GAO

United States General Accounting Office

Report to the Honorable

Benjamin L. Cardin,

House of Representatives

February 2000 ACCRUAL 

BUDGETING

Experiences of Other 

Nations and 

Implications for the 

United States

GAO/AIMD-00-57

Page 1 GAO/AIMD-00-57 Accrual Budgeting

Contents

Letter 5

Executive Summary 6

Chapter 1

Introduction

30

Chapter 2

An Overview of 

Nations’ Accrual 

Budgeting Initiatives

46

Chapter 3

Perspectives on 

Accrual Budgeting for 

Decision-making

61

Chapter 4

Challenges in 

Implementing Accrual 

Budgeting

86

Chapter 5

Adapting Accrual 

Budgeting for the 

United States Context

96

Appendixes Appendix I: Commonwealth of Australia 114

Appendix II: Canada 137

Appendix III: Iceland 151
Contents

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Appendix IV: The Netherlands 165

Appendix V: New Zealand 174

Appendix VI: United Kingdom 201

Appendix VII: GAO Contacts and Staff Acknowledgements 217

Tables Table 1: Comparison of Methods of Budget Reporting 34

Table 2: Use of Accrual Reporting and Budgeting by Country

Reviewed 37

Table 3: Statutory Framework for Performance-Based Management

and Accountability Reform Efforts in the United States 38

Table 4: Design Features of Case Study Countries’ Accrual Budgeting 

Approaches 58

Figures Figure 1: Improvements in Budget Information Attributed to Accrual 

Budgeting 50

Figure 2: Conceptual Concerns Raised About Accrual Budgeting 54

Figure 3: Reconciliation of the Accrual Operating Result to the Fiscal 

Balance 122

Figure 4: Financial Statements Used to Represent the Government’s

Budget 124

Figure 5: Measures of Fiscal Position 128

Figure 6: Reconciliation Between Operating and Cash Balances 129

Figure 7: Estimated Cash Balance Compared to Estimated

Accrual-Based Operating Result, Fiscal Years 1998-99 Through

2002-03 130

Figure 8: Alternative Measures of the Fiscal Balance—Budgetary

Balance Versus Financial Requirements/Surplus 147

Figure 9: The Three Modes of Appropriations 179

Figure 10: The Three Primary Statements Used to Present the Budget 184

Figure 11: The Seven Types of Appropriations 185

Figure 12: Reconciliation Between Operating Balance and Adjusted 

Financial Balance (Cash) 190

Figure 13: Accrual Operating and Adjusted Cash Balances, Fiscal

Years 1994-95 Through 1997-98 191

Figure 14: Reconciliation of Resources to Financing Requirement 208
Contents

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Abbreviations

AAS Australian Accounting Standards

ACC Accident Compensation Corporation

AME annually-managed expenditures

ANAO Australian National Audit Office

CAF capital acquisition funds

CFO Chief Financial Officers

CICA Canadian Institute of Chartered Accountants

DCA Deficit Control Act 

DoFA Department of Finance and Administration

DOE Department of Education

ERC Expenditure Review Committee

FASAB Federal Accounting Standards Advisory Board

FIS Financial Information Strategy

FMI Financial Management Initiative

FRA Fiscal Responsibility Act

FRAB Financial Reporting Advisory Board

GAAP generally accepted accounting principles

GDP gross domestic product

IP Independency Party

JCPA Joint Committee on Public Accounts

NAO National Audit Office

NCOA National Commission of Audit

OAG Office of the Auditor General

OECD Organization of Economic Cooperation and Development

OMB Office of Management and Budget

PP Progressive Party

PRA Public Roads Administration

PSAB Public Sector Accounting Board

PSASB Public Sector Accounting Standards Board

PSNB public sector net borrowing

PSNCR public sector net cash requirement

PUMA Public Management Service

RAB resource accounting and budgeting

RAM Resource Accounting Manual

RSSI required supplementary stewardship information

SOE State-Owned Enterprise

TBS Treasury Board Secretariat
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United States General Accounting Office

Washington, D.C. 20548

Page 5 GAO/AIMD-00-57 Accrual Budgeting

Accounting and Information

Management Division

B-280850 Letr

February 18, 2000

The Honorable Benjamin L. Cardin

House of Representatives

Dear Mr. Cardin:

This report responds to your request that we look at the other nations that have moved toward the 

fuller use of accrual concepts in budget reporting with an eye to what help their early experiences 

might offer the United States. There are obvious and significant political, cultural and economic 

differences between the United States and these countries−Australia, Canada, Iceland, the 

Netherlands, New Zealand, and the United Kingdom. Nevertheless, their early experiences offer some 

insights as the United States considers ways to improve budget recognition of long-term 

commitments and continues to strive for improvements in government performance and 

accountability. 

Accrual-based and cash-based costs are similar for many government activities. However, accrual 

measurement would move budget recognition forward for the costs of some programs such as 

insurance and pensions, which involve future cash flows. The opposite would be true for the purchase 

of capital assets: accrual measurement would provide a later recognition of the cost. 

The U.S. federal budget is expected to provide information on the government's impact on the macroeconomy as well as full information and appropriate incentives for resource allocation, for control 

over cash, for the recognition of future commitments, and for monitoring performance. As a result 

choices about the method of budget reporting require trade-offs among these multiple and potentially 

competing objectives. 

We hope you find this report useful in your efforts to improve the federal budget process. We are 

sending copies to interested congressional committees and the Director of Office of Management and 

Budget. Copies will be made available to others upon request. If you or your staff have any questions 

about this report, please contact me on (202) 512-9573.

Sincerely yours,

Paul L. Posner

Director, Budget Issues
Page 6 GAO/AIMD-00-57 Accrual Budgeting

Executive Summary

Purpose Budgeting is the process by which we as a nation resolve the large number 

of often conflicting objectives that citizens and their representatives seek 

to achieve through government action. In that sense, nothing could be more 

important than debates about the budget. It is in the context of the budget 

debate that decisions are made about 

• the federal government’s fiscal policy, i.e., the relationship between 

spending and revenues;

• where the federal government will be involved and the allocation of 

resources across various program areas; and

• the tools the government will use to carry out these policies. 

Given this, the nature and quality of the information used in the budget 

debate matters a great deal. Information permitting decisionmakers to look 

broadly across a range of ways to provide federal support—both spending 

and tax incentives—can improve the ability to make decisions about 

allocating resources and the best tools to use. Information on the long-term 

implications of different decisions is also important because they are not 

always obvious and may have major consequences. For these reasons, 

questions about changing the method of budget reporting1

 arise.

The method of budget reporting represents much more than a technical 

decision about how to measure costs; rather it reflects fundamental 

choices about the types of controls and incentives that are important in the 

decision-making process. Countries traditionally have relied on cash-based 

budgeting—recording amounts in the budget based on when cash is 

received or paid, regardless of when revenues are earned, resources are 

consumed, or liabilities are increased. These cash-based systems reflect the 

traditional focus of public sector budgeting on control, ensuring 

compliance with spending limits and assessing the short-term economic 

impact of fiscal policy. The United States, however, uses a system of both a 

cash- and obligation-based budget that permits greater control than solely a 

cash-based system. Recognizing that even this provided inadequate 

recognition and control for credit programs, in 1990 the United States 

embraced a form of accrual budgeting in that area.2

1

In this report, the method of budget reporting refers to when and how transactions are 

recognized and measured in the budget.

2

A long-standing exception to the reporting of outlays and receipts on a cash or cash 

equivalent basis is interest on public issues of public debt, which is recorded as it accrues.
Executive Summary

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In recent years, the United States and several other countries have 

undertaken reforms—some more sweeping than others—aimed at 

improving public sector financial and performance management. At the 

same time, in the United States, there has been increasing concern about 

the need to recognize the long-term cost implications of current 

commitments and decisions. Despite recent budget surpluses, the United 

States continues to face long-term budget pressures that stem in large part 

from the burgeoning costs of health and retirement programs prompted by 

the aging population. Simulations by GAO’s and the Congressional Budget 

Office’s (CBO) long-term budget models illustrate these budget pressures; 

even if projected budget surpluses are “saved” and used to pay down debt, 

growth in Social Security, Medicare and Medicaid threaten to crowd out 

discretionary spending. Both this concern and recent management reform 

efforts have challenged traditional thinking about cash-based and 

obligation-based budgeting systems and stimulated interest in the potential 

for accrual-based measurement—which records transactions in the period 

revenues are earned, resources are consumed, or liabilities are increased—

to contribute to improved public sector management. 

In the United States, two key concerns have increased interest in the 

potential for using accrual budgeting for programs other than credit 

programs: (1) a desire to improve the recognition of long-term 

commitments in the budget and (2) an interest in more directly linking 

improved cost and performance information to the federal budget process. 

As a result, there has been interest in the experiences of countries that 

have adopted accrual budgeting and what lessons might be learned from 

these experiences. Representative Benjamin Cardin asked us to examine

• countries’ reasons for shifting to accrual budgeting,

• the ways other countries are using accrual-based information in the 

budget,

• the implications of accrual budgeting for decision-making,

• the key implementation challenges (technical and political) associated 

with the use of accrual budgeting, and

• issues raised by these countries’ experiences that may be informative to 

the United States.

GAO’s review included six countries—Australia, Canada, Iceland, the 

Netherlands, New Zealand and the United Kingdom.
Executive Summary

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Background The federal budget serves as the primary financial plan of the federal 

government. Although budget decisions are inherently based on political 

choice, the method of budget reporting plays an important role by 

determining the information available and incentives provided to 

policymakers. Further, because the budget process serves as a key point of 

accountability, the way costs are measured in the budget can have 

significant consequences for managerial incentives. Therefore, choices 

about the method of budget reporting represent much more than technical 

decisions about how to measure cost; rather they reflect fundamental 

choices about the controls and incentives to be provided by the decisionmaking process. 

The measurement bases discussed in this report—cash, accrual, and 

obligations—primarily affect the timing at which the budget recognizes 

costs. The structure or scope of budget accounts—i.e., whether budget 

costs are arranged based on organization, program, spending item, etc.—

also helps determine the focus of decision-making, and the level of 

oversight and control placed on public spending, but it is a separate issue. 

The adoption of accrual-based measurement for budgeting may or may not 

be combined with changes to the account structure. 

The recognition of costs in the budget (timing) is different for cash-, 

accrual-, and obligation-based reporting.3

• Cash-based budgeting records receipts and outlays at the same time 

cash is received or paid, without regard to when the activity generating 

the revenue, consuming the resources, or increasing the liability occurs. 

• Accrual-based budgeting records transactions in the period when the 

activity generating the revenue, increasing the liability or consuming the 

resources occurs—regardless of when the associated cash is actually 

paid or received. Although the costs recorded for accrual-based 

budgeting need not be identical to those used for accrual-based 

accounting, the term accrual budgeting usually has been used to refer to 

the recording of budget costs based on financial accounting standards. 

As a result, accrual-based appropriations, by reflecting the costs 

incurred during a fiscal year, generally are similar to the expenses 

reported in a private sector operating statement.

3

For additional explanation of the difference in these measurement bases, see chapter 1.
Executive Summary

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• Obligation-based budgeting focuses upon controlling the legal 

obligations or commitments entered during a period. Obligation-based 

budgeting records financial transactions, primarily when orders are 

placed, contracts are awarded and other similar transactions are made 

that will require payment during the same or a future period. 

The U.S. budget is neither accrual nor pure cash; it is obligation-based 

because it focuses upon controlling the legal obligations or commitments 

entered into during a period. Obligation-based budgeting involves three 

stages: (1) the Congress must enact budget authority up front before 

government officials can obligate the government to make outlays, 

(2) government officials commit the government to make outlays by 

entering into legally binding agreements, and (3) outlays (cash 

disbursements) are made to liquidate obligations. However, with limited 

exceptions,4

 the amounts to be obligated are measured on a cash or cash 

equivalent basis and the unified budget deficit/surplus5

—the key focus of 

the policy debate—represents the difference between cash receipts and 

cash outlays in a given year. 

The use of cash-based measurement in public sector budgeting has several 

advantages. Perhaps most notably, cash has been a widely used and 

traditionally accepted measure of the government’s impact on the 

economy.6

 Further, because it can be tracked, cash fits well with the 

traditional public sector budgeting focus on control and on ensuring 

4

The U.S. budget uses accrual measures to recognize the government’s costs for certain 

programs. For more information see chapter 1.

5

Under budget concepts set forth in the Report of the President’s Commission on Budget 

Concepts, the unified budget is a comprehensive budget in which receipts and outlays from 

federal and trust funds are consolidated. When these fund groups are consolidated to 

display budget totals, transactions that are outlays of one fund group for payment to another 

fund group (that is, interfund transactions) are deducted to avoid double counting. 

6

A cash-based budget is not the only measure available to assess the impact of government 

activities on the economy. In the United States, for example, the official national income and 

product accounts (NIPAs) provide a picture of government activities in terms of production, 

distribution, and use of output. There are a number of major differences in the treatment of 

federal receipts and expenditures in the NIPAs and their treatment in the unified budget, 

including adjustments for timing of payments. For example, the unified budget counts 

receipts for corporate taxes when they are paid, whereas NIPA counts them when the 

liability is accrued. NIPA and the unified budget also differ in their treatment of investment 

and capital consumption. The unified budget reflects all expenditures of the federal 

government including investment while the NIPA budget shows current expenditures and 

thus excludes investments and includes the consumption of fixed capital (depreciation). 
Executive Summary

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compliance with spending limits. In addition, for most government 

activities the time between the occurrence of the underlying transaction 

resulting in a government liability and the cash outlays necessary to 

liquidate the liability is relatively short. Therefore, cash-based 

measurement generally provides both adequate information and control.

Despite these advantages, two reinforcing issues have stimulated interest 

in the use of accrual measurement for public sector management. At the 

governmentwide level, costly incidents, such as the deposit insurance crisis 

in the United States and the issuance of guarantees in New Zealand, served 

to highlight shortcomings of cash reporting for signaling the long-term 

implications associated with some policy decisions and the need for a more 

complete picture of a government’s financial condition. At the 

organizational level, the desire to improve the efficiency and effectiveness 

of government operations through more performance-focused 

management has placed an emphasis on understanding and managing 

costs. Faced with concerns about the sustainability of government 

activities and with demands for more result-oriented management systems, 

other countries moved towards accrual-based measurement for financial 

reporting and a few moved from cash-based budgeting to accrual 

budgeting. Similar concerns have raised questions about whether the 

current U.S. cash- and obligation-based budget adequately (1) presents 

information on the long-term sustainability of government activities or

(2) matches cost to government performance in a way which effectively 

supports management reform efforts. 

For some activities, such as credit and pension programs, cash-based 

measurement is incomplete and potentially misleading. As a result, the true 

cost to the government as a whole, and/or the cost of particular goods or 

services, may be misstated. For example, GAO has argued that the cashbased measure understates the costs of commitments already entered into 

for federal insurance programs.7

 Further, the cash flows for some items, 

such as asset purchases, may not adequately match annual resources 

consumed with the provision of goods and services. As a result, it may be 

difficult to fully assess the costs associated with a given level of 

performance. 

7

See Budget Issues: Budgeting for Federal Insurance Programs (GAO/AIMD-97-16, 

September 30, 1997).
Executive Summary

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In recent years, the United States and other countries have undertaken 

reforms aimed at improving public sector financial management and 

performance while enhancing transparency and accountability. These 

reforms have served to highlight the need for more complete and 

comparable cost and performance information. For example, it has been 

recognized that adequately assessing performance under more resultoriented management systems requires information beyond the cash flows 

in a given period and more consistent and credible cost data across 

programs and accounts. As a result, the United States government began to 

produce audited agency and governmentwide financial statements to 

provide accrual-based information on the cost of government activities. 

The challenge, however, remains of how to integrate this information into 

the budget process so that it effectively supports policy decision-making 

and management reform objectives. 

Results in Brief Within broader reform efforts, several countries have adopted accrual 

budgeting as a tool to address concerns about public sector performance, 

sustainability of government activities, and accountability. Much more than 

an isolated technical exercise, the shift to accrual budgeting has generally 

reflected much wider and more fundamental reform efforts. Although these 

countries are still in the early stages of developing and implementing 

accrual budgeting, proponents believe that it provides more complete 

information and better incentives to address these concerns. 

Accrual budgeting has been used as a tool to support performance-focused 

management because, in some cases, it more clearly links the total cost of 

resources used to the performance achieved. For example, New Zealand 

and Australia8

 combined accrual budgeting with output budgeting to 

support more decentralized management systems that hold managers 

responsible for results while reducing controls over inputs (specific 

spending items). Under these systems, appropriations are made not for 

specific items, such as salaries or supplies, but for funds to provide specific 

outputs (goods and services delivered on behalf of the government). 

Managers are then held accountable for delivering the specified outputs 

within the appropriated amount. This makes understanding the total costs 

(including items such as accrued employee pensions to be paid in the 

future) associated with a given result important both for deciding on 

8

The Netherlands has applied a similar approach on a limited basis to select departments.
Executive Summary

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appropriation amounts and for ensuring accountability. Other countries, 

such as the United Kingdom, which chose to incorporate accrual 

measurement into the budget to reflect more completely and systematically 

the cost of resources consumed, have stopped short of adopting outputbased appropriations.

Proponents also believe that accrual budgeting improves incentives to 

address the longer-term implications of current decisions by better 

reflecting year-to-year changes in assets and liabilities. For example, New 

Zealand officials attributed reforms in both its employee pension program 

and an accident insurance program to the fact that costs became more 

apparent in the budget. Proponents also believed accrual budgeting 

improves accountability and control by enhancing the consistency of 

budget information, even though it raises some new oversight issues. For 

example, proponents saw improving the consistency between the budget 

and the financial statements as important to enhancing oversight. 

Although some officials and experts cited benefits, others expressed 

skepticism and concerns about the use of accrual budgeting. While 

proponents noted that information on cash flows is available under accrual 

budgeting, other experts expressed concern about a reduction in the 

transparency of information on the government’s cash borrowing 

requirement. Another potential reduction to transparency stemmed from 

the fact that accrual budgeting requires more sophisticated understanding 

of financial reporting standards and underlying assumptions. Along these 

lines, concerns were raised about the ability to clearly track and control 

government spending. In addition, some thought that some benefits, such 

as improved asset registers, could be achieved through accrual accounting 

and reporting alone without using accrual-based measurement for 

budgeting. Finally, countries faced a number of implementation challenges, 

such as the identification and valuation of assets.

Despite obvious and significant political, cultural, budget, and economic 

differences, these countries’ early experiences with accrual budgeting 

provide some valuable insights for the United States. Their experiences, 

however, must be seen in the context of their particular situations. The 

challenge is how to translate useful ideas developed in a parliamentary 

political system to the U.S. system in ways that could improve its decisionmaking process while protecting its unique institutional needs. In analyzing 

the benefits cited by other countries and the potential for similar benefits in 

the United States, it is important to consider that the legislative bodies in a 

parliamentary system of government and the Congress of the United States 
Executive Summary

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differ, especially in the role each plays in the budget process. The U.S. 

Congress is an independent and separate branch of government that takes 

a more active role in resource allocation decisions than the parliaments in 

GAO’s case study countries. Many important decisions that, in the United 

States, are debated during the annual appropriations process occur in case 

study countries before the budget is presented for parliamentary approval. 

Also, most case study countries generally deal with the approval of 

obligations through executive branch controls whereas in the United States 

congressional approval (budget authority) is required before executive 

branch departments can obligate funds. Further, most case study countries 

used purely cash reporting for budgeting before adopting accrual 

budgeting. In contrast, the United States’ obligation-based budgeting 

already captures many obligations not apparent in a purely cash system. 

These differences are likely to influence perspectives on the trade-offs 

associated with the use of accrual budgeting, particularly in terms of 

accountability and legislative control issues.

Any reform effort should begin with consideration of the overarching 

managerial and control objectives embodied within the United States’ 

institutional system. While concerns have been raised that the U.S. 

obligation-based system may not adequately reflect all long-term 

commitments or properly align budget cost recognition with the 

consumption of resources, it offers other benefits in terms of up-front 

control of obligations. Thus, the challenge for the U.S. system is to see if 

accrual concepts can be adapted to address the unique budgetary needs of 

the Congress as well as the executive branch. 

The up-front funding requirement under an obligation-based budget helps 

ensure control but does not necessarily align budget cost recognition with 

the consumption of resources. Conversely, accrual measurement can be 

used to better match costs with the consumption of resources, but in its 

simplest form does not necessarily provide up-front control over entering 

into legally binding commitments. Thus, choices about the basis of 

budgeting depend in part on the relative importance one places on 

recognizing and controlling the full costs at the time decisions are made 

versus matching budget recognition to the period resources are actually 

consumed. 

GAO believes that the selective application of accrual budgeting to certain 

long-term commitments can strengthen the information and accountability 

for these costs. In addition, decision-making could benefit from 

incorporating accrual measurement into the budget in ways that better 
Executive Summary

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match the cost of resources consumed with the performance achieved 

without forfeiting budgetary control. Finally, even without changing the 

measurement basis of budgeting to accrual, congressional oversight and 

managerial decision-making could be enhanced by better integration of 

supplemental accrual-based information (e.g., net present value for longterm commitments and unit cost for goods and services) into the decisionmaking process.

Earlier recognition can promote timelier action to address some long-term 

commitments before they become too unwieldy or burdensome. For many 

government activities, such as salaries or grant payments, there generally 

would not be significant differences in the timing of budget recognition 

between cash and the annual accrued costs. Accrual measurement, 

however, would advance the recognition of costs for commitments such as 

pensions and insurance that involve cash flows over many years. Such an 

approach might also be helpful for selected tax expenditures where current 

cash flow numbers fail to capture their longer-term effects on government 

revenues (e.g., the timing differences associated with certain pension and 

savings incentives). Conversely, for capital assets, accrual measurement 

would delay cost recognition by spreading costs over the lives of the assets. 

Thus, while accrual budgeting matches budget costs with the provision of 

goods and services, it raises issues about up-front cost recognition and 

control for capital assets.9

For these reasons, adopting accrual budgeting selectively within an 

obligation-based control system may improve information while preserving 

up-front control within the United States’ unique separation of powers 

system. Specifically, accrual measurement within the obligation-based 

budget might result in better budget information and incentives for 

decision-making for programs like government employee pensions or 

insurance in which cash-based measurement may fail to capture the 

magnitude of the government’s commitment. The approach developed for 

9

While the full cost of an asset may not be appropriated up front, case study countries 

established a number of compensating controls in an attempt to alleviate control concerns. 

In most cases, case study countries require appropriations for the annual cash required to 

purchase assets. A number of case study countries also established supplemental approval 

processes for capital projects. In New Zealand, managers are not allowed to change the 

structure of their balance sheets without legislative approval; this is aimed at preventing 

managers from running down their asset bases to artificially lower the price of outputs. 

However, legislative approval is not required for asset purchases below a certain amount if 

the department can fund them from depreciation reserves. See chapter 3 and country 

appendixes for additional information. 
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credit programs in the Federal Credit Reform Act of 1990 is an example of 

the selective application of accrual budgeting. On the other hand, the 

obligation-based approach could be retained for items like capital, for 

which the use of accrual budgeting without additional compensating 

controls would reduce the up-front control provided by the United States’ 

current system.

In terms of providing a more complete picture of the long-term 

sustainability of a government’s activities, it is important to note that 

accrual budgeting as implemented by the case study countries does not 

cover social insurance commitments. The extent to which accrual 

budgeting based on financial accounting standards can be used to improve 

the recognition of long-term issues is limited. Although social insurance is 

generally viewed as a government commitment likely to result in a future 

cash outlay,10 it is not judged to be a liability according to accounting 

standards in these countries. Thus, none of them have budgeted for such 

commitments on an accrual basis. This would also be the case if the United 

States adopted accrual budgeting based on its federal accounting 

standards.11

As a result, accrual budgeting as implemented by case study countries is 

not the answer to questions of how to improve the budget recognition of 

10Under current law, U.S. Social Security benefits can only be paid from the trust fund 

balance. 

11Accounting standards in case study countries do not recognize future social insurance 

payments as a liability because they are uncertain. For example, the government can change 

these programs. Similarly, accounting standards developed for the U.S. federal government 

do not view social insurance as a liability because the level of future benefits is considered 

to be uncertain. Proponents of these standards point out that the underlying laws 

establishing a claim to payments can be (and have been) changed over time. Also, they cite 

that estimates change greatly depending on economic assumptions and have changed 

overtime. For example, the 1983 legislative changes to the Social Security program were 

expected to maintain a positive fund balance until 2063; however, by current intermediate 

cost assumptions the fund will run out three decades sooner. However, many others believe 

that a liability should be recognized for the net benefits expected to be paid in future periods 

to current participants. Agreement on the final standards calling for disclosures but not 

recognizing a liability for such payments was a compromise between the two positions. 

While not included as a liability, information on social insurance is to be included as 

“required supplementary stewardship information” (RSSI). The requirement for RSSI was 

established in recognition of the federal government’s unique stewardship role over certain 

resources entrusted to it. The standards require that an entity responsible for a social 

insurance program include in its financial report, as RSSI, a description of the social 

insurance program, how it is financed, how benefits are calculated, and its financial and 

actuarial status. 
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long-term social insurance commitments. If formal recognition of social 

insurance commitments in the budget is desired, other methods of 

incorporating accrual concepts into the budget could be developed. Some 

possible approaches for Social Security, for example, might include 

recasting the Social Security surplus by recording outlays in the same 

amount as social insurance receipts to reflect the government’s 

commitment to spend those amounts on benefits in the future. 

Alternatively, revenue recognition of the surplus receipts might be deferred 

until they are used to make payments in the future. Another possibility 

would be to track the expected cost of the government’s long-term 

commitments in the budget for each budget account or program alongside 

its cash-based budget authority and outlays. These ideas and others would 

need to be explored in detail by experts in the field of budgeting to 

determine their workability and potential benefits. Suggestions have been 

made that a budget concepts commission is needed to address a number of 

issues, including Social Security; it could be the proper forum to fully 

develop new budgeting ideas.

Congressional oversight could also be enhanced by better matching of the 

cost of resources consumed with the performance achieved in a manner 

that does not forfeit budgetary controls. For instance, GAO’s previous 

review of agencies’ performance plans shows that some agencies have 

been able to develop approaches that make basic and useful connections 

between proposed spending and performance goals within the current 

budget framework.12 While full accrual budgeting is not necessary to 

continue improving such connections or to enhance the quality of cost 

information, efforts will be necessary to mitigate the danger that such cost 

information may be treated as a supplemental exercise rather than 

considered integral to the budget debate. Also, accrual budgeting could be 

used to better reflect resources consumed without moving to output-based 

appropriations. For example, mechanisms to charge programs for the use 

of capital assets over time, such as capital acquisition funds,13 could better 

align the cost of capital with its use while preserving the up-front control. 

