) Payables Repayment amounts Provisions Current: anticipated payment amount Non current: present value Severance payments and anniversary bonuses: projected unit credit method Financial liabilities and currency swaps Nominal value Currency swaps (receivable and payable): nominal value and repayment amount 38
  39. 39. Opening Balance Sheet 1.1.2013 ASSETS A Non-current assets A.I Intangible assets A.II Property, plant and equipment A.III Securities and other investments A.IV Equity investments A.V Long-term receivables B Current assets B.I Short-term financial assets B.II Short-term receivables B.III Inventories B.IV Cash and cash equivalents Total assets in EUR 76,102,292,902.39 368,174,458.38 39,588,678,261.93 3,824,000,000.00 25,189,128,452.17 7,132,311,729.91 13,406,897,790.94 0.00 8,499,492,321.12 698,836,278.74 4,208,569,191.08 89,509,190,693.33 NET ASSETS AND LIABILITIES in EUR C Net assets (balancing item) -133,873,299,331.09 D Non-current liabilities D.I Long-term financial liabilities, net D.II Long-term payables D.III Long-term provisions E Current liabilities 187,219,596,890.75 169,702,071,074.72 14,004,805,522.87 3,512,720,293.16 36,162,893,133.67 E.I Short-term financial liabilities, net 19,848,526,578.95 E.II Short-term payables 15,931,759,970.13 E.III Short-term provisions Total net assets and liabilities 382,606,584.59 89,509,190,693.33 39
  40. 40. Pragmatic approach Multitude of valuation methods (tangible assets) e.g. historical buildigings, land improvements Simplified method (“Land raster method”) Basis: land register, categorisation derived from land register (forest, agricultural use, building area), price of square meter out of tax agency data of land sale, deductions for limited use (e.g. bodies of water, alpine land, military land) At equity Thresholds for valuation concerning assets, inventories, receivables, provisions creation of groups • for provisions (for litigation expenses) • for adjustments of receivables (taxes, custom duties, advance of child support) 40
  41. 41. Asset valuation - Land improvements Asset value: ≈ € 1bn Roads, railways, airports and port facilities depreciated cost, or based on specified reference values or average values Linear depreciation based on the usable lives specified in a decree by the Austrian Federal Ministry of Finance: − Paved: − Unpaved: useful life 33 years useful life 10 years Example of a cobblestone road Measurement: Values were calculated as average prices based on a variety of relevant sources. Classification of condition as good (A), medium (B) or poor (C). 41
  42. 42. Measurement of historical buildings Asset value: ≈ € 3.6 bn no cost figures available, value can not be determined on market price due to the lack of an active market special measurement method: • average costs of comparable buildings • categorization of use as well as condition of building (good, medium, poor) • resulting net book values were calculated based on remaining useful lives 42
  43. 43. Historical Buildings Reported as heritage assets Burgtheater € 98.10m Schönbrunn Palace € 285.7m Historical Parliament Building ramp area € 33.89m Vienna State Opera € 102.8m 43
  44. 44. Asset valuation associated entities (equity investments) Asset value € 25,2bn Measurement on the Federal Governments proportionate share of the estimated net assets (@ equity) – based on financial statements of each subsidiary. Categorization according to IPSAS (affiliates, associates, other equity investments) If significant influence or control can be exercised over a company or a institution, it is reported as an equity investment, regardless of the legal relationship. Universities are included No FULL CONSOLIDATION 44
  45. 45. Pensions Liablities for pensions displayed in an annex and in fiscal sustainability report – not as a provision in the financial statement 2013: € 6.1bn EUR (net – not covered by contributions) 30- year projection of pension liability (2013-2042) : € 342.2bn (net – not covered by contributions) 45
  46. 46. Opening Balance Sheet Asset valuation - difficulties Austrian specific problems with complex legal structure (e.g. streets are owned by state, but leased unpaid to agency without restriction) Tension of true and fair view and pragmatic approach Discussion about value added of balance sheet it is not envisaged, that • assets are being sold • assets have a cultural value • state is not an enterprise Standard setting and data gathering involve costs 46
  47. 47. Opening balance sheet – lessons learned … spring clean – „aha-experience“ e.g. asset valuation, equity investments stock taking consistent and homogeneous asset management developing awareness of assets depreciation of property shows upcoming investments set-up of know-how in the Federal Administration 47
  48. 48. Conclusion Negative value for net assets shows that federal liabilities are significantly greater than federal assets. The significance of this item lies more in the changes over time than its value at this date. Transparent information on assets and liabilities that help to induce efforts to achieve sustainable public finances. 48
  49. 49. Future Financial statements Court of Audit Very detailed annex Main additions to opening Balance Sheet: • Including 2nd Level of Subsidaries in the annex • Leasing: operating leasing – future payments 49
  50. 50. Outlook Next steps – coherent accounting rules in all government sub-sectors
  51. 51. Federal states and municipalities - under compulsion EU (Six Pack, Fiscal Framework Directive, EPSAS) The perceptions with the “Salzburg case” underscore the urgent need for action due to the following deficiencies: • • • • • lack of informative value and transparency lack of completeness lack of comparability no sufficient governance differing mid-term budgetary planning Budgeting and Accounts Regulation (VRV new!) 51
  52. 52. Thank you for your attention!
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