Resource Management in Education and Public Sector - Assignment Example

Running Head: RESOURCE MANAGEMENT IN EDUCATION AND PUBLIC SECTOR Resource Management in Education and Public Sector a) What are the differences between ‘full accrual’, ‘modified accrual’ and ‘cash budget’? There are fundamental differences between full accrual and modified accrual as bases of accounting. These differences in applying the accrual concept in the financial practices of public sector organisations are seen in the way the objectives of the accounting measurements are treated as well as the general accounting environment. Differences between the two systems are seen in the way different aspects are treated under them. These are outlined as follows. To begin with, the essence of accrual accounting is to record all the transactions in an enterprise which have a financial effect on the organisation in the periods in which they occur as opposed to the periods in which there is transfer of cash, as is the case in the cash budget (Thai, 1992, p. 268). This is in contrast to modified accrual which refers to a modified system of accounting that has been adapted for practical and appropriate implementations of the accrual concept in public sector financial management practices. The modified accrual system, which is a combination of both cash and accrual accounting bases, is in common use in all governmental funds accounting as well as reporting under the Generally Acceptable Accounting Procedures (Thai, 1992, p. 257). Another difference between the two accounting systems is seen in the way accounts payables are treated in the accounting books. Under the modified accrual system, such transactions are identified in the financial year in which they occur. This means that in a case where a government organisation is not under an applicable modification, accounts payables are recognized in the books of accounts in the same year that the organisation incurs them as a liability. This is in contrast with what the case is under a full accrual system. In such a case, an organisation’s items regarded as accounts payable are recognized and recorded in the accounting books in the financial year in which the organisation incurs them as a liability. This means that whereas there is the allowance of applicable modification in the treatment of accounts payable under modified the accrual accounting system, the full accrual accounting system does not provide for such modifications. Another difference between the two systems is demonstrated in the way prepaid items are treated in the accounting records. When full accrual is used, prepaid items in the financial records are treated using the consumption method (Ruppel, 2009, p. 28). This means that items are recognized in the financial records the moment items are purchased, used or consumed by the organisation. This is different from what happens under the modified accrual system. Under the latter method, prepaid items are treated in two optional ways: using the consumption method or using the purchases method (United States Government Accountability Office, 2006, p. 14). In general, treating expenditures and prepaid items using the purchases method involves recognizing inventories and prepaid items as expenditures when they are purchased rather than being capitalized as assets. In general practice, the consumption method, in which inventories and prepaid items are recognized as assets and the recognition of the expenditure deferred until the period of consumption, is what is officially used in the public sector accounting. Another distinction between the two bases arises in the way long-term liabilities, both in the current and non-current portion of the balance sheets, are treated. Under the modified accrual system, the liability is recognized in the accounting books as it matures or to the extent that the liability is expected to be liquidated with available financial resources that are expendable (Khan & Mayes, 2009, p. 9). This is in contrast with what happens under the full accrual accounting system in which the long-term liability is recognised in the year in which the organisation incurs it. This is applicable for long-term liabilities which fall under the category of being non-current. Another difference between the two bases is evident in the way expenditures are treated. The full accrual system provides that fund expenditures by government organisations be recognized in the year in which the organisation incurs the liability. Notably, some times there may be need to make adjustments so as to ensure that the matching principle is followed in the accounting books. For modified accrual, expenditures are recognised in the financial year in which the actual expenditure occurs or when they are subject to accrual (Khan & Mayes, 2009, p. 10). This is so in the absence of applicable modifications. Also, under the modified accrual system of accounting, accruals are recognized in the accounting books when it is expected that they will use financial resources in the future (Ruppel, 2009, p. 30). This is related to the treatment accorded to purchases of assets under the two systems. When accounting is done on a cash basis, the full costs of purchasing capital assets is recorded in the books so as to provide the management with an opportunity to make decisions when the cost of purchasing the assets can be controlled. However, when the accrual accounting system is used, capital assets are recorded first on the balance sheet. The last difference between the two bases is seen in the way revenue is treated in the accounting books of government organisations under the two systems. Whereas the modified accrual provides that governmental funds recognise revenue as