This type of mechanism is one way that accrual-based cost could be 

12Performance Budgeting: Initial Agency Experiences Provide a Foundation to Assess 

Future Directions (GAO/T-AIMD/GGD-99-216, July 1, 1999). 

13Capital acquisition funds would finance the purchase of capital assets with up-front 

funding using funds borrowed from the Treasury. They would then rent the assets to one or 

more program accounts, charging a rate sufficient to cover repayments of principal and 

interest on the Treasury loan.
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incorporated in the budget at the agency level while preserving the cash 

and obligations basis for the government as a whole.

GAO Analysis 

Accrual Budgeting Adopted 

as Part of Broader Reform 

Efforts

In case study countries, the use of accrual budgeting has been linked 

intrinsically with broader reform efforts driven by concerns about the size, 

role, and effectiveness of the public sector. These reforms have generally 

sought to improve government activities through improved transparency 

and/or more performance-oriented management. However, while accrual 

budgeting has generally been much more than an isolated technical 

exercise and reflective of wider and more fundamental reform efforts, the 

impetus for and the magnitude of change varied significantly across the 

countries reviewed. Some countries, such as New Zealand and Iceland, 

were motivated by large deficits or concerns over the sustainability of 

government activities. Others, such as the United Kingdom and Australia, 

undertook changes to make general improvements in public sector 

management. 

The implications of a shift to accrual budgeting need to be seen in the 

context of these broader reform efforts. For example, in New Zealand, the 

adoption of accrual accounting and budgeting was only one component of 

sweeping reforms undertaken to restore its economy after several years of 

serious economic difficulties. As part of these reforms, New Zealand not 

only changed its reporting from cash to accrual but also comprehensively 

and fundamentally restructured the role of the national government in the 

economy and radically changed the accountability relationship between 

the government and departmental executives. To varying degrees, the other 

case study countries also undertook accrual budgeting as part of broader 

financial and performance management reforms. 

Countries Vary Significantly 

in the Design and 

Implementation of Accrualbased Budgeting Systems

Not surprisingly, each country’s reform objectives and budget control 

needs influenced the approach taken to designing and implementing its 

accrual budgeting framework. Approaches varied with respect to

• the extent to which accrual budgeting is used as part of an output 

budgeting framework in which the budget is intrinsically linked to 

performance,
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Page 18 GAO/AIMD-00-57 Accrual Budgeting

• the scope of budget items measured on an accrual basis, and

• the organizational level to which accrual budgeting is applied.

Four countries—New Zealand, Australia, Iceland, and the United 

Kingdom—have chosen, or are expecting, to implement accrual budgeting 

for most budget items at both the departmental and central government 

levels. Their approaches (1) use the same accounting standards14 for both 

financial reporting and budgeting and (2) incorporate primary financial 

statements15 roughly similar to those found in private sector financial 

reporting into the budget process. With two notable exceptions—the 

exclusion of capital and centralization of pension costs in Iceland and the 

United Kingdom’s exclusion of revenues—these countries apply accrualbased measurement using financial accounting standards to virtually all 

budget items at both the departmental and the governmentwide levels.16

Two of these four countries—New Zealand and Australia—placed 

significant emphasis on directly linking the budget (including the basis of 

appropriation) with their overall performance and accountability 

structures. In these two countries, the shift to accrual measurement 

occurred concurrently with a shift to output-based appropriations. In 

general terms, output-based appropriations provide funding for the total 

resources required to produce an “output” (a good or service produced by 

departments) including costs that do not require a cash outlay, such as 

depreciation. The United Kingdom has also proposed an accrual budgeting 

framework that aligns resources to performance, but has stopped short of 

adopting output-based appropriations. Iceland’s approach reflects a greater 

emphasis on recognizing the cost of the long-term commitment for 

employee pensions at the governmentwide level rather than allocating 

costs to particular goods and services.

14Some countries’ accounting standards are not fully accrual-based. For example, Iceland 

reports physical assets on a cash basis and the United Kingdom accounts for revenues on a 

cash basis.

15Traditionally, primary financial statements include (1) a balance sheet which presents the 

total balances of assets, liabilities, and net position of an organization as of a specific time, 

(2) a statement of operations which provides accrual-based information on an organization’s 

flows of revenues and expenses and other changes in the organization’s net resources 

during a period of time, and (3) a statement of cash flows which presents the cash flows of 

an organization during a period of time. 

16For the most part, social insurance is not recognized as a liability under financial 

accounting standards used in the case study countries and the United States. See footnote 8. 
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Page 19 GAO/AIMD-00-57 Accrual Budgeting

The other two case study countries, Canada and the Netherlands, have 

applied accrual budgeting on a more limited basis to specific budget items 

or departments. Canada currently applies accrual budgeting to public 

sector employee pensions and accounts payable at both the department 

and the governmentwide levels. However, Canada is considering shifting 

capital to an accrual basis with the intent of better integrating its financial 

management system. The Netherlands has applied accrual budgeting, using 

an approach similar to the New Zealand and Australia output-based 

models, for a select number of agencies (subunits within ministries) but is 

still undecided about its application governmentwide. 

Countries Measure Budget 

Deficit/Surplus Differently

Another key difference among countries’ approaches is the basis used to 

measure the governmentwide deficit/surplus. New Zealand reports its 

deficit/surplus using the accrual-based net operating result. Under Iceland’s 

approach, the main focus of the budget debate is the Operating Statement 

which includes estimates of revenues and expenses on both an accrual and 

a cash basis. However, the aggregate operating result is reported only on an 

accrual basis. Australia has chosen to use a “fiscal balance” measure which 

is derived by adjusting the accrual-based operating balance to better 

approximate cash and the national investment/saving gap. Under the 

current Canadian system, two measures of fiscal position (deficit/surplus) 

are used: (1) the financial balance, or cash requirement which 

approximates the country’s financing needs and (2) the budgetary 

balance—its primary fiscal measure—that includes pensions, accounts 

payable, and other accrual-measured items17 even though cash is not 

needed immediately. In the Netherlands, the governmentwide 

deficit/surplus is reported on a cash basis. 

Accrual Budgeting Used as a 

Tool in Addressing 

Performance Management 

Challenges

Proponents described accrual budgeting as a useful, if not critical, tool in 

addressing performance management challenges. Accrual-based 

measurement is viewed as eliminating distortions that are inherent in cashbased reporting, such as reporting pensions as they are paid rather than as 

they are earned, and thus better matching the budget recognition of cost 

with the expected performance results. As a result, accrual budgeting is 

credited with supporting broader performance management reform efforts 

in several ways, such as

17For additional details see appendix II on Canada.
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• reflecting and supporting more decentralized and performance-focused 

accountability systems; 

• facilitating more competitive, businesslike approaches to providing 

government goods and services; and

• encouraging more efficient and effective resource management, 

particularly with respect to capital assets.

For example, New Zealand and Australia18 combined accrual budgeting 

with output budgeting to support more decentralized management systems 

that hold managers responsible for results while reducing controls over 

inputs (specific spending items). Under these systems, appropriations are 

made for outputs (goods and services delivered on behalf of the 

government), rather than for specific items, such as salaries or supplies. 

These systems aim to create a more businesslike environment in which an 

appropriation can be thought of as the “price” received by the department 

and paid by the government for a given output. Managers are then held 

accountable for delivering the specified outputs within the appropriated 

amount. This makes understanding the total costs associated with a given 

output, not just the immediate cash outlays, important to ensuring 

accountability. From the department’s perspective, outputs must be 

“priced” so that appropriations will be sufficient to cover costs over time. 

From the perspective of policymakers as the purchasers of goods and 

services, only by understanding the complete costs, including those that do 

not result in immediate cash flows, can an organization’s performance be 

fully assessed and compared to other organizations, both public and 

private. In this way, accrual measurement in the budget is used to hold 

managers accountable in these more decentralized systems. As a result, 

some proponents view accrual budgeting as critical to establishing more 

performance-focused management systems. Other countries, such as the 

United Kingdom, have chosen accrual budgeting in an attempt to reflect 

more completely and systematically the cost of resources consumed, but 

have stopped short of adopting output-based appropriations.

Accrual budgeting also was viewed as beneficial in the area of capital asset 

management. In addition to one-time benefits such as the identification and 

valuation of assets, accrual budgeting was credited with creating better 

incentives for ongoing asset management by matching the costs of an asset 

with its use and better recognizing the cost of holding capital. However, 

some doubts and concerns about the advantages of accrual budgeting for 

18The Netherlands has applied a similar approach on a limited basis to select departments.
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Page 21 GAO/AIMD-00-57 Accrual Budgeting

assets were also expressed, some similar to concerns that would apply in 

the United States. For example, asset valuation was difficult and often 

subjective. Thus, using the asset values as the basis for budgeting for 

depreciation was questioned. Concerns also were expressed over whether 

managers would actually “save” the amounts appropriated for depreciation 

to use for asset replacement and whether they might choose to operate 

using obsolete assets to avoid cost-of-capital charges. Proponents, 

however, argue that compensating controls can serve to alleviate these 

concerns. Since accrual budgeting has been in place for only a relatively 

short period in any of the case study countries, it is too soon to determine if 

these concerns are valid. 

In addition, experts in the United States expressed concern about a 

reduction of up-front control over asset purchases relative to that currently 

provided under the United States’ obligation-based budget. Whereas case 

study countries generally deal with the approval of obligations, such as 

asset purchases, through executive controls, in the United States 

congressional approval (budget authority) is required for departments to 

make such obligations. 

Accrual Budgeting Used to 

Improve Information and 

Incentives With Respect to 

the Sustainability of 

Government Activities

Many of the countries that have adopted accrual budgeting have done so, in 

part, with the expectation that it will help decisionmakers better 

understand the long-term sustainability of government policies. 

Proponents saw accrual budgeting as useful for assessing the sustainability 

of government policies by providing

• better budgetary recognition of liabilities and

• a more complete set of information to assess a country’s financial 

health. 

For example, New Zealand and Iceland credited accrual budgeting with 

highlighting the longer-term consequences associated with public sector 

employee pension programs. In Iceland, accrual budgeting showed the 

consequences of wage negotiations on future public sector employee 

pension costs. The full costs of these agreements were not fully realized by 

the public until the adoption of accrual budgeting led to the recognition of 

the liability in the budget estimates. Icelandic officials informed us that 

there is no longer public support for decisions that are so costly in the long 

term. Similarly, New Zealand officials decided to discontinue the defined 

benefit public employee pension program after pension liabilities were 

recognized on the balance sheet and the expense incurred was included in 
Executive Summary

Page 22 GAO/AIMD-00-57 Accrual Budgeting

the budget. More recently, as a result of recognizing the liability from 

providing accident coverage, the New Zealand government initiated efforts 

to reform the Accident Compensation Corporation program. 

Furthermore, proponents suggested that accrual budgeting provided 

decisionmakers with a more comprehensive picture of a government’s 

financial condition by better integrating financial statement information—

including the balance sheet, operating statement, and cash flow 

statement—into the decision-making process. However, none of the case 

study countries budget for long-term commitments, such as social 

insurance, on an accrual basis. This is because, in their accrual budgets, 

countries have generally mirrored their financial accounting standards that 

do not consider such commitments to be liabilities. 

Accrual Budgeting Helps 

Address Some 

Accountability and Control 

Issues but Raises Others

Proponents also believe accrual budgeting improves transparency and 

accountability. For example, officials in New Zealand informed us that 

cash-based budgeting followed inconsistent and complex practices 

understood by only a few practitioners. In contrast, proponents believe that 

the decision to use accrual-based financial accounting standards as the 

basis for budgeting improved the credibility of the budget because these 

standards are developed by an independent body, are well documented, 

and are generally accepted and understood. In addition, they viewed using 

the same measurement basis for budgeting and financial reporting as 

enhancing oversight. Others disagreed with this view, believing that the 

increased complexities associated with the use of accrual budgeting may 

reduce transparency and control. Because accrual measurement focuses 

on recognizing the financial effects of economic events, it is necessarily 

dependent on interpretations and judgments about both when those 

economic effects occur and what their ultimate costs will be. Some of the 

concerns focus on features that, depending on the approach used, could be 

part of accrual budgeting, such as (1) cash may be appropriated for 

noncash expenses such as depreciation which do not require immediate 

cash outlays, (2) some of the assumptions and judgments necessary to 

develop accrual estimates are complex and may have no clear resolution, 

and (3) when combined with output-based budgeting, wide discretion is 

provided to departments over the use of resources. Under these conditions, 

effective oversight depends on the use of sophisticated financial and 

performance management principles such as asset/liability management 

and benchmarking. 
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Page 23 GAO/AIMD-00-57 Accrual Budgeting

Some Express Skepticism 

About Use of Accrual-Based 

Budgeting

Despite perceived benefits, some officials and other budget experts 

expressed skepticism about the value or feasibility of accrual budgeting. A 

key concern expressed by some government officials and other experts 

was that accrual budgeting does not focus sufficient attention on the 

government’s borrowing requirement and thus fails to adequately address 

the central government’s stewardship role for the current and future 

economy. As noted earlier, there was also some concern because 

decisionmakers have encountered difficulties understanding the 

complexities involved in the use of accrual budgeting because of the 

technical issues and assumptions on which accrual measurement is based. 

For example, the National Audit Office in the United Kingdom noted that 

while accrual measurement may provide a more comprehensive basis to 

assess costs, it is likely to be less precise than cash. Officials from several 

countries commented on the difficulties encountered in valuing some 

assets, including the subjective nature of valuations in some cases. For 

example, several country officials acknowledge the difficulties associated 

with valuing unique assets such as military equipment or national 

monuments which do not have alternative uses or readily available 

comparisons in the private market.19 Nevertheless, asset values are 

particularly important because they serve as the basis for the annual 

depreciation charge included in an accrual budget. 

Implications Despite obvious and significant political, cultural, and economic 

differences, the early experiences of other countries with accrual 

budgeting provide insights that may be helpful as the United States 

considers ways to improve budget recognition of long-term commitments 

and continues to strive for increased government performance and 

accountability. In analyzing the benefits cited by other countries and the 

potential for similar benefits in the United States, it is important to 

consider key differences between (1) the legislative bodies in a 

parliamentary system of government and the Congress of the United States, 

19In the United States, there has been debate surrounding the treatment and valuation of 

unique governmental assets such as weapon systems and heritage assets. In considering this 

issue, the Federal Accounting Standards Advisory Board (FASAB) suggested that (1) the 

value of some federal assets, such as museums and national parks, may be indeterminable 

and (2) allocating the costs of assets such as military weapons systems to accounting 

periods may be meaningless. In response to these difficulties, FASAB required a new 

category of financial reporting, “required supplementary stewardship information,” which is 

to accompany financial statements, but not be included directly on the balance sheet. 
Executive Summary

Page 24 GAO/AIMD-00-57 Accrual Budgeting

especially in terms of the role each plays in the budget process, (2) the 

methods of budget reporting already in place in each country, and (3) the 

relative stages of development of financial reporting and budgeting 

processes. In addition, the implications of other reforms undertaken at the 

same time as accrual budgeting need to be considered. Given the 

differences between the United States and the other countries in all of 

these factors, it is unlikely that the United States would achieve all of the 

benefits claimed by case study countries. However, some benefits could 

result from expanding the selective use of accrual budgeting, as has already 

been demonstrated for credit programs. 

The implications of various accrual budgeting approaches must be 

evaluated against the objectives sought in the U.S. budgeting system. 

Choices about the appropriate method of budget reporting are complicated 

by the multiplicity of the budget’s uses and users. The federal budget is 

simultaneously asked to provide full information and appropriate 

incentives for resource allocation, control over cash, recognition of future 

commitments, and monitoring of performance. Given the multiple and 

potentially competing objectives, choices about the method of budget 

reporting involve trade-offs. For example, control over spending is greatest 

if the budget recognizes the complete costs at the time the spending 

decision is made while assessing performance and its costs is generally 

best supported by recognizing resources as they are used to produce goods 

and services.

Thus, changing the basis of budgeting is much more than a technical 

change; it represents choices among the uses and functions of the budget. 

An accrual budget can be used to better match recognition of budget costs 

with the use of resources and to capture changes in assets and liabilities. 

However, despite some acknowledged limitations in these areas, the 

obligations basis of budgeting used by the United States provides its own 

benefits, particularly for up-front budgetary control. Since the United 

States operates under the principle of the separation of powers the 

constitutional provision “no money shall be drawn from the Treasury but in 

the consequence of appropriations made by law” is particularly 

important.20

20U.S. Constitution, Article I, Section 9, Clause 7.
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Whether accrual budgeting as implemented by the case study countries 

would provide earlier budget recognition of costs depends on the item. For 

many government activities, such as salaries or grant payments, there 

generally would not be significant differences between cash and the annual 

accrual-based costs. However, for programs which involve future cash 

flows such as insurance and pensions, accrual measurement would move 

cost recognition earlier to when the insured event occurs or benefits are 

earned, even if cash flows do not occur in the budget year. In contrast, for 

capital assets, accrual measurement would delay recognition relative to 

obligation-based budgeting by matching its costs not with the purchase but 

with the consumption of the asset. For example, while an obligation-based 

budget recognizes the full cost of an asset and permits congressional 

control by requiring up-front authority for the asset’s full cash purchase 

price before the purchase is made, generally an accrual budget would not 

show a cost for an asset until it begins to be depreciated—after it has been 

purchased and put into service.21

21Case study country officials, however, pointed out that their accrual budgeting 

frameworks have compensating controls. Although treatment varies among case study 

countries, appropriations are generally required for the annual cash required to purchase 

assets. However, these annual cash amounts may not represent the full cost of the assets. In 

some cases, legislative approval is not required for asset purchases below a certain amount 

if the department can fund them from depreciation reserves.
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The fact that a shift to accrual budgeting would reduce control over capital 

purchases relative to the obligation-based budget and would not make a 

significant difference for most budget items raises serious questions about 

whether full accrual budgeting would provide sufficient benefits to warrant 

its full adoption in the United States. However, adopting accrual budgeting 

selectively within an obligation-based control system could be beneficial. It 

would provide a means for improving budget information and incentives 

for decision-making in cases where cash-based measurement does not 

capture the full cost of the government’s commitment while preserving the 

up-front control of the obligation-based budget. The approach developed 

for credit programs in the Federal Credit Reform Act of 1990 is an 

example.22 Similar treatment might be extended to other areas in the 

budget for which cash basis reporting does not adequately represent the 

extent of the government’s commitment, such as employee pensions and 

retiree health benefits or federal insurance programs.23

However, there are limits to which an accrual measurement based on 

financial accounting standards improves recognition of long-term issues. 

For example, accrual budgeting as implemented by the case study 

countries does not fully deal with social insurance commitments. In 

general, the countries have chosen to mirror their financial accounting 

standards in their accrual budgets. Although social insurance programs 

may be widely viewed as government commitments likely to result in 

future cash outlays, they are not currently judged to be liabilities under 

accounting standards in these countries. Thus, none of them have budgeted 

for such commitments on an accrual basis. This would also be the case if 

the United States adopted accrual budgeting based on its federal 

accounting standards. 

As a result, accrual budgeting based on current financial accounting 

standards is not the answer to questions about improving the budget 

recognition of long-term social insurance commitments. If formal 

recognition of social insurance commitments in the budget is desired, other 

methods of incorporating accrual concepts into the budget could be 

22For credit programs, obligations measured on a cash basis sent the wrong signals about 

the cost of the government’s commitment, while obligations measured on an accrual basis—

as required by credit reform—showed the expected cost to the government over the life of 

the credit instrument.

23See Budget Issues: Budgeting for Federal Insurance Programs (GAO/AIMD-97-16, 

September 30, 1997).
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Page 27 GAO/AIMD-00-57 Accrual Budgeting

developed. For programs with current surpluses that are dedicated for 

long-term cost commitments like Social Security, the budget might record 

outlays in the same amount as social insurance receipts to reflect the 

government’s commitment to spend those amounts on benefits in the 

future. Alternatively, it might defer revenue recognition until the receipts 

are used to make payments in the future. Finally, if the decision is made not 

to formally recognize and control the future costs of social insurance 

commitments directly in the budget, decision-making could still be 

enhanced by better integrating supplemental reporting of these costs into 

the budget process. For instance, the present value of the expected cost of 

the government’s long-term commitments could be tracked in the budget 

for each budget account or program alongside its cash-based budget 

authority and outlays. These ideas and others would need to be explored in 

detail by experts in the field of budgeting to determine their workability 

and potential benefits. Suggestions have been made that a budget concepts 

commission is needed to address a number of issues including Social 

Security; it could be the proper forum to fully develop new budgeting ideas.

Some countries’ reform efforts—in particular Australia and New Zealand—

emphasized the importance of matching the budget (including the basis of 

appropriations) with a government’s overall performance management and 

accountability structure.24 The United States faces similar issues as it 

strives to satisfy the objectives of recent reforms such as the Government 

Performance and Results Act (the Results Act). 

However, in the U.S. context, the combination of a shift to accrual 

measurement with a loosening of controls over agency spending decisions 

raises questions about both decreasing the up-front control and changing 

the nature of congressional oversight. Nevertheless, some better matching 

of the cost of resources consumed with the performance achieved might be 

accomplished without forfeiting budgetary controls. For example, GAO’s 

performance budgeting report suggests that agency budget structures can 

be brought into closer alignment with their performance goals. This shift 

would help facilitate greater congressional coordination of performance 

issues in budget deliberations. 

24Improved alignment in these countries involved both a change in (1) how costs were 

measured from cash to accrual and (2) what was measured to focus on the results of 

government spending.
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Ultimately, in certain areas the development of accrual budgeting 

mechanisms could be used to embrace, not weaken, congressional 

oversight. In the U.S. system, congressional budgeting could be enhanced if 

systematic cost data were presented across programs and accounts. To 

move toward this goal, intermediate steps to provide accrual data while 

preserving the control benefits of obligation-based budgeting could be 

taken. For example, mechanisms to charge programs for the use of capital 

assets over time, such as capital acquisition funds, could better align the 

cost of capital with its use while preserving up-front control. This type of 

mechanism is one way that accrual-based costs could be incorporated in 

the budget at the agency level while preserving the cash and obligations 

basis for the government as a whole.

In conclusion, the United States can benefit from the experiences of 

countries that have adopted accrual budgeting. However, for several 

reasons, the wholesale adoption of accrual budgeting in the United States 

may not garner the benefits cited by other countries and may in fact 

undermine other important budgetary goals in the U.S. system. 

Nevertheless, the United States’ obligation- and cash-based budget might 

be improved by selectively incorporating some accrual concepts when 

doing so would improve the up-front recognition of the government’s 

commitments. In addition, an exploration of accrual concepts different 

from those embodied in accounting standards could very well lead to new 

ways of budgeting for long-term commitments like social insurance. For 

example, as mentioned above, steps such as deferring revenue recognition 

could be used as a means to better match Social Security revenues with 

benefit payments. Finally, some case study countries’ experiences point to 

the importance and challenges associated with improving cost information 

to support more performance-focused management. As the United States 

pursues the objectives of the Results Act, continued efforts will be 

necessary to integrate improved financial and performance information 

into the budget process. 

However, in considering potential reforms, it is important to recognize that 

the timing of cost recognition—i.e., cash versus accrual measurement—is 

but one of several factors that shape the budgetary information and 

incentives provided to decisionmakers. For example, as noted above, the 

structure or scope of budget accounts—i.e., whether budget costs are 

arranged based on organization, program, or spending item—also helps 

determine the level of oversight and control placed on public spending. 

Both the early experiences of some case study countries and GAO’s past 

work on the Results Act draw attention to the importance of better 
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Page 29 GAO/AIMD-00-57 Accrual Budgeting

integrating planning and budgeting. Significant challenges remain in 

improving the information provided in the federal budget so that 

decisionmakers have a more comprehensive and cohesive picture of the 

government’s activities. For example, in the past, GAO has emphasized the 

need to better integrate information on the various federal strategies and 

tools—such as spending, tax expenditures, and regulation—being used to 

address particular national needs. The development of a broader and more 

integrated budgetary framework is particularly important for crosscutting 

areas, such as health care or the antiterrorism effort, which may involve tax 

incentives and/or an array of programs carried out by numerous different 

agencies. More fully integrating longer-term analyses, such as the use of net 

present value calculations, into the budget process may also be useful in 

helping decisionmakers understand the future implications of current 

policy decisions. Along these lines, case study countries’ experiences 

suggest that there may be value in using multiple measures to assess fiscal 

and managerial performance. Thus, as in the case study countries, accrual 

budgeting represents one tool which can be used to improve the role of the 

budget in addressing concerns about public sector performance, 

sustainability of government activities, and accountability for results. 

Further, since the U.S. government continues to have responsibility for the 

national fiscal policy and management of the national debt, whatever the 

merits of accrual measurement, budget measures which are easily 

reconciled with the public sector borrowing requirement will continue to 

be important. 

Matters for 

Congressional 

Consideration

As the Congress considers changes in the budget structure and/or process, 

it would be well served to explore ways to improve information on two 

dimensions: breadth and time horizon. This report dealt with one way to 

lengthen the time horizon for information. The Congress should consider 

the selective use of accrual measurement in the budget in areas where it 

would enhance obligation-based control. In addition, the Congress and the 

Office of Management and Budget should consider whether and when to 

use mechanisms, such as capital acquisition funds, to better match budget 

recognition with the consumption of resources while preserving up-front 

control.
Page 30 GAO/AIMD-00-57 Accrual Budgeting

Chapter 1

Introduction Chapte1r

In recent years, the United States and several other countries have made 

changes—some more sweeping than others—aimed at improving public 

sector financial and performance management. Although differences exist, 

the reforms have converged around the common objective of establishing 

more business-like practices with the aim of improving the performance, 

sustainability, and transparency of government activities and ensuring 

accountability for results. In a number of countries, these reform efforts 

have challenged traditional thinking about cash-based accounting and 

budgeting systems and stimulated interest in the potential for accrualbased information to contribute to improved public sector management. 

Accrual measurement is generally viewed as a better means of matching 

cost recognition with the consumption of resources.

