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GOVERNMENT’S MOVE TO ACCRUAL ACCOUNTING

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As the public sector begins the implementation of its conversion to Generally Recognised Accounting Practice (GRAP) for government, an examination of how this will assist in effective service delivery is necessary. The fundamental question is whether or not this exercise will provide benefits for the South African public – or if it will simply cost the taxpayer money.

From a performance point of view, there is merit in moving to accrual accounting, but it is not without its problems. The essence of GRAP is that it puts government on the same footing as the private sector in terms of how assets are valued and accounted for, and what exposures the government has in terms of liabilities to taxpayers. When there are problems such as those being experienced in the United States and Europe, GRAP makes it possible to examine and gain some understanding of whether or not governments are exposing their economies to undue risk.

Perhaps the most significant change as government moves from the modified cash basis is that government departments are required to provide a detailed valuation of the assets under their control on any given day. At the local government level, municipalities have already set out on this process, while departments are scheduled to move from a modified cash basis to GRAP by 2015.

However, therein lies the rub: determining the cost of these assets can be a tricky exercise. Converting the assets and assigning a value to them is a specialised undertaking; putting a value to such assets as road systems, electricity networks and water systems is arguably an academic exercise with dubious benefit. It includes recognition of creditors and debtors – who owes government, and to whom does government owe money. Where provincial and national government is concerned, there can be major problems in establishing and reconciling the creditors and debtors, as each owes the other on varying bases, resulting in an all too frequent disconnect. Achieving clarity is therefore no mean feat.

However, this has had benefits – municipalities are now presenting more realistic financial results. This can better reflect the resources required to discharge their mandate.
Examining what conversion takes, the primary concern is that it takes money that, arguably, could be spent on service delivery rather than an overhaul of accounting systems and practice. Investment in infrastructure to establish systems that can handle GRAP is the first step; while costly, it is also perhaps the simplest. In addition, change management and upskilling are necessary to ensure that the people that will work with the systems are able to do so effectively. With the prevailing skills shortage, many government departments are coming off a low skills base, and getting people up to the acceptable finance management level is quite an undertaking.

With the 50 high capacity municipalities that have converted to GRAP to varying extents, complex accounting issues have been presented, such as conflicting standards, difficulty in recognising revenue and asset valuation. Government anticipates conversion of these municipalities by 2009, with medium capacity to follow and low capacity to be converted by 2010. Whether or not GRAP will bring benefit to the low capacity municipalities, which have limited resources and may be struggling financially, is perhaps a moot point.

At the national and provincial departmental levels, which are presently operating on a modified cash basis, the biggest problem faced is that the systems do not support the concept of accrual accounting; of course, local governments ‘feed’ their accounting into the provincial and then national levels. However, the process of conversion to full accrual accounting is underway and, as mentioned, is targeted for completion by 2015.

In general, the move is a good one where we are now comparing the public sector to the private sector. More realistic decisions will be made, as the principles are more sound and the exposures are disclosed.

George Higgins CA(SA) is an Associate Director: Professional Practices Group at Ernst & Young.

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