cash is received during or as soon as after the end of the year, full accrual provides that revenue is recorded in the financial year in which it is earned, regardless of the availability. Additionally, the modified accrual systems require that revenue earned is recognised when it is both measurable and available to the organisation. b) Explain the issue that the adoption of accrual reporting will enhance transparency The issue that adoption of accrual reporting will enhance transparency in the public sector is based on the fundamental differences between accrual and cash systems of accounting. Fundamentally, the difference between the two systems arises from the basis of accounting, which is the rule that provides instructions on when to recognize the effects of a transaction in the books of an organisation (Ruppel, 2009, p. 24). Whereas recognition occurs with the exchange of assets and liabilities under the accrual system, the cash system is based on recording expenses and receipts only when cash transactions are involved. As such, there are several reasons that can be used to explain the overall observation that accrual reporting will enhance transparency in the public sector financial management practices. These are outlined as follows. To begin with, an accrual accounting system enhances overall transparency because of its role in strengthening accountability within the public sector. Under this system, organisations and government agencies are required to accurately provide all the information about the costs of resources they have consumed in the course of providing their services to the public (Department of Finance and Deregulation, 2014, p. 14). This is one of the responsibilities of the department in the Australian public sector. This implies that when public sector accounting practices are based on accrual accounting, public organisations shall be held accountable for the results to which they are responsible since they will be required to account for public resources of which the government wants to hold them responsible. This way, accrual accounting strengthens accountability in the public sector and, by extension, enhances overall transparency in the sector. It is this observation that has informed the adoption of the accrual accounting system in public sectors of different countries across the world. The second reason as to why accrual accounting is regarded as being able to improve overall transparency in the public sector arises from the comprehensive range of information that is provided when the system is used. Under the system, different financial statements are prepared. For instance, full statements of assets and liabilities as well as revenues and expenses are prepared (Khan & Mayes, 2009, p. 5). These statements are interlinked in that the net asset position is a result of the difference between the revenues and expenses. Also, movements in the cash balances of the organisation are reconciled to other operations and movements that affect assets and liabilities of the organisation. By presenting this range of statements whose results are connected to each other, an accrual accounting system provides a much comprehensive picture of accounting transactions in the public sector as compared to what would be presented when a cash accounting system is used. This information is necessary for overall macro-fiscal management decisions (Wanna, O’Faircheallaigh & Weller, 1999, p. 133). This way, the system enhances overall accountability within the public sector. In addition to providing a comprehensive picture of the financial transactions of organisations, accrual accounting enhances overall accountability by providing a means of recording non-cash transactions which are left out by the cash based accounting framework. Such non-cash transactions include transactions involving creation and settlement of liabilities, off-budget funding by donors and transactions of off-set arrangements (Khan & Mayes, 2009, p. 6). Also, non-cash transactions such as payments due and settlements of debts of public-owned enterprises are usually not covered by the cash accounting system yet they bear an economic impact on the finances of an organisation. Since the accruals framework of accounting provides for a mechanism by which all such transactions are captured, it provides information on the true cost of government operations. This enhances transparency in the financial operations of government agencies (Carlin, 2005, p. 320). More so, transparency is enhanced when accrual accounting is used since the framework provides full information about the costs of non-cash transactions such as depreciation and accrued expenses (Wanna et al., 1999, p. 137). Such information is essential for not only assessing the efficiency of public services but also as a key component of the public sector management framework. Since this information is crucial in assessing the potential benefits of using alternative service delivery frameworks, it enhances accountability in the overall public sector. Lastly, accrual accounting system is associated with overall transparency in the public sector because its adoption promotes the development of improved systems and procedures for the management of assets and liabilities. This is so because under this framework, organisations seek to improve public sector performance by taking a systematic approach for not only identifying but also keeping track of all movements in assets and liabilities (United States Government Accountability Office, 2006, p. 15). This is done using special systems that promote overall improvement in the way the assets and liabilities are managed. This way, overall transparency is encouraged through accountability in the