At least 11 of 29 Organization for Economic Cooperation and Development 

(OECD) member countries, including the United States, have incorporated 

accrual-based measures to some degree into their financial management 

systems, and four—Australia, New Zealand, Iceland, and the United 

Kingdom1

—have extended or plan to extend the use of accruals directly 

into the budget for most items. Others, such as the United States, Canada, 

and the Netherlands, have adopted more limited accrual budgeting 

approaches, applying accrual budgeting to a limited number of budget 

items or specific departments. Other countries’ early experiences with 

accrual budgeting may be useful to the United States as it continues down 

the path toward improving the way the government budgets for and 

manages its operations and programs and considers whether to extend its 

use of accrual budgeting.

1

As discussed in more detail in the report, Iceland has adopted accrual budgeting with the 

notable exception of capital spending. The United Kingdom does not accrue revenues.
Chapter 1

Introduction

Page 31 GAO/AIMD-00-57 Accrual Budgeting

Background

Method of Budget Reporting 

Reflects Choices About the 

Uses and Functions of the 

Budget

The U.S. federal budget serves as the primary financial plan of the federal 

government and thus plays a critical role in the decision-making process. 

Policymakers, managers, and the American people rely on it to frame their 

understanding of significant choices about the role of the government and 

to provide them with information to make decisions about individual 

programs and overall fiscal policy. While budgetary decisions are 

inherently based on political choice, the method of budget reporting2

 plays 

an important role by shaping difficult choices and highlighting what tradeoffs are brought to the forefront. Further, because the budget process 

serves as a key point of accountability between policymakers and 

managers, the way costs are measured and reported in the budget can have 

significant consequences for managerial incentives. The three bases of 

measurement discussed in this report—cash, obligations, and accrual—

represent much more than technical means of cost measurement; they 

reflect fundamental choices about the uses and functions of the budget.

Cash and accrual represent two different bases for measuring budgetary 

costs. Cash-based measurement records receipts and outlays when cash is 

received or paid, without regard to when the activity occurs that results in 

revenue being earned, resources being consumed, or liabilities increased. 

Accrual-based measurement, on the other hand, records revenues and 

expenses in the period the activity generating revenues, increasing 

liabilities or consuming resources occurs, regardless of when associated 

cash is actually received or paid. Accrual measurement is useful in 

accommodating situations where transactions are not completed in one 

period. In the financial accounting context, accrual measurement places an 

emphasis on contractual duties. For example, revenues are recognized to 

the extent that goods or services have been delivered and expenses are 

recognized for assets used and liabilities incurred in generating the 

revenue. In an accrual accounting system, a corollary of revenue and 

expense recognition is the simultaneous recognition of changes in assets 

and liabilities. 

2

In this report, the method of budget reporting refers to the criteria used to determine how 

and when transactions are recognized and measured in the budget.
Chapter 1

Introduction

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In comparison, obligation-based budgeting focuses on the legal obligations 

entered into during a period regardless of when cash is paid or received 

and regardless of when resources acquired are to be received or consumed. 

The obligations basis is used in the United States for controlling federal 

government obligations and outlays. Obligation-based budgeting involves 

three stages: (1) the Congress must enact budget authority3

 before 

government officials may obligate the government to make outlays,4

(2) government officials commit—obligate—the government to make 

outlays by entering into legally binding agreements, and (3) outlays are 

made to liquidate obligations. Obligation-based budgeting, as currently 

used in the United States, provides an additional level of control over pure 

cash budgeting by requiring that entities have authority to enter into 

obligations to make outlays of government funds. Budget authority, 

obligations, outlays, and receipts are generally measured in cash or cashequivalent terms.5

 Further, with limited exceptions, the unified budget 

deficit/surplus—the key focus of the policy debate—is the difference 

between cash receipts and cash outlays. As a result, the U.S. budget is often 

referred to as cash-based as well as obligation-based.

In contrast to cash- and obligation-based budgeting, accrual budgeting 

generally involves aligning budget recognition with the period in which 

resources are consumed or liabilities increased, rather than when 

obligations are made or cash flows occur. Although accruals can be 

measured in a variety of ways, the term accrual budgeting typically has 

been used in case study countries to refer to the recording of budgetary 

costs based on financial accounting standards. Thus, accrual-based 

appropriations, by reflecting costs incurred during a fiscal year, generally 

provide information similar to that found in a private sector operating 

statement. Table 1 provides an overview of the three methods of budget 

3

In the U.S. federal budget system, budget authority refers to authority provided by law to 

enter into financial obligations that will result in immediate or future outlays of government 

funds.

4

In the U.S. federal budget system, outlays refer to the disbursement of government funds in 

order to liquidate an obligation.

5

Theoretically, transactions within an obligation-based budget could be measured on either 

a cash/cash-equivalent basis or an accrual basis. With limited exceptions, the U.S. 

obligation-based budget measures transactions on a cash or cash-equivalent basis. One 

exception is the treatment of credit programs for which budget authority, obligations, and 

outlays are measured on an accrual basis. Certain interest payments are also measured on 

an accrual basis. For more details, see the discussion of credit reform in the following 

section on recent reform efforts in the United States.
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reporting—cash-based, obligation-based, and accrual-based—and uses two 

hypothetical transactions to illustrate how the budgetary information 

provided to decisionmakers may differ based on the method used. 

Choices about the appropriate method of budget reporting are complicated 

by the multiplicity of the budget’s uses and users. The federal budget is 

simultaneously asked to provide full information and appropriate 

incentives for resource allocation, control over cash, recognition of future 

commitments,6

 and the monitoring of performance. Given the multiple and 

potentially competing objectives, choices about the method of budget 

reporting involve trade-offs. For example, control over spending is greatest 

if the budget recognizes the complete cost at the time the decision is made 

while assessing performance and its cost is generally best supported by 

recognizing resources as they are used to produce goods and services. As 

demonstrated in table 1, the up-front funding requirement under an 

obligation-based budget helps ensure control over the acquisition of a new 

building but does not align its cost with its use. Conversely, accrual 

budgeting better aligns the cost of the building with the periods that benefit 

from its use, but in its simplest form it does not provide for up-front control 

over entering a legally binding commitment to purchase the building. Given 

these trade-offs, a budget reporting approach should be selected based on 

the primary decision-making and accountability needs of a governmental 

system while balancing the needs of multiple users.

6

In this report, the term “commitment” is used to mean a promise to provide a good or 

service. It does not necessarily mean a legally binding obligation, although it may be, in the 

case of a contract to purchase an asset, for example.
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Table 1: Comparison of Methods of Budget Reporting

Notes:

a

In this table, the term “budget authority” is used as a proxy for whatever term a government uses to 

imply legislative approval of amounts in its budget. In case study countries, authority to enter 

Method General description

Budgetary treatment of hypothetical transactions relating to capital and 

inventories

Purchase and 1st year’s use of building

Total equipment cost = $10m

Cash payments during fiscal year = $5m

Depreciation expense for fiscal year = $1m

Purchase and use of supplies

Total supplies ordered and 

received = $3m

Total payments for supplies = $2m

Total supplies used = $1m

Cash Budget authoritya

 would equal 

estimated cash payments for the 

fiscal year. No appropriation required 

for outstanding contract costs or 

depreciation expense. Prior legislative 

budget approval may not be required 

before entering into legally binding 

contracts whose cash consequences 

do not occur during the fiscal year.

Outlaysb and receipts are recognized 

in the budget only in year cash flows 

take place.

$5m included in budget authority

$5m included in outlays and in 

deficit/surplus calculation

$2m included in budget authority 

$2m included in outlays and in 

deficit/surplus calculation

Accrualc Budget authority is the estimated 

amount of resources consumed, 

irrespective of when commitment is 

made or cash flows take place.

Outlays/receipts are recognized in 

budget in the period resources are 

consumed, liabilities increased, or 

receipts earned. 

$1m included in budget authority

$1m included in outlays in the 

deficit/surplus calculation (assuming net 

operating amount used as measure of 

deficit/surplus)

$5m included in financing requirement 

(cash flows), which may or may not 

require approval depending on approach 

used 

$1m included in budget authority 

$1m included in outlays and in 

deficit/surplus calculation to cover 

supplies consumed during the 

period

$2m included in financing 

requirement (cash flows), which 

may or may not require approval 

depending on approach used

Current 

United 

States 

obligationbased 

budget

Budget authority is the authority 

provided by law to enter into financial 

obligations that will result in immediate 

or future outlays involving federal 

government funds. This authority is 

required before officials can enter into 

legal commitments on behalf of the 

government. 

Obligations are recorded primarily 

when goods and services are ordered, 

regardless of when resources acquired 

are to be received or consumed.

$10m included in budget authority and 

obligations

$5m included in outlays and in 

deficit/surplus calculation

$3m included in budget authority 

and obligations

$2m included in outlays and in 

deficit/surplus calculation
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obligations is generally dealt with through executive controls. In the United States, congressional 

approval is required to enter into financial obligations.

b

In this table, the term “outlay” is used as a proxy for whatever term a government uses to signify the 

use of resources.

c

As will be discussed in detail in the report, accrual budgeting approaches vary significantly across 

countries. These examples are to provide general understanding of the accrual budgeting concept in 

its simplest form.

Cash-Based Measurement 

Traditionally Used for 

Public Sector Budgeting 

Historically, countries have maintained central government budgets on a 

cash basis. The use of cash-based measurement in public sector budgeting 

has several advantages. Perhaps most notably, cash is a widely used and 

traditionally accepted measure of the government’s impact on the economy 

since the cash-based deficit closely approximates the government’s 

borrowing needs.7

 Further, because it can be easily tracked, cash fits well 

with the traditional focus of public sector budgeting on control and on 

ensuring compliance with spending limits. In addition, for most 

government activities, such as salaries or grant payments, the time between 

the occurrence of the underlying transaction and the cash flows is 

relatively short. Therefore, cash-based measurement generally provides 

both adequate information and control.

There are some activities, however, for which cash measurement is 

misleading. For programs such as credit, pensions, other postemployment 

benefits, and insurance, the current-year government obligations can 

involve cash flows to and from the government for many years. Other 

programs involve implied commitments or claims on future budgetary 

resources for social insurance programs such as Social Security and 

Medicare. Cash-based reporting also does not adequately reflect the cost of 

other decisions that can have a long-term impact, such as the cost of some 

tax expenditures, regulations, or government liabilities for environmental 

cleanup. As a result, cash-based measurement may not recognize the 

7

A cash-based budget is not the only measure available to assess the impact of government 

activities on the economy. In the United States, for example, the official national income and 

product accounts (NIPAs) provide a picture of government activities in terms of production, 

distribution, and use of output. There are a number of major differences in the treatment of 

federal receipts and expenditures in the NIPAs from their treatment in the unified budget, 

including adjustments for timing of payments. For example, the unified budget counts 

receipts for corporate taxes when they are received, whereas NIPA counts them when the 

liability is accrued. NIPA and the unified budget also differ in their treatment of investment 

and capital consumption. The unified budget reflects all expenditures of the federal 

government including investment while the NIPA budget shows current expenditures and 

thus excludes investments and includes the consumption of fixed capital (depreciation). 
Chapter 1

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government’s ultimate costs at the time the commitment is made. In other 

cases, such as for capital assets and inventories, the actual use or 

consumption of the asset may be spread over a period of time. As a result, 

cash-based measurement may not properly align costs with the provision of 

government goods or services. Thus, the true cost to the government as a 

whole and the specific cost of particular goods or services may be 

overstated in some periods and understated in others. These issues have 

led analysts and researchers in the United States and other countries to 

raise concerns over the past several decades that cash-based budgeting 

does not provide adequate information or appropriate incentives for some 

government activities. While the United States budgeted on an obligations 

basis and garnered its control benefits, most other case study countries 

were budgeting solely on a cash basis prior to their shift to accrual 

budgeting. 

Public Management 

Reforms Have Renewed 

Interest in Accrual 

Reporting and Budgeting

In recent years, public sector reforms emphasizing improving transparency, 

cost effectiveness, and managerial flexibility have served to further 

highlight the limitations of cash-based reporting and budgeting. For 

example, it has been recognized that adequately assessing performance 

under more result-oriented management systems requires information 

beyond the cash flows in a given period and more consistent and credible 

cost data across programs and accounts. At the same time, there has been a 

growing recognition that information on the long-term cost consequences 

of today’s commitments is important for policymakers as they consider 

making those commitments. 

Faced with concerns about the sustainability of government activities and 

the demands of more result-oriented management systems, some countries 

have begun moving towards accrual-based measurement for financial 

reporting and, in some cases, budgeting. To date, at least 11 OECD 

countries, including the United States, had incorporated accrual measures 

to some degree for financial accounting purposes, and four—New Zealand, 

Australia, Iceland, and the United Kingdom—had extended or plan to 

extend accruals directly into their budgets for most budget items. Other 

countries, such as the United States, Canada, and the Netherlands, have 

adopted accrual budgeting approaches only for specific budget items or 

departments. Table 2 provides a snapshot of the use of accrual reporting 

and budgeting by the United States and the other countries included in our 

review.
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Table 2: Use of Accrual Reporting and Budgeting by Country Reviewed

Notes:

a

Accrual measurement used for credit programs and some interest.

b

This involves the whole-of-government, including local authorities proposed for FY 2005-06.

c

Departmental financial statements will be produced on a full accrual basis in FY 2001-02.

d

Twenty-two agencies produce accrual-based financial statements and receive appropriations for the 

“price” of outputs based on accrued costs. For more information on these agencies and the Dutch 

approach to accrual budgeting, see appendix IV.

Recent U.S. Reform Has 

Taken Significant Steps to 

Improve Financial and 

Performance Management

Like many of its OECD counterparts, the United States has taken 

significant steps in recent years to improve public sector financial and 

performance management. Recognizing the need to improve effectiveness 

while at the same time limiting costs, the Congress established a statutory 

framework, outlined in table 3, which provides a powerful framework for 

instilling a more performance-driven approach to management and 

accountability.8

 These reforms have served to highlight the need for more 

complete and reliable cost and performance information. In doing so, 

questions have been raised about whether the current U.S. cash- and 

obligation-based budget provides (1) a complete picture of the 

government’s financial condition to assess the long-term sustainability of 

government activities such as Social Security and (2) matches cost to 

Accrual financial statements Budgets on accrual basis

Department-level National (core) government 

United States Yes Yes, subject to audit since FY 1997 No, with limited exceptionsa

New Zealand Yes, since FY 1991-92 Yes, since FY1991-92 Yes, since FY 1994-95

Australia Yes, since FY 1995-96 Yes, since FY 1997-98 Yes, since FY 1999-2000

United Kingdom Yes, started in 1993; all by 

FY 1999-2000

Yes, estimated for FY 1999-2000b Proposed. First accrual budget to be 

presented for FY 2001-02 

Iceland Yes, since FY 1992 Yes, since FY 1992 Yes, since FY 1998. Also presented on 

cash basis

Canada Noc Yes, modified accrual; full accrual for 

FY 2001-02

No, modified accrual including 

pensions and accounts payable

Netherlands No, except for select 

agenciesd

No No, except for select agencies

8

See Managing for Results: The Statutory Framework for Performance-Based Management 

and Accountability (GAO/GGD/AIMD-98-52, January 28, 1998).
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government performance in ways which effectively support management 

reform efforts. 

Table 3: Statutory Frameworka for Performance-Based Management and Accountability Reform Efforts in the United States

Notes: 

a

The framework also includes: Paperwork Reduction Act of 1995, P.L. 104-13; Debt Collection Act of 

1982, as amended, P.L. 97-365; Debt Collection Improvement Act of 1996, P.L. 104-134, sec. 31001; 

Prompt Payment Act P.L. 97-177, 96 Stat. 85 (1982), Codified at 31 U.S.C. secs. 3901-3906; Inspector 

General Act, as amended P.L. 95-452; and Computer Security Act of 1987, as amended, P.L. 100-235, 

101 Stat. 1724 (1988), as amended by P.L. 104-106, 110 Stat. 701 (1996).

b

The U.S. Government Standard General Ledger provides a standard chart of accounts and 

standardized transactions that agencies are to use in all their financial systems.

c

The Omnibus Consolidated Appropriations Act of 1997 (P.L. 104-208) renamed both the Federal 

Acquisition Reform Act of 1996 (P.L. 104-106, Div. D) and the Information Technology Management 

Reform Act of 1996 (P.L. 104-106, Div. E) as the “Clinger-Cohen Act of 1996."

Title of act Purpose

Government Performance and 

Results Act of 1993, P.L. 103-62

The purposes of the Results Act include holding federal agencies accountable for achieving 

program results and requiring federal agencies to clarify their missions, set program goals,

and measure performance toward achieving those goals.

Chief Financial Officers Act of 1990, 

P.L. 101-576, and Government 

Management Reform Act of 1994, 

P.L. 103-356

The objective of the Chief Financial Officers (CFO) Act is to greatly improve and strengthen 

financial management and accountability in the federal government.

The Government Management Reform Act expanded the CFO Act by, among other things, 

establishing requirements for the preparation and audit of 24 agencywide financial statements 

beginning with fiscal year 1996 and for the preparation and audit of consolidated financial 

statements for the federal government beginning with fiscal year 1997.

Federal Financial Management 

Improvement Act of 1996, 

P.L. 104-208, Div. A, 

Title I, sec. 101(f) [Title VIII], 

110 Stat. 3009-389

The purpose of the Federal Financial Management Improvement Act is to ensure that agency 

financial management systems comply with federal financial management system 

requirements, applicable federal accounting standards, and the U.S. Government Standard 

General Ledger b

 in order to provide uniform, reliable, and more useful financial information.

Clinger-Cohen Act of 1996, 

P.L. 104-208

The purpose of the Clinger-Cohen Actc

 is to improve the productivity, efficiency, and 

effectiveness of federal programs through the improved acquisition, use, and disposal of 

information technology resources. 

Federal Managers’ Financial 

Integrity Act of 1982, P.L. 97-255, 31 

U.S.C. secs. 1105, 1113, and 3512

The purpose of the Federal Managers’ Financial Integrity Act is to establish a framework for 

ongoing evaluations of agency systems for internal accounting and administrative control.

Federal Credit Reform Act of 1990, 

as amended, P.L. 101-508, 104 Stat. 

1388-609 (1990), and as amended 

by P.L. 105-33, 111 Stat. 692 (1997)

The purpose of the Federal Credit Reform Act is to accurately measure the costs of federal 

credit programs by placing the cost of credit programs on a budgetary basis equivalent to other 

federal spending and to improve the allocation of resources among credit programs and 

between credit and other spending programs.
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At the heart of this framework are two significant reforms of the 1990s: the 

Chief Financial Officers (CFO) Act of 1990 and the Government 

Performance and Results Act of 1993 (the Results Act). The CFO Act—as 

expanded by the Government Management Reform Act of 1994 and 

amended by the Federal Financial Management Improvement Act of 1996—

was designed to remedy decades of serious neglect in federal financial 

management by establishing chief financial officers across the government 

and requiring the preparation of audited annual financial statements. It 

requires the preparation and audit of agencywide financial statements for 

24 specified agencies beginning with fiscal year 1996 and for the 

preparation and audit of consolidated financial statements for the federal 

government beginning with fiscal year 1997. While the CFO Act established 

the foundation for improving management and financial accountability 

among agencies, the Results Act aims more directly at improving program 

performance. Under the Results Act, agencies are required to set multiyear 

strategic goals and corresponding annual goals, measure performance 

toward achievement of those goals, and report on their progress. 

These reform objectives have been supported by the development of 

financial and cost accounting standards suitable for the federal 

environment.9

 Under these federal financial accounting standards, the 

financial statements required by the CFO Act are prepared on an accrual 

basis unless otherwise noted. In contrast, the federal budget is based on 

budgetary concepts and policies adopted by the Congress and the 

executive branch, generally on an annual cash and obligation basis.

The United States has, however, also recognized the contribution accrualbased measurement can make to budgeting. In a series of reports in the 

1980s on managing the cost of government, we advocated the use of some 

accrual cost measures in the budget. Specifically, we reported that the 

budget’s exclusive focus on cash transactions meant that the costs of some 

9

The Federal Accounting Standards Advisory Board (FASAB) was established in October 

1990 to consider and recommend accounting standards to address the financial and 

budgetary information needs of the Congress, executive agencies, and other users of federal 

financial information. When the Board has developed a proposed concept or standard, it is 

submitted to the Secretary of the Treasury, the Director of OMB, and the Comptroller 

General for their review. If, within 90 days after its submission, any one of these officials 

objects to the proposed concept or standard, then it is returned to the Board for further 

consideration. If, within 90 days after its submission, none of these officials objects to the 

proposed concept or standard, it becomes final. Cost accounting standards developed by 

FASAB require agencies to develop and implement cost accounting systems that can be 

used to relate the full costs of various programs and activities to performance outputs.
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programs, including retirement, insurance, and credit, were not accurately 

reflected in the budget. Since then, the budget has been modified gradually 

with the use of accrual measures to recognize the government’s costs for 

certain programs. For example, in 1985, budgeting for military retirement 

costs was moved to an accrual basis at the program level by reflecting the 

government’s expected costs for retirement benefits as they are earned. 

Similarly, since 1987, accruing retirement costs not covered by employee 

contributions have been charged to employing agencies for civilian 

employees covered by the Federal Employees Retirement System. In both 

cases, these program costs are offset within the budget because each 

agency’s outlays for the accrued cost are paid to and recorded as receipts 

by the military and civilian retirement systems, respectively. As a result, the 

allocation of costs across agencies is improved. However, because the 

retirement systems themselves are within the budget, total outlays, and 

thus the deficit/surplus, include only cash outlays to current retirees.
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More recently, the Federal Credit Reform Act of 1990 changed the method 

of controlling and accounting for credit programs to an accrual basis and 

uses these accrued costs in the deficit and surplus. Prior to credit reform, 

outlays for credit programs were reflected in the budget only when cash 

was disbursed. Thus, the full amount of direct loans was reported as an 

outlay, ignoring that many would in fact be repaid. For loan guarantees, no 

outlays were reported when guarantees were made, thus ignoring the fact 

that some of the guaranteed loans would eventually default and require 

governmental cash outlays. Cash-based measurement thus overstated the 

cost of direct loans and understated the cost of loan guarantees in the year 

they were made. This not only skewed the cost comparisons between these 

two similar programs but also misrepresented their relative costs in 

comparison with other federal spending and led to disadvantageous 

patterns of funding loan guarantees rather than direct loan programs. 

Credit reform addressed the shortfalls of cash-based budget measurement 

for credit programs by requiring the budget to include before the credit is 

extended the estimated net present value10 of the cost11 to the federal 

government over the entire lives of loans or loan guarantees. 

10Present value is the worth of a future stream of returns or costs in terms of money paid 

today. A dollar today is worth more than a dollar at some date in the future because today’s 

dollar could be invested and earn interest in the interim.

11Under the Federal Credit Reform Act, the estimated cost of a direct loan or loan guarantee 

is now the sum of all expected costs—including interest rate subsidies and estimated 

default losses—and all expected payments received by the government over the life of the 

commitment, discounted by the interest rate on Treasury securities of similar maturity to 

the loan or guarantee. Reestimation of the cost of loans disbursed or guaranteed in a given 

year is required over the life of the commitment.
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There has been continued interest in the potential for accrual-based 

measurement to overcome the limitations of cash-based measurement for 

specific programs. Several years ago, the Chairman of the House 

Committee on the Budget asked us to review the budget treatment of 

federal insurance programs to assess whether cash-based budgeting 

provides complete information and whether accrual-based information 

could be used to improve budgeting for these programs. In 1997, we 

concluded that for federal insurance programs cash-based measurement 

may provide incomplete or misleading information because the annual net 

cash flows currently reported in the budget may not adequately match 

premium collections with the expected costs of insurance commitments. 

We recommended that the Director of the Office of Management and 

Budget (OMB) develop accrual-based cost estimation models for federal 

insurance programs and encourage similar efforts at agencies with 

insurance programs. Further, we recommended that, as estimates become 

available, they should be reported annually in a standardized format as 

supplemental information along with the cash-based estimates.12 Building 

on these recommendations, legislation was introduced in the 106th 

Congress calling for the development of accrual-based cost estimates for 

federal insurance programs, with the eventual aim of incorporating these 

estimates into the budget. In addition, there has been increasing attention 

paid to the solvency of the Social Security program, which has generated 

interest in whether accrual-based information could serve to highlight longterm issues in the annual budget process.

Two concerns in particular have prompted interest in the use of accrual 

budgeting: (1) a desire to improve the budget treatment of commitments 

which extend over many years and (2) a growing recognition that to be 

most useful the improved cost and performance information provided by 

recent reforms must be closely linked to the federal government’s budget 

and appropriations process. As a result, there has been interest in what 

lessons may be learned from other countries that have chosen to adopt 

accrual-based budgeting. These countries’ early experiences with the 

benefits, problems, and feasibility of incorporating accrual-based 

measurement into the budget may provide insights as the United States 

continues its own financial and performance management reform efforts.

12See Budget Issues: Budgeting for Federal Insurance Programs (GAO-AIMD-97-16, 

September 30, 1997).
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Countries Face Common 

Reform Objectives But 

Different Institutional 

Frameworks

Although commonalties in recent public sector reform agendas pursued by 

the United States and other countries provide a valuable opportunity for 

shared learning, consideration must be given to significant differences that 

exist among countries. Specifically, key differences exist between the role 

legislative bodies in a parliamentary system of government and the 

Congress of the United States play in the budget process. In the United 

States, the legislature and executive are independently elected and have 

different constituencies and roles. In a parliamentary system, governments 

are formed by the political party, or coalition of parties, that have the 

support of a majority of Parliament. As a result, the line between the 

executive and the legislative functions is not as clear as it is in the United 

States. Many important budget decisions that are debated during the 

annual appropriations process in the United States occur before the budget 

is presented for parliamentary approval in the parliamentary system. 

Parliament’s duty is to satisfy itself on behalf of its constituency that the 

current government has the Parliament’s full confidence to continue 

governing. In fulfilling this duty, case study countries’ parliaments regularly 

enact the government’s budget without amendment. In Westminster 

systems a failure to do so may be viewed as a lack of confidence in the 

government and signal a need for new elections, including for a new 

Parliament.

Another difference between the United States and other countries is the 

method of budget reporting to which accrual is compared. While most of 

the countries in our study previously had budgeted on a cash basis, the 

United States has an obligation-based budget that permits greater 

legislative control than a cash-based budget. This difference is significant 

for evaluating the implications of a shift to accrual budgeting. As discussed 

later in this report, the use of an obligation-based budget provides 

additional recognition and control beyond that in either a pure cash budget 

or an accrual budget and thus has additional implications for assessing 

what would be gained and/or lost were the United States to move to accrual 

budgeting.

Objectives, Scope, and 

Methodology

Representative Benjamin L. Cardin asked us to review other countries’ 

experiences with accrual budgeting. Specifically, Representative Cardin 

was interested in accrual budgeting since such a shift in measurement is 

one way to improve the recognition of the costs of some government 

commitments. We were asked to review (1) how accrual budgeting fits into 

these countries’ other reform efforts and (2) the implications the shift in 
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budget reporting has had, or may have, on fiscal policy decision-making 

and on managerial decision-making. Finally, Representative Cardin asked 

us to summarize, based on the experiences of these countries, any issues 

for the United States to consider.

To select countries for our review we consulted with OECD’s Public 

Management Service (PUMA). PUMA analyzes and assesses information 

and reports on public management developments in OECD member 

countries, including detailed studies on budget reforms. Based on this 

preliminary research, we identified countries that have adopted or plan to 

adopt accrual budgeting for most government activities. These were the 

United Kingdom, Iceland, Australia, and New Zealand. Two other 

countries—Canada and the Netherlands—have adopted accrual budgeting 

selectively and may expand into other areas but do not have set plans and 

time frames for doing so. In addition, we interviewed PUMA officials, as 

well as other international experts on accrual budgeting reforms with the 

International Monetary Fund (IMF) and the Brookings Institution to obtain 

more information on the nature and scope of these countries’ reforms. We 

also researched these countries’ budget processes and reforms from other 

publicly available information sources, including their own government 

Internet web sites.

We focused most of our attention on the four countries that have 

implemented, or plan to implement, accrual budgeting most fully. To obtain 

information on the genesis of these countries’ reforms, the role accrual 

budgeting plays in broader reform efforts, the perceived benefits of accrual 

budgeting, and the implementation challenges posed by the shift to accrual 

budgeting, we interviewed various government officials and other analysts 

involved in influencing decisions about accrual budgeting. Specifically, we 

spoke with senior officials responsible for designing and implementing the 

reforms. In general, these same officials were also able to describe the key 

details of the new budget format and the implications this shift had or is 

expected to have for decision-making.

We also spoke with proponents and skeptics of accrual budgeting in 

Canada and the Netherlands, both of which are considering accrual 

budgeting issues. In these countries we focused our resources on 

understanding the issues in their debate over how accrual budgeting might 

be implemented and how it might influence decision-making.

To determine the interaction between the new accrual-based budgets and 

fiscal policy, we interviewed senior government officials responsible for 
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the development of fiscal policy. We also reviewed these countries’ 

published strategies for debt management and fiscal policy to gain an 

understanding of how accrual budgeting will affect these strategies.

To determine the impact the shift to accrual budgeting will have on 

resource allocation decisions we met with Members of Parliament when 

possible and with key parliamentary staff. They were able to describe 

Parliament’s role in the resource allocation process, which differs from the 

role the Congress plays in resource allocation in the United States. In most 

of these countries, we also interviewed senior staff to Cabinet officials to 

gain information on how the accrual information is used in the 

development and implementation of fiscal policy.

To gain an understanding of (1) how accrual budgeting will influence 

managerial decision-making at the departmental level and (2) what 

challenges are faced in implementing the shift to an accrual budget, we 

interviewed the budget development officers in various ministries. For 

example, in Australia we met with the budget development officers at the 

Ministry of Defence and Ministry of Family and Community Services. In the 

United Kingdom, we met with officials from the Ministry of Defence, 

Customs and Excise, and the Home Office. 

To identify potential audit and financial control issues, we interviewed 

senior staff in the national audit offices.

We sent copies of the appendixes for review and comment to officials in 

each of the countries we visited to ensure the accuracy of our portrayal of 

their reform efforts and the details of the treatment of specific budget 

items.

To help us identify and assess the implications that the experiences of 

these countries may have for the U.S. budget process, we convened a panel 

of experts including staff from OMB and the Congressional Budget Office. 

We provided the panelists with information gathered during our visits and 

held a wide-ranging discussion of the implications for the United States. In 

addition, our panelists and other experts reviewed a draft of this report to 

ensure completeness and accuracy of the issues discussed in relation to the 

implications of accrual budgeting in the U.S. context.

Our work was conducted in the six case study countries and Washington, 

D.C., from July 1998 through January 2000 in accordance with generally 

accepted government auditing standards.
Page 46 GAO/AIMD-00-57 Accrual Budgeting

Chapter 2

An Overview of Nations’ Accrual Budgeting 

Initiatives Chapte2r

In the countries we reviewed, the use of accrual budgeting has been linked 

intrinsically with broader public management reforms driven by concerns 

about the size, role, and effectiveness of the public sector. While 

proponents attributed improvements in fiscal policy and managerial 

decision-making to the adoption of accrual budgeting, others have 

expressed skepticism about the usefulness and feasibility of accrual 

measurement for public sector budgeting. Further, because accrual 

budgeting was just one part of broader reform efforts, it is difficult to 

isolate the direct benefits and limitations of accrual budgeting from those 

resulting from other aspects of the comprehensive changes. 

Although countries that have chosen to adopt accrual budgeting tend to use 

a common language in articulating their objectives, they have taken 

significantly different approaches in designing and implementing their 

accrual budgeting frameworks. These approaches generally reflect each 

individual country’s reform environment and objectives. Thus, while 

“accrual budgeting” is often used as a generic term, it has been applied in 

different forms to address a variety of budgeting challenges.

Accrual Budgeting 

Adopted as Part of 

Broader Reform 

Efforts

Case study countries generally adopted accrual budgeting and reporting as 

part of broader reform efforts.1 In general, these efforts sought to improve 

the effectiveness and efficiency of public sector operations through 

improved transparency and more decentralized performance-oriented 

management. However, the impetus for and the magnitude of change 

varied. Some countries, such as New Zealand and Iceland, were motivated 

by large deficits and/or concerns over the sustainability of a large public 

sector. Others, such as the United Kingdom and Australia, undertook 

change as part of more general improvements in public sector 

management. Further, the situation is dynamic as some countries continue 

to refine and expand their reforms, including the role of accrual budgeting. 

As countries pursued these broader reform agendas, officials increasingly 

realized the limitations of purely cash-based budgeting systems. For 

example, by focusing budget decisions on cash flows within a particular 

year, cash-based budgeting did not include crucial information on assets, 

liabilities, and other commitments necessary to assess the sustainability of 

government activities or to provide incentives for a longer-range policy and 

1

See appendixes for more detailed descriptions of the accrual budgeting reforms in each 

country.
Chapter 2

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management focus. Further, because cash-based budgeting did not always 

capture the full costs incurred in a period, it was viewed as hampering full 

understanding of and accountability for the relationship between 

performance and cost, a cornerstone of the performance-oriented 

management paradigm. According to officials in several countries, these 

concerns were heightened by the general belief that cash-based budgeting 

allowed manipulation of spending across years simply by delaying or 

accelerating cash payments. In addition, they expressed concerns that 

cash-based budgeting misstated the annual cost of using capital by failing 

to spread the purchase costs of capital projects over their useful lives and 

by ignoring the opportunity cost of tying up capital in the form of physical 

assets.

Proponents described accrual budgeting as an integral tool within broader 

reform efforts. In New Zealand, accrual budgeting was adopted as a part of 

a systematic program of sweeping changes that, beginning in 1984, sought 

to transform the country’s economy and public management system in 

response to several years of serious economic difficulties. These reforms 

comprehensively and fundamentally restructured the role of the national 

government in the economy by corporatizing and privatizing government 

entities and enhancing efficiency and accountability in the remaining 

public sector.2

 In addition, the reforms radically changed the accountability 

relationship between the government and departmental executives by 

establishing 5-year contracts with departmental executives and holding 

them accountable for achieving discrete and measurable performance 

outputs included in the terms of purchase agreements3

 signed with their 

respective ministers. Accrual budgeting was described as an essential tool 

in supporting this new model of devolution of responsibility by reflecting 

the full costs of resources used in achieving those outputs. 

Australia’s adoption of an integrated accrual budgeting and reporting 

framework built on numerous reforms previously undertaken to improve 

the effectiveness and efficiency of government operations and increase the 

transparency of budget and fiscal policy decisions. Following a 

comprehensive review of the government’s operations in 1996, a reform 

agenda was developed which, according to the National Commission on 

2

Budget Issues: Privatization/Divestiture Practices in Other Nations (GAO/AIMD-96-23, 

December 15, 1995).

3

The purchase agreements between ministers and departments specify individual outputs in 

terms and conditions similar to private sector contracts.
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Audits, was intended to (1) put the public sector on a more business-like 

footing, (2) foster a more competitive environment, and (3) build a culture 

that values high performance. Along these lines, the Financial Management 

and Accountability Act of 1997 devolved responsibility for financial 

management to agencies and established mechanisms to help hold chief 

executives accountable for the results of exercising their management 

prerogatives. As in New Zealand, some Australian officials described the 

adoption of an integrated accrual budgeting and reporting framework as 

key to advancing these efforts. It was generally believed that improving the 

consistency and comparability of financial, budget, and performance 

information would increase its use in the decision-making process.

Similarly, the United Kingdom’s proposed adoption of accrual budgeting 

emerged from long-standing efforts aimed at improving public sector 

performance. Throughout the 1980s the United Kingdom embarked on a 

series of reforms aimed at improving public sector performance, including 

the Financial Management Initiative (FMI), which emphasized the 

devolution of responsibility for budget and financial management. At the 

beginning of these performance reforms, it became clear that a cash-based 

system would fail to account completely for all costs necessary to deliver a 

specific result, thus making it difficult to adequately assess and compare 

performance within the public sector, and between the public and private 

sectors. As a result, attention turned to developing an accrual-based 

integrated system that would better support reform efforts by improving 

the quality and consistency of the cost information and incentives provided 

to decisionmakers. Given this, the United Kingdom’s accrual-based system 

was described by one Treasury official as an extension of earlier reform 

efforts rather than a “new” direction. 

Canada also is considering expanding its use of accrual measurement in 

budgeting as part of an ongoing effort to improve government financial 

management and establish more business-like practices. The Financial 

Information Strategy (FIS) first announced in 1989 sought to decentralize 

many financial reporting responsibilities to departments and to use accrual 

accounting and new reporting structures to provide departmental 

managers with better tools for financial management. Through FIS, 

Canadian officials hope both to achieve improvements in the government’s 

accountability framework and to increase efficiencies in program and 

service delivery. The Canadian Auditor General opined that efforts to 

integrate improved financial management into day-to-day decision-making 

may be impeded if this information is not used for appropriations and 

budgeting, traditionally the means by which managers are held 
Chapter 2

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accountable. Because of these concerns, in December 1998, the 

government was asked by Parliament to study how best to incorporate 

accrual concepts more fully in the budget and appropriations.

Although Iceland’s adoption of accrual budgeting also was only one small 

part of broader reforms, the driving factor in Iceland’s decision to adopt 

accrual-based budgeting and reporting was concern over the sustainability 

of the government financial commitments. According to senior officials 

with the Ministry of Finance, the overarching theme behind the reforms 

was to recognize the full costs of central government obligations when they 

are made rather than when they are paid. In particular, there were concerns 

over the large accumulated pension liability for public sector employees. 

Under the prior cash system, these costs were reflected in the budget when 

paid, not when earned. As a result, there were concerns that the costs of 

the government’s underlying commitments were understated. 

The Netherlands’ efforts in this area have focused on rebalancing the role 

of the public sector through privatization, deregulation, and 

decentralization. Since 1992, the Netherlands increasingly has adopted 

performance management initiatives to achieve these objectives and to 

improve the efficiency of the public sector. The government viewed accrual 

budgeting and financial statement reporting as providing the framework 

necessary to manage for results. To date, an accrual framework is being 

applied only in agencies where it was deemed useful in promoting resultsoriented management, such as those engaged in providing specific, 

definable services like correctional facilities. In 1992, the Netherlands 

amended its Government Accounts Act to create agencies—a new subunit 

of government—and allow them to operate on a private sector 

management model which included accrual budgeting and financial 

reporting. 

Accrual-Based 

Budgeting Credited 

with Improving 

Completeness and 

Usefulness of Budget 

Information for 

Decision-making

The difficulties in isolating the benefits of accrual budgeting from those 

resulting from other elements in broader reform efforts have not stopped 

proponents of accrual budgeting from claiming benefits from accrual 

budgeting. This chapter provides a brief introduction to some of the 

general benefits and concerns these countries associated with the use of 

accrual budgeting. The next chapter more fully discusses the role of 

accrual budgeting in addressing issues of performance, sustainability, and 

accountability within the public sector. 
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As outlined in figure 1, proponents credited accrual budgeting with 

improving the completeness and usefulness of the budget for decisionmaking by:

• better aligning cost with performance,

• providing information on all costs to encourage a longer-term 

management and policy focus, and 

• improving the consistency and credibility of budget reporting. 

Figure 1: Improvements in Budget Information Attributed to Accrual Budgeting
Chapter 2

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Proponents from several countries suggested that accrual-based 

information was an important tool in understanding the full costs of 

government programs and activities. Because accrual measurement 

matches costs with the period resources are used in the provision of goods 

and services, it generally has been viewed as providing a more accurate and 

complete picture of the cost of government activities than the cash flows in 

a given period. For example, accrual budgeting recognizes costs which 

contribute to the provision of goods and services but do not require 

immediate cash distributions such as employees’ deferred compensation 

(pensions to be paid in the future). It also spreads the costs of some cash 

spending over the periods that benefit from it. For example, in an accrual 

budget, the purchase cost of a capital asset would be spread over the life of 

the asset as it is used rather than having the full cash amount appearing as a 

cost in the period the asset is purchased as in a cash-based budget. Thus, 

accrual-based information is a better indicator of the actual resources 

consumed in performing government activities. However, whether it is also 

appropriate for resource allocation depends in part on whether it 

represents the full cost of government’s commitment at the time decisions 

are made. In some instances, such as pensions, accrual measurement 

recognizes the government’s commitment earlier than obligations 

measured on a cash-basis; in other instances, particularly capital assets, 

accrual measurement does not reflect the government’s full resource 

commitment at the time the decision is made.4

In addition, accrual budgeting was viewed as enhancing understanding of 

the cost of performance by making budget information more comparable to 

other financial and performance indicators. For example, proponents 

suggested that if both the budget and the financial statement are accrualbased, it is easier to compare the amount requested and appropriated in the 

budget to actual results reported in the financial statements and other 

performance reports. Thus, accrual budgeting was viewed as helping to 

improve understanding of the link between budgeted amounts and results 

achieved. 

4

Proponents note that case study countries have established compensating control for 

capital asset projects. Although treatment varies among case study countries, 

appropriations are generally required for annual cash requirements for asset purchases that 

exceed departmental reserves or are above a certain dollar amount. See chapter 3 and 

country appendixes for additional information. 
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Further, proponents argue that by incorporating a balance sheet 

perspective,5

 accrual budgeting improves the information and incentives to 

support a government’s stewardship role. While countries that have 

enacted an accrual budget6

 generally vote on items similar to expenses 

found in a projected operating statement, in doing so they incorporate 

balance sheet information into the budget debate. They do this by:

(1) including expenses associated with changes in an entity’s assets and 

liabilities in appropriation amounts and (2) requiring primary financial 

statements to be included as part of the budget presentation.7

Accrual-based appropriations generally reflect costs incurred during a 

fiscal year and thus provide information similar to that found in an 

operating statement. An operating statement recognizes revenue and 

expenses of a period and reflects changes in the balance sheet. For 

example, an asset’s value is reduced by depreciation on the balance sheet 

and a depreciation expense is recorded in the operating statement. Since 

they reflect information similar to that included in a projected operating 

statement, appropriations under accrual budgeting generally capture 

expenses for a period including those that reflect changes in the balance 

sheet such as depreciation or changes in the liability for pension benefits. 

As a result, proponents generally view an accrual-based framework as 

encouraging a fuller assessment of the government’s management of its 

assets and liabilities, and thus its longer-term financial health. However, it 

is important to note that none of the countries currently use, or plan to use, 

accrual budgeting to focus attention on the long-term fiscal pressures of 

social insurance and health programs that experts predict may have serious 

implications for many of the world’s industrialized countries.8

5

A balance sheet perspective refers to providing information on assets and liabilities of an 

entity.

6

New Zealand, Australia, and Iceland.

7

Primary financial statements include a Balance Sheet, an Operating Statement, and a Cash 

Flow Statement. Iceland does not require a Balance Sheet in its budget presentation.

8

Most countries use financial accounting standards as the basis of measurement for accrual 

budgeting. In order for a future cost to be recognized as a liability under most accounting 

standards, it must be considered both probable and reasonably estimable. Generally, 

government commitments such as social insurance have not been judged as meeting these 

criteria for recognition. Although not considered a liability, U.S. federal accounting 

standards do call for supplemental disclosures for social insurance programs. For further 

discussion, see chapter 5.
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In these countries, aligning the basis of budgetary measurement with 

financial reporting standards, in particular, standards that mirror generally 

accepted practices in the private sector, was seen as increasing the 

credibility and consistency of budget information for public sector 

decisionmakers, the financial markets, and the public. Some argued that 

the public has some familiarity with private sector accounting and so 

would find a budget based on it more understandable. Using the same 

measurement basis throughout the financial management cycle was viewed 

as increasing the credibility and consistency of information provided to 

decisionmakers and thus enhancing the relevance and usefulness of 

financial statements and other cost information for budgetary and 

managerial decision-making. 

Proponents acknowledged that accrual-based information could be 

provided without changing the budget basis, but they suggested it might 

have little effect on management decisions and behavior unless it was the 

basis of accountability, i.e., budgeting. Proponents asserted that budgeting 

on one basis, i.e., cash, and reporting on another basis, i.e., accrual, would 

send conflicting signals and incentives. In the words of a former New 

Zealand official who championed the adoption of accrual budgeting, 

“accrual accounting will not amount to much more than an interesting 

accounting exercise unless the information is used for the purposes of 

economic management.” 

Some Express Skepticism 

About Use of Accrual-Based 

Budgeting

Despite these perceived benefits, some officials and other experts 

expressed skepticism about the value or feasibility of accrual budgeting. 

Figure 2 lists some concerns raised about accrual budgeting with respect to 

a central government’s role in the economy and control over spending. In 

addition, a number of implementation challenges raised by accrual 

budgeting are discussed in chapter 4. 
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Initiatives

Page 54 GAO/AIMD-00-57 Accrual Budgeting

Figure 2: Conceptual Concerns Raised About Accrual Budgeting
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A concern expressed by some experts was that accrual budgeting does not 

focus sufficient attention on the government’s borrowing requirement and 

thus fails to address adequately the central government’s role as partial 

custodian of the economy. For example, some economists in New Zealand 

told us that even though the cash flow statement provides information on 

the government’s borrowing requirements, it does not provide adequate 

information for analyses of the effects of government policies. There was 

also some concern because decisionmakers have encountered difficulties 

understanding the complexities involved in the use of accruals for 

budgeting because of the technical issues and assumptions on which 

accrual measurement is based. As a result, in Australia and New Zealand, 

observers suggested that the opportunity may exist for manipulation in the 

inherently political budget environment. Because accrual measurement 

focuses on recognizing the financial effects of economic events, it is 

necessarily dependent on interpretations and judgments about both when 

those economic effects occur and what their ultimate cost will be. While 

cash-based budget estimates also require judgment and interpretation, the 

impact of a budget decision is known with more certainty at the end of the 

reporting period. In contrast, the impact of accrual-measured budget 

decisions may remain a matter of judgment. In our previous work on 

accrual budgeting we have explored the budgetary implications of 

uncertainty in estimates of risk assumed by federal insurance programs.9

Finally, as discussed in chapter 5, using the accrual basis to measure costs 

in the budget may, in some cases, provide less up-front budget control than 

does obligation-based budgeting, such as used in the United States. For 

example, obligation-based budgeting requires budget authority for the full 

cost of a building before the purchase obligation is made while accrual 

budgeting generally spreads cost recognition over the life of the building. 

Thus, for capital assets, obligation-based budgeting provides greater 

control over committing the government to future payments than does a 

pure cash or accrual basis. Thus, choices about the basis of budgeting 

depend in large part on the relative importance one places on recognizing 

and controlling the full costs at the time decisions are made versus the 

matching of recognition to the period resources are consumed. As 

discussed in chapter 5, methods could be developed to capture accrued 

costs, such as capital acquisition funds, so that costs can be matched with 

performance while still preserving up-front control. 

9

Budget Issues: Budgeting for Federal Insurance Programs (GAO/AIMD-97-16, 

September 30, 1997).
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For these reasons, some view accrual budgeting as potentially undermining 

the central government’s traditional roles in overseeing the economy and 

ensuring accountability for taxpayer funds. In addition, some U.S. officials 

and budget experts have suggested that these potential risks of full accrual 

budgeting may not be warranted given that for most parts of the budget, the 

differences between cash (for obligations) and accrual measurement are 

not likely to be significant. Skepticism about the benefits of a change to 

accrual budgeting is increased by the fact that if accrual budgeting were 

implemented based on financial accounting standards as done by the case 

study countries, it would not fully address social insurance commitments. 

Countries Vary 

Significantly in the 

Design and 

Implementation of 

Accrual−Based 

Budgeting Systems

Despite the use of common language in articulating their objectives, 

countries that have chosen to adopt accrual budgeting have taken 

significantly different approaches in designing and implementing accrual 

budgeting frameworks. Four countries—New Zealand, Australia, Iceland 

and the United Kingdom10—have chosen fairly inclusive approaches to 

implementing accrual budgeting. These approaches (1) use the same 

accrual-based11 accounting standards accepted by the government both for 

financial reporting and to measure budget items and (2) incorporate 

primary financial statements12 roughly similar to those found in private 

sector financial reporting as part of the budget process. With two notable 

exceptions—Iceland’s exclusion of capital and centralization of pension 

costs and the United Kingdom’s exclusion of revenues—these countries 

apply accrual-based measurement to virtually all budget items at both the 

departmental level and the central government. The other two case study 

countries, Canada and the Netherlands, have applied accrual budgeting on 

a more limited basis to specific budget items or departments. 

10Adoption of the United Kingdom’s approach remains subject to parliamentary approval.

11Some accounting standards are not fully accrual-based. For example, Iceland’s accounting 

standards require that physical assets be reported on a cash basis and the United Kingdom 

accounts for revenues on a cash basis.

12Traditionally primary financial statements include (1) a balance sheet which presents the 

total balances of assets, liabilities and net position of an organization as of a specific time, 

(2) a statement of operations which provides information on an organization’s flows of 

revenues and expenses and other changes in the organization’s net resources, during a 

period of time and (3) a statement of cash flows which presents the cash flows of an 

organization during a period of time. 
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Not surprisingly, these varied approaches are reflective of each individual 

country’s reform objectives and budgetary needs. As shown in table 4, 

approaches varied with respect to:

• the extent to which accrual budgeting is used as part of an output 

budgeting framework in which the budget is intrinsically linked to 

performance;

• the scope of budget items measured on an accrual basis; and

• the organizational level to which accrual budgeting is applied.
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Table 4: Design Features of Case Study Countries’ Accrual Budgeting Approaches

New Zealand and Australia placed significant emphasis on directly linking 

the budget (including the basis of appropriation) with their overall 

performance and accountability structure. In these two countries, the shift 

to accrual measurement occurred concurrently with a shift to output-based 

appropriations.13 In general terms, output-based appropriations provide 

funding for the total resources required to produce an “output” (a good or 

service produced by departments on behalf of the government) including 

costs that do not require a cash outlay, such as depreciation and pension 

expenses. Reflecting the desire for a business-like environment, the intent 

is that, where possible, appropriations will come to represent the “fair 

market price” the government intends to pay for the department’s outputs. 

However, Australian officials we spoke with acknowledge that for the first 

Design feature

New 

Zealand Australia

United 

Kingdom Iceland

Canada

(current 

system)

Netherlands

(for select 

agencies 

only)

Same accrual-based standards for financial 

reporting and budgeting

XXXXXX

Budget presentation includes primary 

financial statements

XXXX

Physical assets on an accrual basis in 

departmental budgets

XXX X

Accrued pension expense for current 

employees included in departmental 

budgets 

XXX XX

Output-based appropriations X X X

Departments receive authority to draw 

cash for non-cash accruals, such as 

depreciation, as means of supporting 

decentralized management framework

XX X

Recognition of change in accrued pension 

liabilities in governmentwide deficit/surplus 

X XX

Accrual-based net operating balance used 

as governmentwide deficit/surplus measure

X X

13Both New Zealand and Australia distinguish between items controlled by departments and 

items administered by departments on the government’s behalf such as social insurance. 

New Zealand has several types of appropriations. For more information, see appendix I and 

appendix V.
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few years, at least, appropriations will be based on the total accrued costs 

(inputs) used to produce an output. They suggested that the objective over 

time is to benchmark the prices of these services to the private sector or 

other government prices for similar services. 

The United Kingdom has also proposed an accrual budgeting framework 

that aligns resources to performance, but it stops short of adopting outputbased appropriations. Under its proposed approach, accrual-based 

“resource accounts” will replace appropriation accounts and become the 

main form of accountability to Parliament. Parliamentary approval for 

departmental funding is to operate on a dual cash and “resource” basis. 

Each budget estimate will be represented by both an accrual request for 

resources—which includes noncash amounts such as depreciation—and a 

cash requirement for proposed cash withdrawals. However, in comparison 

to the New Zealand and Australia models, which provide cash to cover 

noncash amounts such as depreciation, the United Kingdom’s resource 

budget would treat noncash items as “notional” entries, i.e., departments 

will not receive cash to cover these amounts. While stressing that a number 

of issues, such as the precise treatment of capital, were still unresolved, 

officials noted that a key objective in designing the system was to 

concentrate attention on resources without relinquishing control over 

cash. 

Iceland’s approach to accrual budgeting reflects a greater emphasis on 

recognizing certain long-term commitments, such as employee pensions, as 

opposed to allocating costs to particular goods and services. Although 

significant realignment of the budget occurred as a result of the reforms, its 

goal was to bring more activities into the fiscal budget—creating links to 

the decision-making process—rather than aligning resources to programs 

and activities. For example, Iceland’s approach to budget reform differs in 

two key ways from the approaches adopted in other case study countries: 

(1) capital is reported on a cash basis as work is completed and paid for, 

rather than on an accrual basis with depreciation to align its cost with its 

use in the production of goods and services and (2) public sector pensions 

are controlled and recognized centrally in the Ministry of Finance’s budget 

rather than allocated to budgets of the various ministries that manage the 

associated programs and activities. Under Iceland’s approach, the main 

focus of budget debate is on the Operating Statement that includes 

estimates of revenues and expenses on both an accrual and a cash basis. 