way assets and liabilities in the public sectors organisations are managed. This explains the overall trend in which accrual accounting has been adopted in public sector accounting practices across the world (Carlin, 2005, p. 310). Also, accrual accounting enhances overall accountability by encouraging behavioural change among the managers and decision makers involved in preparing budgets. This is so because compared to cash accounting, the framework provides additional information which makes it possible for managers to seek clarification from other stakeholders in the sector. Through this, accountability is encouraged among all stakeholders of the public finance management processes. c) Provide examples of reporting distortions or discrepancies when using specific accounting tools (i.e. accrual versus cash) Reporting distortions or discrepancies refer to different kinds of deviations or divergence between the information that is contained in the financial reports of public organisations and the reality of their financial position (Gandevani, 2010, p. 74). This arises from the fact that using different accounting bases to record accounting transactions for organisations creates reporting distortions and discrepancies for different items. There are several examples in which such discrepancies occur when using specific accounting tools. To begin with, discrepancies and distortions in reporting may occur in the measures of the annual changes in liability for public sector organisations. One discrepancy that can occur when using accrual accounting is in recording changes in liability from year to year is failure to recognise that the liability of the organisation takes into account unpaid expenses (United States Government Accountability Office, 2006, p. 12). Under the accrual system of accounting, annual increases in payments which are not paid and therefore not included in the budget of the organisations, have the effect of increasing the overall liability of the government (United States Government Accountability Office, 2006, p. 13). In this case, discrepancy occurs if the liability of the organisation is not recognised as being equal to the difference between the accrued expenses and the cash payments made for the expenses. Another potential discrepancy in information when using accrual accounting occurs in the form of appearance of cash and accrual deficits. Since these two are associated with cash and accrual accounting respectively, their use results into different forms of distortion of the financial information presented in the financial statements of public sector organisations. For instance, the net operating cost or accrual deficit arises from the difference between revenues and expenses. In this case, the expenses are recorded on accrual or modified accrual basis. When the accrual deficit is used in public sector accounting practices, only contingencies which are regarded as probable are included (Khan & Mayes, 2009, p. 7). This is in contrast with cash deficits in which both contingencies and other future obligations of the government are not included in the cash deficit. As such, using either the cash or accrual deficit presents distorted information on the total amount of financial obligations that the government is required to meet in the future. Another possible distortion is that since potential costs that can be associated with future natural disasters are not included in the accrued contingency, the general public and other users of the financial information may regard the estimates for accrued deficit to be underestimated. This is because both accrual and cash accounting systems have different impacts on the financial positions of organisations in the public sector (Carlin, 2005, p. 321). There are also several specific examples of how financial information provided in the financial statements under the cash accounting framework may be distorted. For instance, since cash accounting focuses solely on the cash flows at the expense of information about the flow of other resources, the information about the assets and liabilities in the public sector is distorted (Thai, 1992, p. 254). Because critical information about accrued expenses and revenue of the government are not captured, the decisions that are based on the information provided by the cash based accounting system may affect the ability of the government to service its financial obligations in the future. References Carlin, T. M. (2005). Debating the impact of accrual accounting and reporting in the public sector. Financial Accountability & Management, 21(3). Department of Finance and Deregulation (2014). Agency resources and planned performance. Retrieved 7 March 2014, from http://www.finance.gov.au/publications/portfolio-budget-statements/13-14/docs/department-of-finance-and-deregulation.pdf Gandevani, N. (2010). Winning edge trading: successful and profitable short and long term systems and strategies. Hoboken: John Wiley & Sons. Khan, A. & Mayes, S. (2009). Transition to accrual accounting. Technical Notes and Papers, International Monetary Fund. Retrieved 7 March 2014, from https://www.imf.org/external/pubs/ft/tnm/2009/tnm0902.pdf Ruppel. W. (2009). Governmental accounting made easy. Mason: John Wiley & Sons. Thai, K., V. (1992). ‘Governmental accounting; an overview.’ In Rabin, J. (ed.), Handbook of public budgeting (pp. 241–274). New York: Marcel Dekker. United States Government Accountability Office (2006). Understanding similarities and differences between accruals and cash deficits. Retrieved 8 March 2014, from http://www.gao.gov/new.items/d07117sp.pdf Wanna, J., O'Faircheallough, C. & Weller, P. (1999). Public sector management in Australia. South Yarra: Macmillan. Read More