However, the operating result (deficit/surplus) is reported only on an 

accrual basis.
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Canada and the Netherlands have taken more limited approaches to 

accrual budgeting, applying accruals only to specific departments or 

specific budget items. Canada currently uses accrual for public sector 

employee pensions and accounts payable at both the department level and 

the governmentwide level. However, it is considering a change which 

would shift capital and other items to an accrual basis with the intent of 

better integrating the financial management system. Under the current 

system, Canada has two measures of fiscal position (deficit/surplus):

(1) the financial balance, or cash requirement, which approximates the 

country’s financing need and (2) the budgetary balance—its primary fiscal 

measure—that includes pensions, accounts payable, and other accrualmeasured items even though cash is not needed immediately.

The Netherlands has applied accrual budgeting, using an approach similar 

to the New Zealand and Australia models, for a select number of agencies 

(subunits within ministries) but is still undecided about its application 

governmentwide. Under the Dutch approach, a ministry receives an 

appropriation to cover the price—including costs for which no cash outlay 

is required—of goods and services purchased from an agency under its 

control. For example, the Ministry of Justice would receive a cash 

appropriation to cover the price of goods and services it intends to 

purchase from the Prison Service. The Ministry of Justice would in turn 

give the Prison Service a cash amount that is intended to represent the 

“price” for the goods and services provided by that agency to the Ministry. 

Under this regime, Parliament must approve an agency’s accrued costs—

including noncash costs such as depreciation—and agencies can “save” 

funds in an account with the Ministry of Finance to fund future capital 

expenses. In addition, effective January 1, 2000, agencies are able to 

“borrow” funds from the Ministry of Finance as well. Both the use of 

“savings” and the “borrowing” of funds require approval by the Ministry of 

Finance and ultimately must be enacted into law by the Parliament. The 

governmentwide deficit/surplus is reported on a cash basis. 

Each of the case study countries turned to some form of accrual budgeting 

as part of a broader reform effort. Chapter 3 discusses how they use 

accrual budgeting to address some key issues.
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Chapter 3

Perspectives on Accrual Budgeting for 

Decision-making Chapte3r

As suggested in the previous chapter, the case study countries, to varying 

degrees, have turned to accrual budgeting to address concerns about 

public sector performance, sustainability, and accountability. Similar 

concerns have also been the focus of recent reform efforts within the 

United States. In several countries, accrual budgeting has been used as a 

tool to support wider performance management reforms including, in some 

cases, more decentralized, performance-driven accountability systems. 

Accrual budgeting is also viewed as improving the recognition of the future 

costs of current decisions and so increasing the attention paid to the 

sustainability of government activities. Further, accrual budgeting was 

viewed as improving accountability by enhancing consistency and 

transparency of budget information, even though it raises some new 

control issues. However, the extent to which accrual budgeting has, or is 

expected to, influence decision-making varies with the approach chosen by 

each country. This chapter discusses more fully the various perspectives on 

implications of accrual budgeting for decision-making.

Performance, 

Sustainability, and 

Accountability Issues 

Central to Reform 

Efforts

The case study countries and the United States share the common 

objective of improving public sector financial management and 

performance while enhancing transparency and accountability. As 

described in the previous chapter, these issues came to the forefront as the 

countries undertook broader reform efforts to address significant fiscal 

stress and/or to improve government operations. In the United States, there 

has been a similar move to improve government performance and financial 

management, leading to the enactment of a series of reforms.1

 At the same 

time, changing demographics and other factors have brought to the 

forefront questions about the sustainability of the government’s long-term 

commitments such as Social Security and Medicare.

To varying degrees countries in our review have used, or plan to use, 

accrual budgeting to help address similar concerns about public sector 

performance, sustainability, and accountability. Proponents of accrual 

budgeting argue that the only way to really affect decision-making is to 

move beyond financial statement and performance reporting to using 

accrual information as the basis of resource allocation. However, most 

countries have limited experience with their accrual-based frameworks 

and provided only a few specific examples of decisions attributable to its 

1

For further discussion of reform efforts see chapter 1 and chapter 5.
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use. Further, since in general case study countries moved from a system of 

cash-based accounting and cash-based budgeting to accrual accounting 

and accrual budgeting, it is often difficult to distinguish the benefits of 

accrual budgeting from those that would have been achieved with accrual 

accounting alone. This is particularly true for such one-time benefits as the 

development of financial systems or the identification of assets. Finally, as 

noted earlier, the comprehensive nature of some of the reform efforts 

makes it difficult to isolate the benefits of accrual budgeting from those 

stemming from other changes. For example, New Zealand—the country 

with the most experience with accrual budgeting—implemented accrual 

budgeting as only one part of sweeping and radical reforms that 

restructured the role of government and its financial and performance 

management system.

Accrual Budgeting as a 

Tool in Addressing 

Performance 

Management 

Challenges

Country officials and other proponents saw accrual budgeting as a useful, if 

not critical, tool in addressing performance management challenges. In 

particular, accrual budgeting has been used to provide more timely 

recognition of the complete costs of government activities, an important 

factor in assessing performance. However, the design of each country’s 

accrual budgeting system, which tends to reflect the country’s overall 

management approach, shapes its role in addressing performance 

challenges.

In our case study countries, accrual budgeting is credited with supporting 

broader management reform efforts in several ways, such as 

• reflecting and supporting more decentralized and performance-focused 

accountability systems, 

• facilitating more competitive, businesslike approaches to providing 

government goods and services, and 

• encouraging more efficient and effective resource management, 

particularly with respect to capital assets.
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Accrual Budgeting Viewed 

as Supporting More 

Decentralized, 

Performance-Focused 

Accountability Systems

In some countries, accrual budgeting has been used to support more 

decentralized, performance-focused management. Most notably, in New 

Zealand and Australia, the adoption of accrual budgeting complemented a 

shift to systems that allow managers considerable autonomy, including 

increased freedom over the use of resources (inputs), while holding them 

accountable for delivering specified results within budgeted costs.2

Officials and other reformers from both countries stressed that accrual 

measurement, by providing a tool to match costs with the provision of 

goods and services, was key to supporting these more decentralized 

management systems that emphasize managerial flexibility as a means of 

improving efficiency and effectiveness.

In both Australia and New Zealand performance management benefits 

were attributed to the union of output budgeting3

 and accrual budgeting, 

not a shift to accrual measurement alone. In general, output-based 

appropriations provide funding for the total resources used to produce an 

“output” (a good or service produced on behalf of the government), 

including costs that do not require an immediate cash outlay. Managers are 

then given significant discretion over the mix of inputs (spending on 

salaries, supplies, capital, etc.) used to produce agreed upon outputs. This 

type of approach reflects and supports the philosophy that the public 

sector should operate as close to a private sector model as possible.

2

The Netherlands has applied a similar approach on a more limited basis to specific 

department activities.

3

Output generally refers to goods and services produced by departments. For example, in 

New Zealand the quantity and price of outputs are agreed upon by the ministers and their 

departments’ chief executives. 
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By structuring appropriations around outputs, these systems are intended 

to reduce the traditional budget focus on controlling inputs while 

increasing accountability for performance. Under New Zealand’s approach, 

output-based appropriations are the result of purchase agreements 

between department executives and their ministers, with the ministers 

specifying the output to be provided in a given quantity and at a given 

quality. In Australia, appropriations for each department are for the full 

financial resources, measured on an accrual basis, required to produce 

outputs that contribute to the outcomes the government is trying to 

achieve. This output-outcome structure is determined during a strategic 

planning process in which departments and their ministers define desired 

outcomes, then define the outputs that, if delivered, would lead to these 

outcomes. Reflecting the desire for a more businesslike environment, the 

ultimate goal in both countries was for departments to be appropriated the 

fair market price of outputs.4

 Further, to provide additional incentives to 

continually seek efficiencies, the Australian system permits departments to 

retain a share of any operating surpluses.

Accrual budgeting was described as useful, if not critical, to developing 

accountability within these more decentralized, output-focused systems. In 

the view of one former official from New Zealand “a decentralized public 

management structure that focuses on output and performance could not 

be managed without accrual budgeting.” Because an output-based system 

gives departments significant discretion over how funding is used to 

produce outputs, oversight is premised on the ability of policymakers, as 

the purchasers of goods and services, to adequately assess the price and 

quality of outputs. As a result, reliable information on the full costs of 

producing goods and services, rather than just the immediate cash outlays, 

becomes increasingly important to ensuring accountability.

By better aligning budget recognition with the consumption of resources, 

proponents view accrual measurement as providing a better analytical base 

to assess the full costs associated with a given level of performance. For 

4

New Zealand has used a staged approach to implementing accrual-based output 

appropriations. The final stage, to which no department has transitioned, assumes 

competition among suppliers of outputs. For more detailed discussion of the New Zealand 

system, see appendix V. Australia’s system is designed so that appropriations ultimately are 

to represent the “price” the government intends to pay for each agency’s contribution to the 

achievement of planned outcomes. Australian officials noted however that at least in the 

first few years, appropriations would be based on the total accrued costs (inputs) used to 

produce an output. See more information on the Australian system, see appendix I. 
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example, accrual measurement recognizes costs as they are incurred, such 

as employee pensions, which may not result in cash outlays for many years 

but nevertheless were earned within a budget year. Proponents also point 

out that accrual measurement helps mitigate some cost distortions 

inherent in cash-based budgeting. For example, the National Commission 

of Audit in Australia noted that, under its accrual budgeting framework, a 

department would no longer appear efficient in budgetary terms just 

because it used less cash in a year if, at the same time, it accumulated more 

liabilities. Conversely, it noted that a department would not automatically 

appear as a poor performer because it spent a large amount of cash in 1 

year on capital assets that may in fact enable it to operate more efficiently 

over time. As a result, accrual budgeting is seen as enhancing 

accountability by, for example, facilitating comparisons of cost and 

performance among alternative suppliers, both public and private.

Proponents from both New Zealand and Australia stressed the importance 

of integrating accrual-based information directly into the budget. In their 

view, better cost information alone would be insufficient to influence 

managerial behavior; holding decisionmakers and managers accountable 

through the budget process for all the costs associated with a given level of 

performance would be more effective in creating incentives to ensure 

efficiency and effectiveness in the absence of input controls. Along these 

lines, a former New Zealand official involved with the reforms stressed that 

if performance is what drives reform, and accrual concepts are deemed 

most appropriate to assess the costs associated with performance, then it 

follows that one would budget on this basis.

Accrual Budgeting Viewed 

as Useful in Facilitating 

More Competitive 

Approaches and Fostering 

Cultural Change 

Whether combined with output budgeting or not, accrual budgeting was 

described as improving performance by fostering more competitive and 

businesslike approaches within the public sector. For example, accrual 

budgeting was described as making it easier to compare performance 

among alternative suppliers, both public and private. In addition, accrual 

budgeting was described as important to fostering cultural change that 

heightens awareness of financial and performance management issues.

Accrual Budgeting Viewed as 

Supporting Performance 

Reforms by Facilitating 

Comparisons

Some proponents view accrual budgeting as supporting performance 

reforms by facilitating more valid comparisons among alternative sources 

of goods and services. As we have reported in the past, consistent and 

complete cost information is important to fostering better management by 

making it easier to more fully understand the implications of different 

decisions. Similarly, officials and proponents suggested that accrual 
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measurement allows for more valid comparisons of performance and thus 

can help the government identify inefficient areas or determine the most 

efficient method of delivering government goods and services. Further, 

accrual budgeting was seen as fostering more performance-focused 

management and oversight by increasing the comparability of prospective 

budget information with actual financial and performance information.

A senior budget official from the Netherlands used prison services to 

illustrate the discord between cash-based budgeting and performance 

assessment, including comparisons among alternative suppliers. He noted 

that, on a cash basis, a prison making capital improvements would appear 

more costly in the budget than another prison that is not making such 

improvements, regardless of the year-to-year relative efficiency of the 

prisons’ operations. In his opinion, accrual budgeting, by spreading the 

budget recognition of the cost of capital improvements over the life of the 

asset, would help to improve the information and facilitate more valid 

comparisons between the relative cost of operations. While this was an 

improvement over a cash-based budgeting system, it does not provide for 

the up-front control over capital purchase obligations that exists in an 

obligation-based system. One possible approach combining the benefits of 

both would be to compare accrual-based financial reports while retaining 

control over government commitments under an obligation-based 

budgeting system. 

Proponents of accrual budgeting saw enhanced comparability with the 

private sector as beneficial. Full consideration of how a good or service can 

be provided most efficiently requires understanding its full costs including 

noncash items such as employee benefits earned but paid later. Under cash 

budgeting or obligation-based budgeting measured on a cash basis, these 

items tend to be excluded from a government’s current budget decisions. 

However, they are incorporated into the price of private sector suppliers. 

Proponents envision that accrual budgeting, by providing more complete 

and comparable costs, could result in better choices about whether a good 

or service should be provided by a government department or by a private 

sector entity. New Zealand intended for departments to pay interest, taxes, 

and dividends so that their costs could be more readily compared to other 

suppliers (including private sector entities) providing similar goods and 

services. 

With more complete cost information, accrual budgeting is seen by its 

proponents as a potential tool to encourage competition and facilitate 

mechanisms such as contracting-out, price benchmarking, and intra-agency 
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charging. For example, New Zealand used accrual reports to determine the 

full cost of providing policy advice in various departments. It was also 

credited with helping to identify high and low cost areas, providing a 

clearer understanding of intradepartmental cost differentials and raising 

the possibility of achieving greater efficiencies and cost savings. As 

discussed above, some proponents see the ability to more readily make 

comparisons based on complete cost information as an essential 

component to ensuring accountability within decentralized management 

systems.

Accrual Budgeting Seen as 

Important Tool in Supporting 

“Cultural Change”

Proponents see accrual budgeting as an important tool in changing the 

public sector “culture” towards a more competitive, businesslike 

environment. As a general point, proponents argued that providing accrualbased information in financial statements or other supplemental reports 

was not likely to change behavior significantly if the accountability 

process, i.e., budgeting, remained on a cash basis. For example, the 

Australian National Commission of Audit (NCOA) expressed the view that 

a full accrual framework, including accrual budgeting, was an essential 

component of the structural and cultural change the government was 

seeking for a more competitive, efficient, and effective public sector. 

Observers in the United Kingdom also suggested that, although as a general 

rule generating interest in financial management issues is difficult, the use 

of accrual measurement in the budget appears to have increased the 

attention paid to implementing the recent accrual reforms. Similarly, 

Canada’s Auditor General emphasized the importance of changing the basis 

of appropriations to accrual to encourage the use of this information in 

day-to-day management.

Proponents generally held the view that accrual budgeting serves to 

enhance the prominence of performance management and oversight. 

Country officials and department managers we spoke with noted a greater 

focus on financial management as a result of the shift to an integrated 

accrual-based framework, including accrual budgeting. They suggested 

that, since the budget really matters to departmental managers, including 

accrual-based information in the budget greatly increases the stakes 

associated with its preparation and use. For example, officials from the 

Office of the Controller and Auditor General in New Zealand said that 

financial data under the accrual-based framework are more robust, 

consistent in quality, and timely. Departments now produce monthly 

accrual reports within 7 days of the end of the month. They attributed this 

in part to the departments more closely monitoring their accounts on an 

accrual basis to avoid breaching appropriations. The view that accrual-
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based frameworks had improved, or were expected to improve, financial 

and cost data was held in most case study countries.

Accrual Budgeting Viewed 

as Encouraging More 

Efficient and Effective 

Resource Management

Advocates of accrual budgeting view it as a useful tool to encourage more 

efficient and effective resource management, particularly with respect to 

capital assets.5

 However, because most case study countries used 

predominately cash-based budgeting systems prior to changing to the 

accrual basis, their views of the trade-offs associated with a shift to accrual 

budgeting based on financial accounting standards are likely to differ from 

that of the United States. Shifting to accrual budgeting might not yield the 

same benefits in the United States, which already has accrual-based 

financial reporting. Moreover, compared to obligation-based budgeting in 

the United States accrual budgeting without compensating controls would 

delay the budget recognition of the government’s commitment for asset 

purchases.

Proponents and officials in most of the case study countries view accrual 

budgeting as encouraging the more efficient and effective use of resources 

by

• providing better information and incentives with respect to total 

resources consumed in the provision of goods and services, and 

• better reflecting the cost of capital, thus encouraging better capital asset 

management.

Proponents see accrual budgeting as improving resource management by 

providing a better analytical base and incentives for assessing performance 

and managing costs. Managers from the United Kingdom and New Zealand 

expected that by providing more and better quality information, accrualbased frameworks would improve resource management by increasing the 

number and quality of questions asked about an organization and its 

performance. Although some other government officials view the increased 

agency discretion provided in systems that combined output budgeting 

5

Not all case study countries use accrual budgeting for capital assets. As discussed in 

appendix III, Iceland expenses assets as payments are made. Canada plans to report all 

assets on an accrual basis in its whole-of-government financial statements beginning in 

fiscal year 2001-2002. As discussed in appendix II, Canada has not decided yet whether to 

budget on a full accrual basis. In the United Kingdom, the current proposal is for 

depreciation and capital charges to be “notional entries” which require a parliamentary vote 

but will not result in the departments receiving cash.
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with accrual budgeting with concern, proponents credited these systems 

with helping achieve fiscal constraint by better targeting spending cuts and, 

as discussed in the previous section, by encouraging efficiency gains. For 

example, according to a former New Zealand government official, under 

the old cash and input focused system, the government could arbitrarily 

impose an across-the-board budget squeeze but would not necessarily 

know the direct implications of this squeeze on performance. In contrast, 

improved availability and quality of performance and cost information 

under their accrual-based frameworks would enable officials to better 

understand the implication of budget decisions on performance. 

Specifically, under accrual-based output budgeting, the ability to translate a 

change in funding to a change in output was viewed by some proponents as 

improving the decision-making process. Some we spoke with, however, 

credited these benefits, at least in part, to the better linking of spending to 

specific results than to the shift from cash to accrual measurement.

In some countries accrual budgeting was used as a tool to support 

increased flexibility in asset management. In New Zealand, Australia, and 

the Netherlands, for example, department appropriations include funding 

for noncash items such as depreciation expense. Managers are expected to 

manage their asset base, which includes purchasing replacement assets 

with funds accumulated from this depreciation expense, although skeptics 

might worry that such funds would not be saved. Proponents say that this 

increased flexibility allows managers to make and implement more 

efficient decisions with respect to their asset mix. In New Zealand, for 

example, managers could replace nonperforming telephone equipment 

more quickly rather than submitting to the previous lengthy approval 

process. In this approach, however, more than budgetary accounting has 

been changed. Agencies in some countries have been given a level of 

discretion with respect to asset purchases that is significantly different 

from the U. S. system.6

6

Proponents point out that case study countries established a number of compensating 

controls in an attempt to alleviate control concerns. For example, in New Zealand, 

managers are not allowed to change the structure of their balance sheets without legislative 

approval; this is aimed at preventing managers from running down their asset bases to 

artificially lower the price of outputs. A number of case study countries also established 

supplemental approval processes for capital projects. See country appendixes for additional 

information.
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Up-front control over contractual obligations is the focus of the U.S. 

obligation-based budget and including the cost of an asset in the budget 

before the government’s commitment is made provides the Congress an 

opportunity to control spending. Recording the full cost for an asset 

purchase up front, as in the United States’ obligation-based budget, also 

promotes fiscal control, an important objective in U.S. budgeting. By 

recording the costs up front, agencies and the Congress are encouraged to 

compare that cost with expected benefits when deciding whether to 

purchase the asset. Conversely, for capital assets, accrual measurement 

would delay cost recognition so as to spread the costs over the life of the 

asset.7

 In this sense, choices about the basis of budgeting depend in part on 

the relative importance placed on recognizing and controlling the full costs 

at the time decisions are made versus the matching of budget recognition 

to the period resources are consumed.

Officials in several case study countries pointed to some compensating 

controls within their accrual frameworks. For example, if the cost of an 

asset exceeds accumulated depreciation, “capital injections”8

 are required 

and these are subject to parliamentary approval in Australia and New 

Zealand and parliamentary notification in the Netherlands. In these cases, 

budget approval would be for the cash required in the budget year. In 

addition, in New Zealand, even if an agency had accumulated sufficient 

funds to replace an asset without a capital injection, capital purchases 

above a specified amount require approval.9

 Further, Australia, New 

Zealand, and the United Kingdom require additional information on capital 

purchases under their accrual-based frameworks. For example, 

information such as (1) depreciation and capital charges resulting from the 

new asset and (2) the available cash reserves and capital injection needs 

may be required. This richer suite of information is perceived to help 

decisionmakers to make the proper trade-off between alternatives, e.g., 

7

Although treatment varies among case study countries, appropriations are generally 

required for the annual cash required to purchase assets. However, these annual cash 

amounts may not represent the full cost of the assets. In some cases, legislative approval is 

not required for asset purchases below a certain amount if the department can fund them 

from depreciation reserves.

8

In general terms, a capital injection refers to the amount of additional funds required for a 

capital purchase beyond a department’s available reserves. It represents an increased 

investment in a department’s asset base.

9

Asset purchases over NZ$10 million require cabinet approval, whether or not departments 

need a cash injection.
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whether to buy or lease a new asset, or simply to renovate an existing asset. 

Finally, some proponents pointed out that because depreciation and the 

capital charge would be included in future budgets, an asset no longer 

appeared as a “free good” after the initial purchase.

Improved alignment between budget recognition and the use of capital is 

another cited benefit of accrual budgeting. In Australia, New Zealand, the 

United Kingdom, and the Netherlands, the appropriation for a department’s 

operating budget or for specified outputs includes the annual cost of using 

capital, i.e., depreciation and the cost of capital charge.10 This treatment 

was viewed as useful in (1) enabling comparisons among the relative costs 

of different operations and (2) distinguishing between current and capital 

spending.

Proponents believe that this approach improves decision-making by 

spreading the budget recognition of capital costs over the life of the asset. 

Specifically, it was viewed as improving both the information and the 

incentives to make more valid comparisons between the relative cost of 

operations. Further, some proponents suggested that by better aligning the 

budget recognition of capital with its use, accrual budgeting can be used to 

provide a better distinction between current spending and capital 

investment. For example, in New Zealand, the United Kingdom, and 

Australia, cash requirements for capital acquisitions are treated separately 

from the cost of using capital in departmental budgets. Some proponents 

stated the view that this reduces a perceived bias against investment which 

may be created when the purchase cost of a capital asset must be 

recognized in the budget in the year of the purchase. The trade-off here is 

between aligning budget recognition of capital with its use and the greater 

fiscal control realized from up-front budgeting. In the United States, the 

purchase cost is recorded up front so that commitments for asset 

purchases can be controlled by the Congress before they are made. In the 

U.S. setting, information on the use of capital in providing services is 

available to the Congress in accrual-based financial reports for use in 

conjunction with obligation-based budgeting.

10Specifically, in New Zealand, Australia, and the Netherlands, departments receive cash 

funding to cover these noncash amounts. In the United Kingdom, the current proposal is for 

these amounts to be “notional entries” which require a parliamentary vote but will not result 

in the departments receiving cash.
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To further encourage the efficient use of assets, some countries also 

incorporated capital charges into their accrual budgeting frameworks. A 

capital charge, similar to an interest charge, generally is used to reflect the 

opportunity cost of capital invested. Several countries in our review—

Australia, New Zealand, and the United Kingdom—have established a 

policy of levying a capital charge based on a percentage of a department’s 

net assets in order to recognize the cost of capital held by departments.11 In 

New Zealand, this works as follows: departments are appropriated as part 

of the output price a capital charge based on their asset base at the 

beginning of the year; at the end of the year they must pay the government 

a capital charge based on their year-end asset base. If a department has a 

smaller asset base at the end of the year than the asset base for which the 

appropriation was made, the department is permitted to keep part of the 

appropriation made for the capital charge. New Zealand officials see this as 

providing an incentive to identify and dispose of underperforming assets; 

Department of Education officials stated that the capital charge spurred 

the department to sell a number of vacant sites that it had acquired in the 

1960s and held although they were no longer needed.

Further, proponents credit accrual budgeting with improving the 

identification and valuation of assets. Although acknowledging that this 

benefit might have been achieved through a shift to accrual accounting 

alone without changing the basis of budgeting, proponents suggested that 

the link to budget improved incentives to take the reforms seriously and 

not simply treat accrual-based information as a paperwork exercise. Some 

officials and managers cited cases of finding assets that were poorly 

managed and even assets that they were unaware of owning. In New 

Zealand, the asset identification exercise led to the discovery that unpaid 

fines due to the Department of Justice were a significant asset on the 

department’s balance sheet. Subsequent attention prompted the 

department to actively manage its accounts receivable by replacing 

traditional collection methods with direct payment systems at courthouses 

and using computerized call centers for tracking slow payers.

Some Skepticism and Concerns 

Raised About Implications of 

Accrual Budgeting on Resource 

Management 

Some skepticism has been raised about the claims for accrual budgeting’s 

beneficial impact on resource management. Some expressed concerns 

about the implications of the assumptions and judgments necessary for 

accrual measurement on transparency and thus on users’ understanding. In 

11In the Netherlands, agencies will pay for the capital costs associated with loans used to 

finance asset purchases beginning in 2000.
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addition, some we spoke with were uncertain about the extent to which the 

new information had influenced managerial decision-making. Several 

issues were noted with respect to asset management. For example, officials 

in New Zealand’s Office of Controller and Auditor General were uncertain 

about the effectiveness of having a charge for capital in changing behavior 

significantly. Further, some officials noted that, while changes resulting 

from the shift to accrual were greatest for capital intensive departments, in 

New Zealand only a limited number of departments hold enough assets to 

make the change significant in the annual budget process. Along a different 

line, some analysts expressed the concern that capital charging could drive 

department executives to decisions that are rational in the short term but 

damaging in the long term. For example, an audit official suggested that a 

department might have an incentive to try to operate with obsolete and 

fully depreciated assets in order to avoid a higher capital charge. In 

addition, while proponents thought that the increased discretion over asset 

purchases was key to supporting managerial efficiency and effectiveness, 

the increased discretion combined with cash funding for depreciation 

could result in the potential for departments to divert this funding for other 

purposes.

Additional concerns were raised that some forms of accrual budgeting 

could impede efficient asset management.12 For example, some officials in 

New Zealand noted that in a technology-intensive environment, such as 

defense, asset prices tend to increase commensurate with improving 

technology. In such an environment, accumulated depreciation would be 

inadequate to fund asset replacement, thus requiring capital injections. 

Because capital injections are given heightened scrutiny during the budget 

process, some hypothesized that it could be harder to replace assets. 

Another concern about the New Zealand model of accrual budgeting was 

the possibility that requiring departments to maintain their asset bases13

could serve to lock in the asset levels that existed when accrual budgeting 

was first implemented whether or not this reflects the optimal allocation of 

assets among departments. Further, the use of initial asset base levels to 

calculate future budgetary amounts, including the depreciation charge 

12As noted earlier, some forms of accrual budgeting provide appropriations for noncash 

expenses such as depreciation with the expectation that departments will use these funds to 

maintain their asset base.

13In an accrual budgeting framework, maintaining the asset base generally refers to 

managing the value of assets on the balance sheet so that it does not decline from year to 

year except through the sale of excess assets.
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generally based on current value, could give departments that were asset 

rich an advantage over those that were asset poor. This latter group either 

must request a capital injection or operate with minimal assets. Although 

New Zealand officials told us that there had been no significant attempt to 

optimize asset levels prior to the shift to accrual budgeting, proponents 

suggested that accrual budgeting has increased the attention given to these 

issues. 

In addition, the need to incorporate accrual measurement directly into the 

budget may be questioned. Some of the benefits credited to accrual 

budgeting—improved asset identification and valuation, better information 

on the organization and its activities, or improved capital investment 

planning—might have been achieved without a shift in budgetary 

measurement by, for example, implementing accrual-based accounting and 

reporting alone. Some experts also noted that the cost of capital charges 

could be implemented within obligation- or cash-based budgeting systems. 

Proponents, however, expressed the strong belief that the link to the 

budget increased the incentives to take the reforms seriously and to ensure 

numbers were reasonable.

Asset identification and valuation were cumbersome and time-consuming 

efforts and the integration of accrual concepts such as depreciation created 

new budgetary control issues. These and other implementation challenges 

are more fully discussed in chapter 4.

Sustainability of 

Government Activity 

Partially Addressed by 

Accrual Budgeting

Some countries that have incorporated accrual information in their 

financial management systems have done so, in part, with the expectation 

that it will help decisionmakers better understand long-term sustainability 

of government policies. This can be thought of as going beyond the longerterm management perspective for capital or more effectively targeting 

budget reductions to support fiscal constraints, as discussed in the 

preceding section, to the question of assessing the sustainability of 

government policies by providing

• better budget recognition of liabilities, and

• a more complete set of information to assess a country’s financial 

health.

However, there are limits to using an accrual budget based on financial 

accounting standards in addressing long-term sustainability issues. A key 

limitation is that accrual budgeting as implemented by the case study 
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countries does not capture social insurance commitments. The case study 

countries chose to largely mirror their financial accounting standards in 

their accrual budgets, but social insurance is not judged to be a liability 

under their accounting standards. Thus, none of them have budgeted for 

such commitments on an accrual basis. This would also be the case if the 

United States adopted accrual budgeting strictly based on its federal 

accounting standards.

Accrual Budgeting’s Better 

Recognition of Liabilities 

Credited With Leading to 

Program Changes

Although accrual budgeting does not deal with social insurance programs, 

proponents said it provides a fuller picture of other liabilities arising from 

past and current policy actions. For programs with long-term 

commitments, including public employee pensions, insurance, and credit, 

cash-based budgeting may not recognize a government’s ultimate costs at 

the time the commitments are made. In these cases, accrual-based 

information on the government’s liabilities could improve budgetary 

decision-making. Indeed, proponents from New Zealand and Iceland 

pointed to accrual budgeting as leading to changes to such programs.

In both countries the adoption of accrual budgeting highlighted issues with 

respect to public employee pension programs. In Iceland, accrual 

budgeting showed the consequences of wage negotiations on future public 

employee pension costs. Since a retiree receives a pension tied to the base 

salary of the person currently in the retiree’s former job, wage 

renegotiations directly affect Iceland’s pension liabilities. The full costs of 

these agreements were not fully realized by the public until the adoption of 

accrual budgeting led to the recognition of the liability in the budget 

estimates. Officials informed us that there is no longer public support for 

decisions that are so costly in the long term. Similarly, in New Zealand, 

recognizing pension liabilities on the balance sheet and accruing the annual 

change in that liability as an expense in the budget prompted greater fiscal 

caution about these long-term commitments. Under cash budgeting, the 

magnitude of future public sector pension costs was recalculated and 

reported to Parliament every 5 years, but this information generally did not 

play a significant role in the budget debate. According to a former minister, 

once the full liability for public sector pensions was brought onto the 

balance sheet and the annual change in the liability was included in the 

budget as an expense, New Zealand made the difficult decision to close its 

defined benefit pension plan to new government employees.
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As a result of recognizing the liability from providing accident coverage, 

the New Zealand government initiated efforts to reform the Accident 

Compensation Corporation (ACC) program. ACC is an insurance program 

comprising six accounts covering accidents ranging from motor vehicle to 

those occurring on the job. In the past, the value of future payments due to 

claimants was recorded only in the financial statement footnotes and had 

no impact on either the operating statement or balance sheet of either the 

ACC or the government. The accounting treatment recently changed, and 

the government recorded a liability for these programs for the first time in 

fiscal year 1999-2000. Consequently, the government booked on its balance 

sheet a liability of nearly NZ$7 billion for previous accidents.14 With accrual 

budgeting, this also reduced the estimated budget surpluses by 

NZ$500 million since the estimated future cost of current accidents was 

booked as an operating expense. Officials attributed New Zealand’s 

decision to raise premiums and add surcharges largely to this inclusion of 

program costs in the budget. The intention was to fully fund portions of 

ACC by 2014, thus helping to ensure that those programs are sustainable 

into the future.

Accrual budgeting was also credited with spurring changes in insurance 

claims management. Under the new accrual environment, ACC staff is 

dedicating more time to managing long-term disability cases with the 

highest projected costs. Through active management, ACC aims to reduce 

the severity of disability cases and thus program costs in the long run.

14The recognition was to be based on the estimated probable cost of claims existing at the 

end of the year, with minor adjustment for claims incurred but not reported based on 

historical experience.
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Some proponents also believe accrual budgeting helps improve decisionmaking by providing more complete information for understanding how 

budgetary decisions will affect a country’s financial health. Accrual 

budgeting frameworks were viewed as providing more complete 

information in at least two ways. The first way is by including actual and 

projected accrual-based financial statements in the budget presentation. 

For example, the accrual budget presentations in Australia, Iceland,15 New 

Zealand, and the United Kingdom include the primary financial 

statements.16 The second way is by reflecting annual balance sheet changes 

in the operating statement which is, in effect, the accrual budget. For 

example, an accrual-based appropriation would include the cost of pension 

benefits earned but not paid in the budget year, which represents the 

annual increase in the liability on the balance sheet. As a result, accrualbased appropriations capture changes to a government’s net worth,17 which 

flow through the operating statement. Some view trends in net worth, if 

measured on a consistent basis, as one indication of whether a country’s 

fiscal condition is improving or declining.

Some Experts Question 

Usefulness of Accrual 

Budgeting for Addressing 

Sustainability Issues

While proponents expressed the view that accrual budgeting was valuable 

in heightening awareness of sustainability issues, other experts were more 

cautious on this point. Two key concerns were:

• some significant government commitments are not captured in an 

accrual budget, and

• the meaning of “net worth” in the government context is unclear.

First, as noted above, accrual budgeting based on financial accounting 

standards does not capture some key fiscal pressures, such as future costs 

associated with social insurance programs. While some case study 

countries used modeling to estimate the future costs of these programs, 

none include them—or plan to include them—in the accrual-based budget. 

15Iceland does not include a projected balance sheet in its budget presentation.

16Primary financial statements include an operating statement, a balance sheet, and a 

statement of cash flows.

17Net worth is the difference between balance sheet assets and liabilities. Case study 

countries that have capitalized assets included values for heritage assets and defense 

weapon systems as assets on their balance sheets. However, some exceptions are made due 

to valuation difficulties.
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Specifically, none of the case study countries recognize social insurance 

commitments as liabilities in their financial statements or record the 

expense in their accrual budgets. This is because these commitments do 

not meet financial accounting standards’ criteria for recognition as a 

liability. Generally, the financial accounting standards adopted by most of 

the case study countries define liability recognition with three criteria:

(1) an event has occurred, (2) a future payment is probable, and (3) the 

amount of the future payment is reasonably estimable. Using these 

standards, a differentiation generally is made between pension and 

insurance programs, which meet the recognition criteria as liabilities, and 

social insurance programs, which do not. For example, premium payments 

for insurance programs bring with them an expectation that claims will be 

paid—a probable and reasonably estimable future payment will be made 

once an insured event has occurred. On the other hand, the future 

payments for social insurance programs, which in the case study countries 

are funded on a pay-as-you-go basis, could be adjusted to fit within the 

fiscal policy objectives of the government at the time the payments need to 

be made.18 However, many of the case study countries use long-term cash 

forecasts, as does the United States, to recognize and present information 

on the imbalance between revenues and expected payment streams for 

social insurance programs.

Another argument made against recognizing social insurance as a liability 

is that a key factor in the government’s ability to meet these social 

obligations, i.e., the power to tax, is not recognized as an asset. For 

example, according to officials in several case study countries, estimating 

future tax revenue is complicated and it may not be able to be reliably 

estimated. Since the power to tax is an asset that the government could call 

upon to meet the demand for social insurance, some experts suggested that 

accruing a liability for social insurance but not recognizing the power to tax 

as an asset would give an inaccurate picture of fiscal position.

This is one major reason why some accrual-based concepts such as net 

worth are difficult to fit into the government context. As mentioned above, 

some important long-term commitments are not recognized as liabilities 

and do not appear on the balance sheet. Further, a government’s “power to 

tax”—the means by which any government can pay its long-term 

18The Canadian Pension Plan, broadly similar to the U.S. Social Security system, is a joint 

federal-provincial program. It is separate from both federal and provincial budgets and its 

revenues and expenses are not included in Canada’s budget. 
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commitments—is not recognized in government financial statements. In 

addition, there are numerous valuation issues created by the unique nature 

of many government assets and liabilities. Nevertheless, proponents 

maintain that the new framework provides more and better information 

than the previous cash-based framework. Further, New Zealand officials 

suggested that, although there are difficulties in measuring and interpreting 

some balance sheet items, this information may still provide useful trend 

information if measured using consistent standards from year to year. That 

is, while the measure may not necessarily be precise, changes from one 

year to the next may provide insights to decisionmakers on the 

implications of their decisions for the overall health of the nation.

Some Accountability 

and Control Issues Are 

Addressed by Accrual 

Budgeting but Others 

Are Raised

Proponents in all of the case study countries expected greater 

accountability from the adoption of accrual budgeting. Specifically, 

officials and other proponents credit the use of accounting standards for 

budgeting with increasing the transparency and credibility of budget 

estimates. Against the backdrop of their own budget history, they viewed 

the adoption of accounting standards as promoting greater accountability 

and transparency. Markets in particular were viewed as one audience for 

these reforms; for example, enhancing the credibility of budget information 

for financial market participants was viewed as a critical part of New 

Zealand’s initiatives to enhance its market standing. In some cases, the 

adoption of accrual budgeting corresponded with the establishment of 

other new budget planning and reporting procedures designed to institute 

forward looking budgetary frameworks and reports.19

Accrual Budgeting Adopted 

for Greater Transparency 

and Accountability

In general, the case study countries adopted accrual budgeting in reform 

environments which stressed the need to improve the “transparency” of the 

budget process and invite increased scrutiny of fiscal policy and specific 

spending initiatives. For example, Australia’s Charter of Budget Honesty 

and New Zealand’s Fiscal Responsibility Act each mandate the release, at 

the start of the budget process, of fiscal strategy statements setting the 

broad strategic goals of the government. Subsequently, the budget 

represents how the government intends to implement its strategy. These 

two countries viewed an accrual framework as important in supporting 

19In the United States, the Congressional Budget Office produces 10-year outlay-based 

projections for use in the budget process.
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efforts to improve transparency. In particular, proponents in New Zealand 

informed us that cash-based budgeting followed inconsistent and complex 

practices understood by only a few practitioners. In contrast, private sector 

standards were viewed as generally accepted and understood. 

Consequently, proponents view applying these standards to the budget as 

helping to ensure that the budget is understood and subject to greater 

public scrutiny than was possible when the budget was cash-based.

Proponents stated the opinion that budgeting based on accounting 

standards increased the consistency and credibility of budget information 

because the accounting standards are independently developed, well 

documented, and may be more readily understood. For example, in New 

Zealand, applying private sector or other established accrual accounting 

standards was viewed as improving the credibility of government financial 

management in the credit markets. New Zealand had experienced loss of 

market confidence—partly attributable to government’s poor fiscal 

management—and faced the prospect of credit downgrades. Reform 

efforts including accrual budgeting were begun, at least in part, to regain 

the trust of the credit markets. Officials in the United Kingdom and New 

Zealand told us that they believe the adoption of standards for budget 

development and presentation that mirror private sector accounting 

standards will enhance the credibility of budget estimates in the public 

debate. Officials told us that in their opinion, budgeting based on these 

standards provides consistency and reliability which can help instill 

confidence in the estimates and in the ability of the government to achieve 

its fiscal targets.

Improving the consistency between the budget estimates and the financial 

statements was also seen as important to enhancing parliamentary 

scrutiny. Proponents expressed the belief that lack of comparability 

between the information in the budget and the information decisionmakers 

receive on the actual results of their budget initiatives in accrual-based 

financial reports was problematic. For example, officials from New 

Zealand, Australia, and the United Kingdom all noted that differing 

budgeting and reporting standards generally provided conflicting signals to 

decisionmakers and could lead to the failure to adequately focus on results 

and performance. They viewed the alignment of the basis of budgetary 

measurement with that used in financial accounting standards, i.e., accrual, 

as providing a consistent basis with which to make comparisons.
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Accrual Budgeting Raised 

New Accountability and 

Transparency Concerns 

Just as different budget structures highlight different issues, they can bring 

to the forefront different trade-offs. Budgetary accounting may hide or 

make transparent the implications of given choices and so confer an 

advantage or disadvantage. In some cases the trade-offs highlighted in an 

accrual budget are different than those that would have been presented for 

the same budget proposal under a cash budget. Although decisionmakers 

were expected to benefit from any new information that would be available 

as a result of accrual budgeting, its use—especially in support of more 

decentralized, performance-focused management philosophies—also 

raised some new accountability and control concerns.

Some forms of accrual budgeting may provide less control by top-level 

decisionmakers over some budget items. This is especially true for capital 

assets where, on an accrual basis, parliamentary decisionmakers may have 

less ability to control asset purchasing decisions than with a cash-based or 

obligation-based budget. As previously noted, in New Zealand, Australia, 

and the Netherlands cash is appropriated for noncash items, such as 

depreciation expense, and agencies will be allowed to save for asset 

renovation or replacement. Proponents in these countries argue that this 

discretion is key to encouraging effective management and that 

compensating controls can be established to alleviate these concerns. 

However, critics have raised concerns that delegating asset purchase 

authority to departments entails surrendering control over decisions that 

should be made in a governmentwide arena. This delegation could limit the 

government’s ability to make trade-offs across agencies in the use of scarce 

resources. It also ties funding for new assets to existing assets through 

depreciation which fails to recognize changes in needs. For example, this 

process could provide too much for agencies with declining demands for 

assets and too little for agencies with expanding asset needs. It is unclear 

whether the compensating controls that were instituted to provide for 

parliamentary review of most asset purchases offset these problems.

Monitoring budget execution on an accrual basis presents new challenges. 

Under cash- and obligation-based budgeting, oversight of budget execution 

is relatively straightforward because managers usually do not have access 

to more cash than they are expected to use in a given period and 

obligations are closely monitored to avoid breaching the amount permitted 

by law. Under these types of budgeting systems, oversight of budget 

execution generally involves reviews of obligations incurred and cash 

disbursements to ensure that payments are made in accordance with 

authorized purposes.
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Some we spoke with expressed concerns that the increased complexities 

associated with the use of accruals may lead to reduced transparency and 

control. These challenges arise because, depending on the accrual 

approach used: (1) cash may be appropriated for noncash expenses,

(2) some accrual-based amounts are based on assumptions and judgments 

which must be understood to reduce the potential for error or 

manipulation, and (3) when combined with output-based budgeting, wide 

discretion is provided over the use of resources. For example, 

parliamentary staff in the United Kingdom expressed concern about the 

ability to understand the reconciliation between cash requirements and 

accrued costs. Further, observers in New Zealand expressed concern that 

in the absence of truly competitive environments, the lack of detailed input 

information makes it difficult to judge departmental performance, 

especially the reasonableness of the output “prices” on which the system is 

premised. Under an accrual budgeting model, oversight may be grounded 

in financial management principles such as asset/liability management and 

the sustainability of projected cash flows. For example, in Australia, 

departmental performance will be monitored based on assessment of 

departmental operating statements. This is important in these systems 

because, as departments are given significant discretion over how funding 

is used to produce outputs, oversight is premised on the ability of 

policymakers, as the purchasers of goods and services, to adequately 

assess the price and quality of outputs. As a result, understanding the full 

costs of producing goods and services, rather than just the immediate cash 

outlays, becomes increasingly important to ensuring accountability.

These issues and other oversight challenges will be discussed more fully in 

chapter 4.

Countries Developed 

Mechanisms to Cope With 

Budget Control Issues 

Proponents noted various mechanisms which can help address control 

issues. For example, officials from several countries, including New 

Zealand, Australia, and the United Kingdom, pointed to corresponding 

enhancements such as alternative measures of fiscal performance, 

increased requirements for strategic and investment planning, and 

increased accountability for performance. For these reasons, proponents 

argued that it was important to consider a country’s entire accrual-based 

management framework when considering issues of control and 

accountability. For example, limits may be placed on managerial discretion 

by fiscal targets that govern key budgetary decisions and continue to be 

measured primarily on a cash basis. Officials argued that if total borrowing 

is constrained through fiscal policy objectives, such as debt-to-GDP targets, 
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it may be more difficult for departments to justify capital injections (cash 

advances) for an asset purchase price even if only one year’s depreciation 

expense would be recognized in the accrual-based budget.

All case study countries that adopted accrual budgeting continued to use 

some cash-based measures to monitor fiscal policy. For example, New 

Zealand uses an accrual-based operating balance as its primary deficit or 

surplus measure, but continues to monitor its debt-to-GDP ratio—a cashbased measure. Officials explained that the debt-to-GDP ratio is a key fiscal 

target which, used in conjunction with an accrual-based surplus or deficit, 

provides additional information for decisionmakers to undertake fiscally 

cautious decisions that contribute to improving the fiscal health of the 

country.20 In fact, New Zealand officials and experts we interviewed 

explained that setting debt targets guides the determination of the accrualbased surplus or deficit target.

In the United Kingdom, the adoption of a fiscal framework which more 

clearly distinguishes between current and capital spending was intended in 

part to encourage capital investment. Nevertheless, the Parliament has 

asked that the new appropriations bills include a reconciliation at the 

departmental level between resources consumed (accrual amounts) and 

cash. Furthermore, they asked to vote on the departmental cash 

reconciliation as well as on the resources allocated at the activity level. 

These votes are intended to draw attention to the cash needs of the budget 

and demonstrate an interest in continuing parliamentary review of these 

cash resources.

In Australia, debate continues over whether the dominant measure of fiscal 

position should be accrual- or cash-based. Some who advocated that the 

primary measure of fiscal position be accrual-based stated that in order to 

most fully influence behavior, the government should use as its primary 

measure the same measure to which departments are held accountable. 

Others expressed the view that that cash-based measures are a better 

indication of the government’s role as steward of the economy and, 

additionally, are more familiar to the public. While Australia’s budget is 

presented on an accrual basis, the budget balance—or bottom line—is 

adjusted to represent the cash financing requirements.

20For more detailed discussion of this topic see Budget Surpluses: Experiences of Other 

Nations and Implications for the United States (GAO/AIMD-00-23, November 2, 1999).
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Aside from constraints imposed through cash-adjusted and cash-based 

fiscal targets, some case study countries imposed other controls at 

different levels in the budget process. For example, successive reforms in 

New Zealand—the State Sector Act of 1988 and the Public Finance Act of 

1989—changed the locus of accountability in the public service by holding 

executives responsible for their performance through public service 

contracts. The new public service system is characterized by executive 

discretion over the hiring and firing of managers and other employees 

should performance not measure up to the expectations set forth in their 

contracts. 

In addition, in some countries Cabinet scrutiny ensures that cash controls 

are still in place at an overall governmental and fiscal level. In Australia, for 

example, the Expenditure Review Committee, which is responsible for 

making budget decisions, retained its focus on incremental changes and 

cash requirements. Further, the Department of Finance and Administration 

(DoFA) will continue to review the monthly expenditure reports to ensure 

that departmental spending is in line with what has been budgeted and 

appropriated. Although ultimate accountability for any breach in budgeted 

appropriations lies at the department level, DoFA expects to review 

spending trends and advise senior decisionmakers if financial management 

is suspect. Similarly, in New Zealand, the timely availability of monthly 

financial statements was viewed as allowing analysts in the Department of 

Treasury to determine whether departments are on track to deliver outputs 

within the agreed upon price, or on the verge of breaching their 

appropriations.

Conclusion Case study countries expressed the view that accrual budgeting is a useful 

tool in addressing concerns about public performance, sustainability, and 

accountability. Some proponents view it as necessary to support more 

decentralized, performance-focused management by improving links 

between cost and performance. Accrual budgeting was viewed as providing 

decisionmakers with more complete information on sustainability of some 

government policies with long-term budgetary implications. Finally, 

proponents expressed the belief that accrual budgeting would improve 

accountability and control by enhancing the consistency and transparency 

of budget information. This last point was challenged by other observers 

who expressed concerns and skepticism that the increased complexities of 

accrual measurement and the decentralization of responsibility that 

accompanied most of the case study countries’ budget reforms present 

difficult trade-offs that might offset the benefits proponents expect to 
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achieve. Finally, some question the usefulness of accrual budgeting in 

addressing sustainability issues because it does not capture some key fiscal 

pressures—those associated with social insurance and health care 

programs.

The design of an accrual budgeting system shapes its role in addressing 

these challenges and tends to reflect a country’s overall management 

approach and desired level of control. For example, the extent to which the 

adoption of accrual budgeting reflected fundamental changes to core 

management philosophies and systems varied significantly. Some 

countries, such as New Zealand and Australia, integrated accrual budgeting 

with output-based appropriations to support decentralized, performancefocused management systems. The United Kingdom plans to use accrual 

budgeting to better recognize costs but to date has not chosen to shift to 

output-based appropriations. Conversely, Iceland’s accrual budgeting 

system, which excludes capital and accrues pension costs only at the 

central level, better reflects aggregate costs to the government but places 

less emphasis on allocating full costs to particular goods and services. In 

general, the design of a country’s accrual budgeting system tended to 

reflect its key concerns and reform objectives.
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Chapter 4

Challenges in Implementing Accrual 

Budgeting Chapte4r

Case study countries faced a number of challenges in implementing their 

accrual budgeting systems. First, they had to determine what standards to 

use to measure accrual amounts in the budget. To varying degrees, 

countries also had to develop new systems to collect and analyze accrualbased data. In addition, countries faced challenges with respect to asset 

identification and valuation, oversight of budget execution, and cultural 

change. Most countries felt that strong leadership and extensive education 

efforts were key to addressing these implementation challenges. 

Countries Faced Some 

Common 

Implementation 

Challenges

In our case study countries, a key rationale for moving to an accrual budget 

was the desire to use a consistent set of standards for financial statements 

and for the budget. Although the process for developing public sector 

accounting standards differed in each country, they all adopted accounting 

standards similar to those used by the private sector in their countries. The 

adoption of standards developed by an independent body was viewed as 

increasing the consistency and credibility of budget information. With 

some modifications, the accounting standards were adopted for budgeting 

as well. Most of the countries found they needed new information 

management systems to collect accrual-based data and in some cases to 

facilitate reporting under new output/outcome-based account structures. 

In the transition from a cash-based reporting environment to accrual-based 

frameworks countries faced further challenges with respect to

• asset identification and valuation,

• oversight, and

• cultural change.
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Identification and Valuation 

of Assets Presented 

Difficulties in Move to 

Accrual Framework

Asset identification and valuation were cumbersome and time-consuming 

efforts for the countries that chose to capitalize assets. Indeed, one of the 

reasons that Iceland decided against capitalizing assets was the difficulty it 

would have faced in identifying and agreeing on the asset values. Even in 

countries that have accounting standards in place to provide guidance on 

asset valuation, the valuation of individual assets can be subjective. For 

example, unique assets such as national parks, military weapons systems, 

and infrastructure proved very difficult to value.1

 Further, some suggested 

that funding of depreciation creates an incentive for departments to 

overvalue their initial asset base to ensure higher funding levels to replace 

assets in the future.

Different approaches were used for asset valuation and identification. In 

New Zealand, the use of different approaches across departments was 

cited by some as raising concerns about the reliability of the estimates and 

the “fairness” of the funding levels across government. For example, the 

Department of Education (DOE) hired an independent contractor to assist 

with asset valuations. Other agencies assessed the value of their assets 

themselves. Officials noted that departments as diverse as the Department 

of Defense, DOE, and the police department have had problems identifying 

assets and/or determining their ownership. Officials from the other 

countries which chose to capitalize assets expressed similar views that 

much time was spent on trying to get asset registers right. 

The allocation of assets among departments at the time of the change to 

accrual budgeting also may affect future operations. Under accrual 

budgeting approaches in which depreciation funding is to be used to 

maintain the existing asset base, the issue of whether the initial asset mix is 

optimal may have unintended consequences. For example, in New Zealand 

there was an implicit assumption that departments began accrual 

budgeting with the capital necessary to ensure the sustainability of their 

activities. Under accrual budgeting, depreciation funding permitted 

renovation or replacement of the existing asset base. As a result, some 

1

In the United States, there has been debate surrounding the treatment and valuation of 

unique governmental assets such as weapons systems and heritage assets. In considering 

this issue, FASAB suggested that (1) the value of some federal assets, such as museums and 

national parks, may be indeterminable and (2) allocating the costs of assets such as military 

weapons systems to accounting periods may be meaningless. In response to these 

difficulties, FASAB required a new category of financial reporting, “required supplementary 

stewardship information,” which is to accompany financial statements but is not included 

directly on the balance sheet. 
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equity problems have arisen between departments that were asset-rich and 

those that were asset-poor at the time of the change to accrual budgeting. 

Departments that were asset-rich when the new system was implemented 

were able to maintain their asset bases regardless of shifts in relative 

spending priorities and demand for services. Officials found that some 

asset-rich departments have been able to install up-to-date computer 

systems because the price of their outputs was based on operating 

expenses that included depreciation costs for a large asset base and they 

had accumulated their depreciation funding. In contrast, asset-poor 

departments were not able to accumulate much depreciation funding and 

were unable to fund new, more expensive, replacement assets. Officials 

warned that these departments had been forced to run down their asset 

bases and may need capital injections in the near future. Some believed 

that such capital injections will be difficult to get in the future.

Management and Oversight 

Roles Will Be Affected by 

Use of Accrual Budgeting

Accrual budgeting presents new challenges for the management and 

oversight of public funds. Accrual measurement requires the use of 

judgment regarding, for example, the estimated useful life of an asset, the 

recognition of a contingent liability, and revenue forecasting. 

Decisionmakers will need to understand how such judgments can affect a 

department’s budget request. The change in management and oversight of 

public funds will, perhaps, be most dramatic in those countries that have 

adopted an output-based model because such models inherently focus less 

on control over inputs. Rather, output-based models are premised on the 

ability of decisionmakers to assess the appropriateness of the “price” of 

outputs. Some countries made various attempts, such as crosswalks 

between cash and accrual reports, to assist decisionmakers in performing 

their oversight roles.

Decisionmakers Sought 

Crosswalks and Reconciliation 

to Cash

Many users of budget documents, notably members of Parliament and their 

staffs as well as observers outside of government, expressed an interest in 

having a crosswalk between the last fiscal year in which a cash budget was 

presented and the first fiscal year in which an accrual budget is presented. 

They thought this would help the users understand the implications of the 

shift in budget measurement. Some countries have accommodated this 

desire for crosswalks while others, for various reasons, have not. For 

example, in Iceland as the reforms were being debated in the Althingi, the 

Ministry of Finance presented budgets for the two previous fiscal years on 

both a cash and an accrual basis providing decisionmakers a clear idea of 

what information might be lost and what was gained in the change. 

Members of the Althingi and other senior government officials indicated 
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that this approach was helpful in gaining widespread support for the 

reforms. Iceland requires the budget to be presented on both a cash and an 

accrual basis, although the detailed spending estimates are presented only 

on an accrual basis.

In the United Kingdom, the Parliament has requested that the proposed 

period of dual running of the old cash system and the new accrual-based 

resource system be extended to allow time for increased understanding of 

the implications for parliamentary control and oversight. The Treasury 

opposes the extension and has testified that doing so would be too costly 

and could undermine incentives to move to the new system. In contrast, in 

New Zealand, officials found no need for cash information after the first 

transitional budget was produced. Treasury officials said that after 

consulting with various users of budget information, including 

parliamentarians, experts, and the press, a consensus was reached to forgo 

future presentation of cash-based supplementary budget information.

Crosswalks to cash could not be implemented in Australia primarily 

because the adoption of accrual measures also coincided with the adoption 

of a new budget framework. Resources will no longer be appropriated by 

object classes to specific departments and agencies; rather, appropriations 

structures have been “remapped” to show the allocation of resources to 

outcomes and outputs to more effectively account for the full costs of 

those programs and activities. Budget officials in Australia said that a 

crosswalk between the last fiscal year’s cash-based budget and the new 

accrual-based budget would not be practical, largely due to the fact that a 

new information management system was developed to allocate resources 

to outputs and the cash-based information would not be collected in 

accordance with this new framework. Instead, the previous fiscal year’s 

budget was reestimated on an accrual basis to highlight the differences 

between cash and accrual estimates.

New Analytical Skills Are 

Required for Oversight

In addition to understanding how accrual-based budget requests compare 

to the previous cash-based requests, parliamentarians must be able to 

understand basic accounting concepts, such as depreciation and 

revaluation, and the implication of their use in order to perform their 

oversight responsibilities. For some items, financial statement and budget 

reporting on an accrual basis requires more assumptions and judgment 

than cash-based reporting. However, independent auditors provide 

assurances as to the reliability and reasonableness of these judgments in 

their review of the financial statements. On the other hand, when budget 

estimates are presented for parliamentary approval no such independent 
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review has been undertaken. A department’s request for depreciation 

expense, for example, may have increased from the previous year due to a 

revaluation of assets that has not yet been subjected to independent audit. 

Consequently, absent further scrutiny, these estimates could be enacted 

into law and cash appropriated to the departments for expenses that may 

be overstated. This concern has been addressed in different ways. For 

example in Australia, departmental budget requests are reviewed by 

analysts in the Department of Finance and Administration (DoFA) and 

compared to the department’s most recent audited financial statements and 

to requests made during recent budget cycles. In New Zealand, because 

output prices are rarely changed, any higher depreciation expenses 

resulting from asset revaluations would have to be absorbed by the agency. 

If an agency were to insist that as a result of the higher depreciation costs it 

needed additional appropriations, the request would require considerable 

justification and review of its assumptions in order for the minister to agree 

to a “price” increase for that department.

Some observers expected that the shift in the focus of parliamentary 

scrutiny of budget estimates would pose challenges. Some experts in New 

Zealand felt that the focus on output funding instead of input funding could 

provide opportunities for departments to mask data because the new 

reporting framework2

 does not provide information on the mix of inputs 

used to produce each specific output. For example, social work services to 

children and young persons is one output requiring an appropriation of 

almost NZ$190 million. Although the output is defined by various 

performance standards, such as the number of notifications investigated or 

the number of orders in force, the appropriation documents provide no 

detail as to the mix of personnel, overhead, or technology used to provide 

the output. Consequently, it can be difficult to determine whether an output 

was achieved by extracting efficiencies or by running down and not 

replacing needed assets.

Furthermore, as departments redefine outputs over time, the lack of input 

information may make it difficult to compare performance on a consistent 

basis. Moreover, output classes are defined inconsistently—some in more 

detail than others—which makes meaningful comparisons within and 

across departments challenging. Some observers noted these factors have 

2

For more information on New Zealand’s output pricing model of accrual budgeting see 

appendix V.
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the potential to complicate oversight now that the departments have been 

given a great degree of managerial discretion.

In Australia, some parliamentary staff said that trying to change the focus 

of parliamentary oversight from its current focus on inputs—the cash 

budgeted for personnel, supplies, and overhead—to departmental 

performance and output prices may present challenges because the issues 

are complex and the committees tend to be understaffed. Australia’s new 

budget framework, which encompasses much more than accrual 

budgeting, seeks to link appropriations for outputs purchased to outcomes 

such as “Stronger Families.” These broad outcomes represent the current 

government’s policy initiatives; outputs represent what the government 

purchases in order to achieve the desired policy outcomes. Moving the 

focus of oversight from detailed inputs to broad outcomes presents an 

additional level of complexity because in many cases an outcome requires 

contributions from many agencies and is affected by numerous public and 

private factors. Also, in many cases direct causal links have not been 

established between outputs and outcomes. 

Assessing Prices Is Critical to an 

Output-based Approach to 

Accrual Budgeting

Under output budgeting frameworks, the government agrees to purchase 

outputs from the departments at agreed-upon accrual-based prices. 

Conceptually, the government and the Parliament should be able to 

ascertain whether the output price is fair based on comparisons with 

similar services offered in the private sector or by other government 

agencies. However, many argue that because private markets do not exist 

for numerous government services, benchmarking will be difficult. New 

Zealand, with more experience in output budgeting than any other country, 

is still grappling with this issue. Officials said that the benchmarking 

exercise is difficult for a number of reasons. First, analyzing the price of a 

publicly funded activity can be complicated. For example, a few years ago 

the Customs and Treasury departments analyzed the processing of inbound passengers. Even this simple process had to be broken into 

surveillance, baggage checking, paper processing, etc. As a result, it took 6 

months to fully understand the process and assign a price to each 

component. Once such a process analysis is complete, finding an exact 

private sector equivalent against which to benchmark prices is not 

straightforward, partly because there is often no private sector counterpart 

that performs the same function as a sovereign government entity. New 

Zealand appropriates to more than 750 outputs, but as of fiscal year 1999-

2000 only a few output prices had been successfully benchmarked. Many 

officials said that this exercise was only just beginning and most 
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appropriations continued to be closely tied to departmental operating 

costs. 

Similarly, in the Netherlands, the goal of the accrual budgeting framework3

is to encourage agencies to benchmark their prices against other 

providers—public or private—of similar services, but even after 6 years 

this has been done infrequently. Instead, the price usually reflects the costs 

of production. The lack of widespread benchmarking to determine prices 

was attributed to inexperience with accrual measures, the recent accession 

of many new agencies in the program, and the fact that for some of the 

services these agencies provide there is no private sector equivalent that 

can be used for benchmarking.

Cultural Change Was 

Necessary to Achieve 

Benefits of Accrual 

Budgeting 

As with any major reform effort, significant cultural change was viewed as 

important to ensuring successful implementation of accrual budgeting. The 

shift to an accrual budget, especially in Australia and New Zealand, was 

part of a major change in how departments requested and would be held 

accountable for resources. Shifting accountability from central oversight 

agencies to individual departments changed the way financial resources 

were controlled. Many officials described these changes in control and the 

focus of information as “cultural changes,” signaling the magnitude of the 

challenges and the possible resistance to the implementation of the 

reforms. These concerns were largely addressed through extensive training 

efforts on accrual techniques specifically and, more generally, on the 

benefits expected from the broader reform efforts.

Implementation time frames varied significantly across case study 

countries. There is little consensus, however, regarding the appropriate 

length of time needed for implementation. The United Kingdom’s 

implementation approach provides for a long phase-in period for the 

reforms: over 6 years will have passed between 1994, when the government 

issued a “white paper” signaling its intention to proceed with budget 

reforms, and 2001 when the first accrual-based budget is to be presented in 

Parliament. Treasury officials said that they were able to take advantage of 

the long time frame to thoroughly vet the reporting standards, train 

personnel, and perform “dry runs” of the new budget presentations. Some 

believe that even 6 years is not long enough to fully prepare for the reforms. 

Others in the Treasury argue that the long lead time allowed departments to 

3

See appendix IV for more information on the Netherlands’ accrual budgeting framework.
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“put off” the inevitable. In contrast, Australia introduced its first accrual 

budget within 18 months after laws requiring a shift to accrual budgeting 

had been enacted. However, problems with quick implementation were 

noted in Australia where officials expressed frustration at trying to provide 

training on policy changes while the policies were still being developed. 

Leadership 

Commitment and 

Extensive Training Are 

Keys to Addressing 

Implementation 

Challenges

In all countries, commitment to financial reporting and budgeting reforms 

from the top levels of government was considered crucial to successful 

implementation. In addition to management commitment, extensive 

training helped increase general understanding of the benefits to be 

achieved and reduced the resistance to change.

Demonstration of 

Leadership Commitment 

Essential for Successful 

Implementation of Reforms

A key factor in successfully moving to accrual budgeting was the strong 

support from both the political leadership and within the bureaucracy. In 

New Zealand, politicians’ needs for better financial and managerial 

information provided the impetus behind the passage of the Public Finance 

Act. The act significantly changed the managerial accountability and 

incentive structure. Under the new system, all managers are required to 

sign limited-term contracts and are subject to annual reviews based on 

quantifiable performance criteria. If not met, contracts were not renewed 

for another term. According to many observers, once departmental 

managers recognized the degree of change necessary to implement these 

reforms and the implications for not meeting their contractual obligations, 

their own commitment to making the changes increased significantly.

In Iceland, financial reporting reform legislation was debated for nearly

3 years in the Althingi before it was enacted. The bill passed by unanimous 

vote, an outcome sought by the government to ensure the widest possible 

support for these reforms. While punitive incentives were not imposed in 

Iceland as they were in New Zealand, the extent of the debate and the 

support of the political leadership from all parties sent a strong signal. In 

addition, to ensure the consistency of the new measurement basis and to 

ease its implementation and use in the budget process, most of the more 

complex accrual analyses were done by the Ministry of Finance, 

consolidated in its budget, and not allocated to individual departmental 

budgets.
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In the United Kingdom, the impetus to move to accrual budgeting has 

continued despite changes in the parties controlling the government. A 

senior Treasury official noted that a key factor in the successful 

implementation of accrual budgeting has been the strong ministerial 

backing from the start, under both Conservative and Labour governments. 

These officials said that politicians viewed the reforms as grounded in the 

goal of providing managerial improvements and better information to 

Parliament. Equally important, the reforms had support from the senior 

level within Treasury which ensured a consistency of staff responsible for 

designing and implementing the reforms.

In Australia, support for the reforms at the ministerial level was ensured 

through direct dialogue between the Minister of Finance and 

Administration and his colleagues in the Cabinet. The expectation followed 

that Cabinet ministers would reinforce the importance of the reforms 

throughout the departments in the ministers’ portfolios. These 

reinforcements complemented training strategies that were geared towards 

further emphasizing the government’s commitment to the reforms.

Multifaceted Training 

Methods Used to Support 

Cultural Change

Training played a key role in most countries to ensure that accrual 

concepts were well understood. But more important, training opportunities 

were also used to ensure the dissemination of information on and a clear 

understanding of the government’s commitment to these reforms and to 

instill an equal commitment to and understanding of the reforms at every 

level of the bureaucracy. In Australia the outreach effort to inform and 

educate departmental personnel was undertaken by DoFA. The training 

curriculum was designed to reach multiple levels of management through 

the use of different communication tools and techniques such as seminars, 

speeches, focus groups, newsletters, and Internet web sites. Most 

importantly, the training curriculum could be redesigned for different levels 

of management depending on the needs of the users. DoFA officials believe 

that the use of a multifaceted, multimedia approach facilitated 

communication about the reforms, allowing them to address departmental 

concerns as quickly as possible. 

Officials at the United Kingdom’s National Audit Office also believe that 

training will be essential to successful implementation of accrual-based 

resource accounting and budgeting and that a huge education effort is 

necessary to ensure that staff at all levels are technically equipped to 

understand and implement basic accrual requirements. Individual 

departments prepare and implement their own training programs by taking 
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pieces of the curriculum developed by the Treasury. Treasury has taken the 

role of facilitating the exchange of ideas through a “training network,” 

which they believe also supports a key objective in delegating more 

authority and responsibility to the departments. 

Furthermore, as accounting issues typically garner little management 

interest, the link to the budget has worked to increase interest in the 

overall reforms. Many departmental personnel are realizing that their 

budget will soon be measured differently and this will affect their funding 

levels. Officials in the various departments that are in charge of training 

suggested that as a result of these linkages, staff are paying more attention 

to the reforms than might have otherwise been expected.

Observations Case study countries faced some common challenges in implementing their 

accrual-based frameworks. Most countries found that they needed new 

information management systems to support the collection of accrualbased data and, in some cases, to facilitate reporting under new 

output/outcome-based frameworks. In addition, country officials reported 

significant challenges in asset identification and valuation. Further, the 

shift to accrual-based financial and budget reporting required a significant 

cultural change with implications for managerial and oversight roles. 

Cultural change and the concomitant managerial and oversight role 

changes were most pronounced in countries which combined a shift to 

accrual budgeting with output-based budgeting. Leadership commitment 

and extensive training were identified as crucial in addressing these 

implementation challenges.
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Chapter 5

Adapting Accrual Budgeting for the United 

States Context Chapte5r

The United States and the countries in our review share common 

objectives of improving the efficiency, effectiveness, and sustainability of 

government activities while enhancing transparency and accountability. To 

varying degrees, case study countries have turned to accrual budgeting as a 

tool in addressing these issues. Despite obvious and significant political, 

cultural, and economic differences, these countries’ early experiences with 

accrual budgeting provide some valuable insights for the United States. 

Their experiences, however, must be seen in context of their particular 

situations and any translation to the United States should be done within 

context of its situation and political structure. 

Accrual budgeting in some case study countries was coupled with 

initiatives to devolve authority and accountability to executive agencies. 

The United States, unlike the case study countries, has a separation of 

powers between the executive and legislative branches of government with 

the Congress taking an active role in resource allocation decisions and 

oversight. The challenge becomes how to translate useful ideas developed 

in a parliamentary political system to the U.S. system. Any reform efforts 

need to be adapted to meet the unique budgeting needs of both the 

Congress and the executive branch in the U.S. system. This chapter 

explores the implications accrual budgeting could have within the United 

States’ unique constitutional framework and focuses on ways to adapt 

accrual concepts to enhance the information available to the Congress and 

the President in considering budget decisions. Accrual concepts can 

effectively serve to enhance accountability by the Congress as well as the 

executive branch for certain types of budgeting decisions, particularly 

those involving commitments of future budgetary resources. 

To understand the implications of accrual budgeting it is necessary to 

consider the goals of the federal budget process. Although the U.S. cashand obligation-based budget may not fully recognize long-term 

commitments or directly match full costs with the provision of goods and 

services, it nevertheless offers other benefits, particularly for up-front 

budgetary control of the purchase of capital assets. Accrual budgeting 

based on financial accounting standards can be used to better match costs 

with the provision of goods and services, but whether it would result in 

earlier budget recognition than the current cash- and obligation-based 

budget depends on the budget item. Accrual budgeting would advance the 

recognition of costs for items, such as pensions and insurance, that involve 

cash flows over many years, but would delay it for capital assets so as to 

spread costs over the periods that benefit from their use. In this sense, the 

decision about whether to apply accrual budgeting based on financial 
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accounting standards for the entire budget depends on the relative 

importance one places on recognizing and controlling costs at the time 

decisions are made versus the matching of costs to the period resources 

are consumed in the provision of goods and services. In the United States, 

specific concerns about the implications for budgetary control would be 

raised if some accrual budgeting approaches were applied to capital assets; 

this concern is especially great with regard to control over asset purchases. 

Further, accrual budgeting, as implemented by the case study countries, 

ameliorates but does not “solve” the problem of inadequate recognition of 

long-term commitments since social insurance commitments are not 

included. 

The differences between the United States and the case study countries in 

the budgetary role of the legislative branch make it unlikely that any case 

study country’s accrual budgeting approach would be fully applicable for 

the United States. Nevertheless, several useful ideas still can be drawn 

from their experiences. For example, the experiences of Iceland and New 

Zealand suggest that using accrual budgeting for some programs, such as 

pensions and insurance could result in better information and incentives 

for budgetary decision-making. Further, while accrual budgeting as 

implemented by case study countries would not address long-term 

commitments associated with social insurance, it would be possible to 

develop budgeting approaches drawing on accrual concepts but not 

specifically wedded to financial accounting standards. Finally, while 

accrual-based output budgeting models adopted by New Zealand and 

Australia are not likely to be adopted fully in the United States, their 

experiences with clearly aligning budget and performance information 

within an integrated accountability framework in order to support 

performance management reforms could prompt some further exploration 

of ways to better match costs and performance without sacrificing up-front 

control.

Performance, 

Sustainability, and 

Accountability Central 

to U.S. Reform Efforts

The United States and the countries in our review share common 

objectives of improving public sector financial and performance 

management while enhancing transparency and accountability. As in these 

other countries, decisionmakers in the United States recognize that the 

federal government could benefit from greater integration of financial 

accounting and performance reporting in the budget decision-making 

process. At the same time, changing demographics and other factors have 

raised questions about the sustainability of the government’s long-term 

commitments, such as Social Security, Medicare, and Medicaid. 
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In response to the desire to improve effectiveness and accountability while 

limiting costs, the Congress established a statutory framework to address 

key management issues. Two major laws are at the heart of this framework: 

the Chief Financial Officers Act of 1990 (CFO Act) and the Government 

Performance and Results Act of 1993 (the Results Act). 

The CFO Act—as expanded by the Government Management Reform Act 

of 1994—was designed to remedy decades of serious neglect in federal 

financial management. For example, the act, among other things, 

established chief financial officers across the government, called for 

improved financial management systems and controls, including cost 

accounting, and required the preparation of audited annual financial 

statements for the 24 largest agencies and for the government as a whole. 

To improve the usefulness of federal financial reports and ensure public 

accountability, the Federal Accounting Standards Advisory Board (FASAB) 

was established to develop accounting standards suitable for the federal 

government.1

 FASAB completed work on the basic set of Federal Financial 

Accounting Standards (FFAS) in 1996, but some standards did not become 

effective until 1998 and 1999. 

These efforts are prompting steady improvements in federal financial 

accountability, but more work remains. Major agencies covered by the act 

are issuing agencywide financial statements and the U.S. government has 

prepared and subjected to audit consolidated financial statements for the 

government as a whole. However, our audits of the 1997 and 1998 

consolidated statements revealed serious deficiencies—including systems 

weaknesses, problems with fundamental recordkeeping, and weak internal 

controls—which prevent the government from accurately reporting a 

significant portion of its assets, liabilities, and costs. Because of these 

deficiencies, we were unable and did not express an opinion on these 

financial statements.2

 As these findings indicate, there are major obstacles, 

both at the agency and consolidated levels, in preparing reliable financial 

statements for the U.S. government. 

1

The Federal Accounting Standards Advisory Board (FASAB) was established in October 

1990. See chapter 1 for more detail.

2

Financial Audit: 1998 Financial Report of the United States Government (GAO/

AIMD-99-130, March 31, 1999) and Financial Audit: 1997 Consolidated Financial Statements 

of the Untied States Government (GAO/AIMD-98-127, March 31, 1998).
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While the CFO Act established the foundation for improving financial 

management and accountability among agencies, the Results Act aimed 

more directly at program performance. Under the Results Act, agencies are 

required to set multiyear strategic goals and corresponding annual goals, 

measure performance toward achievement of those goals, and report on 

their progress. Among its several purposes, the act is designed to improve 

congressional decision-making by providing information on the 

effectiveness and efficiency of federal programs and spending. That is, with 

regard to spending decisions, the act aims for a closer and clearer link 

between the process of allocating resources and the expected results to be 

achieved with those resources. This is viewed as important to shifting the 

budget debate from a focus on inputs to a focus on performance.

There also has been a growing recognition that policymakers need 

information on the long-term cost consequences of today’s commitments. 

The long-term costs implied by the government’s current commitments can 

encumber major shares of future budget resources, thereby constraining 

the government’s fiscal policy. Our long-term budget model illustrates that 

the growth in Social Security and health commitments threatens to crowd 

out discretionary spending in the long run, assuming a constant tax burden. 

This is particularly important for programs such as Social Security and 

Medicare that require long time horizons to understand the implications of 

the government’s commitment and its impact on fiscal policy. The 

congressional budget process has made progress in considering the longer 

term in budgeting by requiring a multiyear focus, including the use of a 10-

year budget window. Further, the Federal Credit Reform Act of 1990 

changed the method of budgeting for credit programs to an accrual basis to 

provide more timely recognition of their costs to the government.3

3

See chapter 1 for more detailed discussion of the Federal Credit Reform Act.
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These reforms represent significant steps towards improving budgeting, 

financial information, and performance management and have begun to 

provide the tools for better management. At the same time, additional 

challenges remain to ensure that high performance principles become an 

integral part of the government’s operating culture rather than just 

paperwork exercises. For example, agencies face significant challenges in 

improving linkages between performance plans and budget requests. As we 

have reported earlier, tensions exist between the needs of planning and 

budgeting structures. While budget structures have evolved over time to 

help the Congress control and monitor agency activities and spending, 

planning structures tend to be broader and wide-ranging in order to 

articulate the mission and outcomes agencies seek to influence. Despite 

these tensions, better integration of planning and budgeting is important to 

meeting key expectations of the Results Act.4

 Similarly, while the audited 

financial statements required by the CFO Act provide important 

information on the government’s assets, liabilities, and overall financial 

position, integrating this information to better inform budget decisions 

remains a challenge. Further, although the multiyear focus of the Deficit 

Control Act (DCA)5

 represented progress in considering longer-term 

budgeting, it did not fully address sustainability issues. This is particularly 

important for programs such as Social Security, Medicare, and Medicaid, 

whose rising costs are key drivers threatening the sustainability of the 

government’s fiscal policy. Although considerable long-term actuarial 

analyses of Social Security and Medicare costs have been done, the cashbased budget is not currently structured to focus on the long-term outlook 

for these commitments. 

Countries in our review turned to accrual budgeting, at least in part, to help 

address similar concerns about public sector performance, sustainability, 

and accountability. Overall, proponents stressed the value of moving 

beyond accrual-based financial statement reporting to using accrual-based 

information in the budget—the key accountability and decision-making 

mechanism—in heightening the awareness of and responsibility for 

addressing these concerns.

4

Performance Budgeting: Initial Agency Experiences Provide a Foundation to Assess Future 

Directions (GAO/T-AIMD/GGD-99-216, July 1, 1999).

5

The Balanced Budget and Emergency Deficit Control Act of 1985 as amended by the Budget 

Enforcement Act of 1990, the Omnibus Budget Reconciliation Act of 1993, and the Budget 

Enforcement Act of 1997. The DCA as amended established statutory limits on federal 

government spending for fiscal years 1991 through 2002.
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Transferability of Other 

Nations’ Experiences

Despite obvious and significant political, cultural, and economic 

differences, these countries’ early experiences with accrual budgeting 

provide some insights that may be helpful to the United States. Their 

experiences, however, must be seen in the context of their particular 

situations and any translation to the United States should be done in the 

context of its situation and political structure. It is important to consider 

key differences between (1) the legislative bodies in a parliamentary 

system of government and the Congress of the United States, especially in 

terms of the role each plays in the budget process, and (2) the methods of 

budget reporting already in place in each country. In addition, the 

implications of other reforms undertaken at the same time as accrual 

budgeting need to be considered. Given the differences between the United 

States and the other countries in all of these factors, it is unlikely that the 

United States would achieve all of the benefits claimed by case study 

countries. However, some benefits could result from the selective use of 

accrual budgeting, as has already been demonstrated for credit programs.

Parliamentary bodies in our case study countries exercise their influence 

differently than the U.S. Congress. Governments are formed by the political 

party, or coalition of parties, that hold the support of a majority of 

Parliament. As such, the line between the executive and the legislative 

functions is not as clear as it is in the United States where the separation of 

powers serves as a check on each branch’s power. Many important budget 

decisions that, in the United States, are debated and settled during the 

annual appropriations process, occur in the case study countries before the 

budget is presented for parliamentary approval. Parliament’s duty is to 

satisfy itself that the current government has the Parliament’s full 

confidence to continue governing. If it is satisfied on that front, case study 

countries’ parliaments regularly enact the government’s budget without 

amendment. In Westminster systems, the failure to do so would be viewed 

as a statement of “no confidence” in the government and would signal a 

need for new elections, including for a new Parliament. The separation of 

powers also has implications for budget accountability as the Congress 

generally exerts a greater degree of control over agency spending. Most 

case study countries generally deal with the approval of obligations 

through executive branch controls whereas in the United States 

congressional approval (budget authority) is required before executive 

branch departments can obligate funds.
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Further, while most of the countries in our study had previously budgeted 

on a pure cash basis, the United States has both a cash- and obligationbased budget. A pure cash budget focuses on the cash flows to and from 

the government in a given period. The United States’ obligations basis of 

budgeting focuses upon controlling the legal obligations entered into 

during a period.6

 The U.S. budget is also referred to as cash-based because, 

with limited exceptions,7

 the amounts to be obligated are measured on a 

cash basis, and the unified budget deficit/surplus—the key focus of the 

policy debate—represents the difference in cash receipts and cash outlays 

in a given year. These differences between pure cash-based budgeting and 

the United States’ cash- and obligation-based budget have implications for 

assessing the potential benefits to be achieved from the adoption of accrual 

budgeting. 

6

Obligation-based budgeting involves three stages: (1) the Congress must enact budget 

authority before government officials can obligate the government to make outlays;

(2) government officials commit the government to make outlays by entering into legally 

binding agreements; and (3) outlays are made in payment to liquidate obligations.

7

The U.S. budget uses accrual measures to recognize the government’s costs for certain 

programs. For more information see chapter 1.
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The information and incentives provided by the budget are shaped by both 

the measurement basis used to record costs in the budget and the structure 

of budget accounts (appropriations). The measurement bases discussed in 

this report—cash, accrual, and obligations—primarily affect the timing at 

which the budget recognizes costs. In general, controlling the ability to 

enter into obligations—as is done by the U. S. Congress—provides the most 

control, especially when obligations are measured in a way that is truly 

representative of the government’s commitment to make future payments. 

In some cases, such as insurance and employee pensions, obligations 

measured on an accrual basis would advance the timing of budget 

recognition and thus enhance the Congress’ ability to control. However, for 

capital purchases, accrual measurement would delay the budget 

recognition of costs and thus may impair the Congress’ ability to exercise 

control.8

 The structure or scope of budget accounts—i.e., whether budget 

costs are arranged based on organization, program, or spending item—also 

help determine the type and amount of oversight and control over public 

spending. 

The case study countries varied in the extent to which they made changes 

to the budget account structure when adopting accrual budgeting. In two 

countries, New Zealand and Australia, performance management benefits 

were attributed to a marriage of output budgeting9

 and accrual budgeting, 

not a shift to accrual measurement alone. Some observers expressed 

skepticism that performance improvements would have been achieved 

solely by a shift to accrual budgeting in the absence of the much greater 

managerial flexibility provided by output budgeting. This managerial 

8

Proponents of accrual budgeting suggest that compensating controls can be used to 

address control issues. In most cases, case study countries require appropriations for the 

annual cash required to purchase assets. However, cash requirements may not cover the full 

cost of the asset. Legislative approval may not be required for asset purchases below a 

certain amount if the department can fund them from depreciation reserves. Case study 

countries also established a number of other compensating controls in an attempt to 

alleviate control concerns. For example, in New Zealand, managers are not allowed to 

change the structure of their balance sheets without legislative approval; this is aimed at 

preventing managers from running down their asset bases to artificially lower the price of 

outputs. A number of case study countries also established supplemental approval 

processes for capital projects. See chapter 3 and country appendixes for additional 

information.

9

In these countries the shift to accrual measurement in the budget occurred concurrently 

with a shift to output-based appropriations. In general terms, output-based appropriations 

provide funding for the total resources required to produce an “output” (a good or service 

produced by departments on behalf of the government) including costs that do not require 

an immediate cash outlay, such as depreciation and pension expenses. 
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discretion over how an appropriation is spent is significantly different from 

the detailed nature of U.S. congressional control over spending. While 

these and other factors, such as differences in size and culture, make it 

unlikely that any of the other countries’ accrual budgeting approaches 

would be adopted in full, their experiences nevertheless provide ideas for 

the United States to draw upon in addressing its concerns about 

performance, sustainability, and accountability. 

Selective Application 

of Accrual Budgeting 

Offers Some Benefits

The challenge is to adapt accrual budgeting concepts used in other 

countries to address the unique features of the United States’ budget 

process. In particular, the control role played by the Congress in that 

process means that any adaptations must meet the information needs of 

that body as well as the President in developing an overall fiscal policy for 

the nation and in formulating detailed appropriation bills and budget 

proposals. Thus, while accrual in some other countries was coupled with 

devolution of authority and accountability to executive agencies, in the 

United States’ setting accrual concepts must address the Congress’ needs 

for better information on the cost implications of its budget decisions. 

From this perspective, accrual concepts can help the Congress in those 

selective cases where using accruals would result in more timely 

information and recognition of costs. Obligation-based budgeting generally 

helps ensure that the Congress approves obligations to be entered into by 

agencies before they are made. Accrual measurement within an obligationbased budget enhances control for programs that involve cash flows over 

many years, such as insurance and pensions, by recognizing costs earlier 

when the commitment is made. Doing so would provide a more complete 

picture of the cost of current decisions and thus may encourage timely 

changes in these programs to control costs. In contrast, for capital assets, 

accrual budgeting, by recording depreciation rather than the purchase cost, 

would delay budget recognition in order to match the cost of an asset with 

its use in providing services. From a congressional perspective, obligationbased budgeting promotes accountability by recognizing the purchase cost 

up front and thus permits congressional control over an asset’s purchase 

before the contractual obligation is made. However, for many government 

activities, such as salaries or grant payments, there generally would not be 

significant differences in the recognition of costs measured on a cash or 

accrual basis. The fact that a shift to accrual measurement without 

compensating controls would erode control over capital purchases and 

may not result in significant differences for many government activities 

raises serious questions about whether full accrual would provide 
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sufficient benefits to warrant its adoption in the United States. However, 

adopting accrual measurement selectively within an obligation-based 

control system may prove beneficial. It would provide a means to improve 

budget information and incentives for decision-making in cases where 

cash-based measurement is clearly misleading while preserving the upfront control of the obligation-based budget. However, as discussed later, 

there are limits to which accrual budgeting based on financial accounting 

standards can be used to address long-term sustainability issues. 

The approach developed for credit programs in the Federal Credit Reform 

Act of 1990 is an example of a selective application of accrual measurement 

within the obligation-based system. Unlike other programs for which 

obligations represent cash payments to be made, obligations measured on 

a cash basis for credit programs sent the wrong signals about the cost of 

the government’s commitment. The initial cost of loans in the budget 

ignored repayments while loan guarantees initially appeared to be free. The 

Credit Reform Act required that outlays for credit programs be reported on 

an accrual basis as the expected cost to the government over the life of the 

credit instrument.10 Thus, the obligations that result in those outlays are 

also accrual-based. 

Targets of Opportunity There are several areas in the budget in which obligations measured on a 

cash basis do not adequately represent the extent of the government’s 

commitment. In these cases, the annual cash flows recognized in the 

United States’ current budget fail to capture and control the long-term 

commitment entered into by the government. These areas include 

• employee pension programs,

• retiree health programs,

• federal insurance programs, such as deposit and crop insurance, and 

• environmental cleanup.

Although the future cost of a portion of civilian and military retirement has 

been recognized in the budget, the future costs for some of these pensions 

and for all retiree health benefits and veterans benefits are not. For civilian 

employees hired since 1984 and personnel in the military service after 

October 1, 1984, the full cost of pension benefits is recognized in the budget 

at the department level as they are earned. However, none of the accruing 

10See chapter 1 for additional details.
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costs of civilian or military retiree health benefits or the full cost of 

retirement benefits for civilian employees hired before 1985 are recognized 

in the budget. Similarly, the government’s cost for veterans’ pensions and 

benefits are not reflected in the budget as they are earned. For these costs, 

recognizing in the budget the annual benefits earned would provide a truer 

representation of the commitments that the government has made than 

reporting cash payments in the year.

Federal insurance is provided to individuals and businesses against a wide 

variety of risks, ranging from natural disasters under the flood and crop 

insurance programs to bank and employer bankruptcies under the deposit 

and pension insurance programs. In the past, we reported that the use of 

accrual concepts in the budget has the potential to overcome the time lag 

between the extension of an insurance commitment, collection of 

premiums, and payment of claims that currently distorts the government’s 

cost for these programs on an annual cash flow basis. Accrual concepts 

could be used to recognize the government’s cost at the time the insurance 

commitment is made regardless of the timing of cash flows. The 

government’s accrued costs could be measured as the difference between a 

full risk premium, based on the expected costs of losses inherent in the 

insurance commitment, and the premium charged to the insured. 11

Future environmental cleanup costs are another long-term cost resulting 

from federal operations that are not reflected in the budget. These costs 

have only been recognized in the budget to the extent that appropriations 

have been provided for specific cleanup work. Under federal accounting 

standards, environmental cleanup costs are reported as a liability on the 

financial statements. Recognizing in the budget the new environmental 

cleanup costs resulting from the government’s activities during the year 

would provide a truer representation of the commitments that the 

government has made.

11Budget Issues: Budgeting For Federal Insurance Programs (GAO/AIMD-97-16, September 

30, 1997) and Budget Issues: Budgeting For Federal Insurance Programs (GAO/

T-AIMD-98-147, April 23, 1998).
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Some Long-term 

Commitments May 

Need to Be Addressed 

in an Innovative Way

Some in the United States are interested in improving the budget 

recognition of long-term commitments, such as those associated with large 

social insurance programs, and may think that accrual budgeting would 

help. However, as implemented by the case study countries, accrual 

budgeting does not address these commitments. In general, the countries 

chose to mirror their financial accounting standards in their accrual 

budgets. Even though social insurance is largely viewed as a government 

commitment that may result in future cash outlays, it is not judged to be a 

liability based on accounting standards in these countries or in the United 

States. The standards in these countries generally establish criteria for 

determining a liability based on whether (1) an event has occurred, (2) a 

future payment is probable, and (3) the amount of the future payment is 

reasonably estimable. Since social insurance is not judged by accountants 

as meeting these criteria, none of the case study countries have budgeted 

for such commitments on an accrual basis. This would also be the case if 

the United States adopted accrual budgeting based on current federal 

accounting standards.12 The appropriate treatment of these types of longterm commitments in financial and budgetary reporting remains a 

challenge. 

For these commitments, it may be useful to consider alternative 

approaches that deviate from financial accounting standards but still 

recognize costs sooner than would be the case under the current cash- and 

obligation-based budget. For example, annual outlays could be recorded 

for the Social Security program in the same amount as the annual receipts. 

This would eliminate any annual surplus and recognize that at least the 

amount paid into the trust funds will be spent on Social Security. 

Alternatively, budget recognition of receipts might be deferred until the 

receipts are used to make payments in the future. Under these two options, 

the current cash surplus in Social Security projected to last until 2014 

12Accounting standards developed for the U.S. federal government do not view social 

insurance as a liability because the level of future benefits is considered to be uncertain. 

Proponents of these standards point out that the underlying laws establishing a claim to 

payments can be (and have been) changed over time. Also, they cite that estimates change 

greatly depending on economic assumptions and have changed over time. For example, the 

1983 legislative changes were expected to maintain a positive fund balance until 2063; 

however, by current intermediate cost assumptions the fund will run out three decades 

sooner. However, many others believe that a liability should be recognized for the net 

benefits expected to be paid in future periods to current participants. The final standard 

calling for disclosures but not recognizing a liability for such payments was a compromise 

between the two positions. 
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would not be recorded as income available for spending. Another 

possibility would be to present as supplemental information the net present 

value of the expected cost of the government’s long-term commitments in 

the budget for each budget account or program alongside its cash-based 

budget authority and outlays. These and other ideas could be explored with 

the goal of developing a workable concept. Suggestions have been made 

that a budget concepts commission is needed to address Social Security 

and other budgeting issues; it could be the proper forum to fully develop 

new budgeting ideas such as those mentioned here.

Some Country Reforms 

Emphasize the Need to 

Better Align Budget 

and Performance 

Information to 

Enhance 

Accountability for 

Results

Some countries’ reform efforts—particularly those in Australia and New 

Zealand—emphasize the importance of improving the congruency between 

the budget and the government’s overall performance management and 

accountability structure. In these countries, the adoption of accrual-based 

measurement in the budget was combined with a shift to output 

budgeting.13 Under output budgeting all the costs associated with 

producing an output—salaries, depreciation, etc.—are appropriated in a 

lump sum for the specified outputs. Appropriations are in effect structured 

around the “price” of various outputs rather than specific budget items 

such as salaries or equipment. For example, the Ministry of Defence in 

Australia has one outcome14 (appropriation) linked to 22 different outputs 

rather than specific appropriations for personnel, procurement, operations 

and maintenance, and research and development. Thus, managers have 

discretion over how to use the appropriation to deliver agreed-upon 

outputs. Some observers suggested that accrual budgeting alone, while 

providing a valuable tool to more completely recognize the cost of 

providing outputs, would not have achieved the same improvements in 

performance in the absence of this increased managerial discretion. This 

type of managerial discretion, however, may not be compatible with the 

U.S. Congress’ more detailed control and oversight of spending. 

13In general terms, output-based appropriations provide funding for the total resources 

required to produce an “output” (a good or service produced by departments on behalf of 

the government) including costs that do not require an immediate cash outlay, such as 

depreciation and pension expenses. 

14The Australian Department of Defence outcome is “The prevention or defeat of armed 

force against Australia and its interest.” Examples of the associated outputs are “capability 

for afloat support” and “military geographic information.” 
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In the U.S. context, any potential advantages achieved by changing the 

budget account structure in this way to appropriate funds for a specific 

output would need to be considered against the benefits provided by the 

U.S. Congress’ traditional focus on specific spending decisions. For 

example, appropriation decisions, reinforced by specific accounts, 

program activity items, and committee report language, allow the Congress 

more control over specific spending choices. However, in many cases, 

existing accounts and program by activity schedules do not always provide 

direct linkages between all of the costs of a specific output and the 

achievement of that output. Conversely, more performance-based accounts 

may provide better linkages between spending and results but could result 

in less detailed information on specific spending decisions. Our previous 

work further highlights the tension between the objectives of more 

performance-focused management reforms, such as those required by the 

Results Act and budget structures that have evolved to help the Congress 

control and monitor agency activities and spending.15

Despite this tension, steps could be taken to further improve links between 

costs and related performance. Our review of agencies’ performance plans 

shows that some agencies have been able to develop approaches that make 

basic and useful connections between proposed spending and expected 

performance. Further, it may be possible to develop mechanisms that 

achieve better matching of budget costs and performance without 

forfeiting up-front budgeting controls. For example, capital acquisition 

funds (CAF) could better match an asset’s cost with its use in the provision 

of goods and services while preserving up-front funding control. Under this 

type of mechanism, a CAF could be created for each department to 

purchase all of the department’s assets. It would have authority to borrow16

from the Treasury17 to purchase federally owned assets needed by subcomponents of the department. These sub-components would then “rent” 

the assets from the CAF, paying sufficient rent so that the CAF could repay 

both the principal and interest on the Treasury loan. Because the interest 

15Performance Budgeting: Initial Agency Experiences Provide a Foundation to Assess 

Future Directions (GAO/T-AIMD/GGD-99-216, July 1, 1999).

16Authority to borrow refers to the statutory authority that permits a federal agency to incur 

obligations and make payments to liquidate obligations out of borrowed monies. This does 

not include the Treasury’s authority to borrow from the public or other sources under 31 

U.S.C. 31. 

17Authority to borrow is a type of budget authority and thus is subject to congressional 

control.
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on the Treasury loan is included in the rent, the cost of using resources to 

purchase the asset would be reflected in the agency’s budget. Thus, the cost 

appearing in the sub-components’ budgets—the rent paid—represents both 

the asset cost and the cost of the capital used in the provision of goods and 

services. This type of mechanism is one way that accrual-based cost could 

be incorporated in the budget at the agency level while preserving the cash 

and obligations basis for the government as a whole. 

Both the experiences of the case study countries and our previous work 

highlight the need for continued efforts to improve the role of the federal 

budget in addressing the performance and sustainability of government 

activities as well as accountability for decisions made. To varying degrees, 

the case study countries have used accrual concepts within the budget as a 

tool in addressing these issues. As in these countries, the degree to which 

accrual concepts are integrated into the U.S. federal budget should reflect 

the government’s fiscal control and managerial objectives. 

Thus, to be most useful, the ideas drawn from other countries’ experiences 

with accrual budgeting must be considered in the context of the U.S. 

government’s institutional structure. For example, the selective use of 

accrual measurement in the budget may be used to recognize the cost of 

decisions whose cash consequences may not occur for years while 

preserving the up-front control of obligation-based budgeting. The 

development of mechanisms such as CAFs as well as continued work to 

better align the program and activities structures, which form the basis for 

agencies’ budget requests, with performance goals could support the 

emphasis on performance-driven management envisioned under the 

Results Act while recognizing that the current budget account structure 

evolved at least in part from the Congress’ desire to ensure detailed 

accountability over spending decisions.

Conclusions The United States can benefit from the experiences of countries that have 

adopted accrual budgeting. However, for several reasons, the wholesale 

adoption of accrual budgeting in the United States may not garner the 

benefits cited by other countries. First, some countries combined accrual 

budgeting with broader management reforms, including substantial shifts 

in authority and accountability to executive agencies; thus, the benefits 

they cite cannot be solely attributed to accrual budgeting. Second, the upfront control of the U.S. obligation-based budget provides important 

accountability within our institutional framework of government to meet 

the needs of both the Congress and the President in addressing their unique 
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accountability for fiscal policy and budgetary outcomes. In addition, many 

of the one-time benefits, such as the identification of assets and liabilities, 

already have begun to be addressed by the CFO Act and other reforms. 

Finally, the size and complexity of the U.S. government’s activities suggest 

that it would face implementation challenges similar to, if not greater than, 

those faced by case study countries.

The challenge is how to translate useful ideas developed in one political 

system to the United States’ system in ways that improve its decisionmaking process while protecting its unique institutional needs. Recognizing 

the unique role of the Congress in the budget process, accrual concepts can 

be selectively applied to strengthen the capacity of the Congress and the 

President by prompting greater information and accountability for the 

costs of commitments extending into the future. While the United States’ 

obligation- and cash-based budget serves well in most areas, it could be 

improved by selectively incorporating some accrual concepts to better 

recognize costs of certain commitments. In addition, explorations of 

accrual concepts different from those embodied in accounting standards 

could very well lead to new ways of budgeting for long-term commitments. 

While accrual budgeting, in its purest form, applied to capital would serve 

to weaken accountability for the costs of commitments, other approaches 

can be explored.

In considering potential reforms it is also important to recognize that the 

timing of cost recognition, that is, cash versus accrual measurement, is but 

one of several factors that shape the budgetary information and incentives 

provided to decisionmakers. Although accrual measurement may result in 

more timely budget recognition for some items, this change alone will not 

be sufficient to improve budget information. Decisionmakers also need 

information with sufficient breadth to adequately assess the relative 

contribution of multiple programs and various tools—such as spending and 

tax expenditures—to carry out common federal missions. The 

development of a broader and more integrated budgetary framework is 

particularly important for crosscutting areas, such as health care or the 

antiterrorism effort, which may involve both tax incentives and an array of 

programs carried out by numerous agencies. More fully integrating longer 

term analyses, such as the use of net present value calculations, into the 

budget process may also be useful in helping decisionmakers understand 

the future implications of current policy decisions. Some case study 

countries’ experiences suggest that there may be value in using multiple 

measures to assess fiscal and managerial performance. Thus, accrual 

budgeting is just one of a number of tools and approaches that the United 
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States should consider as it works to improve the role of the budget in 

addressing concerns about public sector performance, the sustainability of 

government activities, and accountability for results. 

Matters for Congressional 

Consideration

As the Congress considers changes in the budget structure and/or process, 

it would be well served to explore ways to improve information on two 

dimensions: breadth and time horizon. This report dealt with one way to 

lengthen the time horizon for information. The Congress should consider 

the selective use of accrual measurement in the budget in areas where it 

would enhance obligation-based control. In addition, the Congress and the 

Office of Management and Budget should consider whether and when to 

use mechanisms, such as capital acquisition funds, to better match budget 

recognition with the consumption of resources while preserving up-front 

control.
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Appendix I

Commonwealth of Australia ApendxiI

Australia’s shift to accrual reporting and budgeting has progressed over 

several years, along with a series of broader reform efforts aimed at 

improving service delivery, fiscal position, and public sector performance. 

The shift to accrual budgeting was undertaken to ensure a better link 

between budgeted information and actual performance. A unique aspect of 

Australia’s accrual budgeting, reporting, and accounting framework is that 

it seeks to both link outputs and outcomes through a strategic planning 

process and to hold managers accountable for outputs. The shift is also 

intended to increase transparency and accountability of public policies 

through greater consistency of information and, ultimately, through 

benchmarking of public activities against similar activities in the private 

sector.

Background The Commonwealth of Australia is a federation composed of a national 

government, 6 state governments, territories, and hundreds of local 

government bodies. The legislative power at the national level is vested in 

the Commonwealth Parliament, made up of the House of Representatives 

(148 members) and the Senate (76 members—12 from each of the 6 states 

and 2 from each of the two most populous territories). The party or 

coalition of parties with a majority in the House of Representatives forms 

the government and provides the Prime Minister. The Prime Minister and 

Cabinet form the Executive Government of the Commonwealth. Cabinet 

members are selected from both the House and the Senate.

The two largest political parties in the Commonwealth Parliament are the 

Australian Labor Party and the Liberal Party of Australia. The other parties 

are the Australian Democrats, the National Party of Australia, and 

independents. The Labor Party was in office from 1983 through 1996, after 

which it was replaced by the Liberal-National Coalition.
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The Commonwealth government collects more than 70 percent of the 

public sector revenue but is responsible for just over half of public sector 

expenditures—the remainder is transferred to lower levels of government. 

Commonwealth budget responsibilities include national defense, 

immigration, outpatient services and pharmaceuticals, social security and 

welfare,1

 and others. State responsibilities include most public sector 

spending on education, hospitals, public safety, and infrastructure. Local 

responsibilities include local roads and parks, libraries, and land-use 

planning. Commonwealth revenue comes primarily from income taxes, 

sales taxes, and custom and excise duties. State revenue comes mainly 

from payroll, business franchise, and stamp taxes, as well as 

Commonwealth transfers in the form of general and specific purpose 

grants, and a national goods and services tax which will go into effect 

July 1, 2000. Local government revenue comes from property taxes, 

charges, fines, and a portion of the Commonwealth grants to the states.

The Budget Process The governing party or coalition of parties in power has control over the 

entire budget process. The government, through the Department of the 

Treasury and the Department of Finance and Administration (DoFA), 

prepares the budget for presentation to Parliament. The budget contains 

estimates for the current budget year, which runs from July 1 to June 30, 

and projections for the 3 forward years. The process starts with senior 

ministers setting overall fiscal strategy and policy and defining government 

priorities for the Budget. A subgroup of the Cabinet called the Expenditure 

Review Committee (ERC—which is chaired by the Prime Minister, or in the 

Prime Minister’s absence by the Treasurer) sets outlay targets2

 and 

examines all expenditure proposals in the light of the government’s 

strategic fiscal policy framework. Cabinet ministers advocate for new 

programs (new outputs in the new framework) or increased funding 

(increased prices for outputs in the new framework) before ERC, which 

reviews and recommends to the Cabinet those programs that promise to 

1

The term social security and welfare refers to old-age pensions, unemployment benefits, 

and welfare. Old-age pension payments are funded out of the general fund, with neither 

employers nor employees making contributory payments. Unemployment benefits are also 

funded out of the general fund, and there is no separate unemployment insurance fund.

2

Outlay targets are set using a system of forward estimates, which are outlay estimates 

based on decisions made in the previous budget year with no future policy changes—similar 

to the “baseline” in the United States.
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fulfill Cabinet priorities. There is a separate Revenue Committee of the 

Cabinet to consider revenue measures.

Budgets are passed largely intact by the House, as the majority of members 

are from the same party, or coalition of parties, as the Executive 

Government that developed the budget. The Australian Constitution 

prevents the Senate from amending appropriation legislation relating to 

“ordinary annual services” of the government, as opposed to its other 

activities. In 1965, the Executive Government and the Senate entered into a 

compact to distinguish between “ordinary annual services” and other 

funding requests. Appropriations for “ordinary annual services,” which 

under the new framework includes replacement capital, are presented in 

Bill 1, which the Senate must pass or reject in total.3

 Bill 2, which contains 

requests for spending on new outcomes or capital projects, can be changed 

by the Senate. 

The Economy and the 

Budget

Australia’s economy grew quickly in the late 1980s, spurred by strong 

growth in exports, consumption, and high business investment. However, 

in 1991 Australia entered a recession. The economy began to recover in 

1992, and since then Australia has experienced a period of sustained 

growth in gross domestic product (GDP) averaging about 4 percent per 

year, compared to an annual average of over 3 percent in the 1970s and 

1980s. Australia’s GDP growth in the 1990s has come with lower inflation 

than in the previous two decades. Despite a drop in the unemployment rate 

from a peak of almost 11 percent in 1993 to just below 7 percent by the end 

of 1999, inflation has averaged around 2 percent annually since 1993. In the 

12 months ending September 1999, GDP growth remained strong at

3.9 percent, despite an economic crisis in much of Asia. 

3

If the Senate does not pass the government’s budget, a new general election may be called. 

In 1975, a “double dissolution” of the Labor government under Prime Minister Whitlam and 

the sitting Parliament occurred after the Senate twice refused to pass the appropriation bills 

for government’s “ordinary annual services.” 
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The Commonwealth has experienced two periods of budget surpluses 

since the mid-1980s, both preceded by periods of deficits and deficit 

reduction. The first surplus period started in fiscal year 1987-88 and lasted 

through 4 fiscal years. Deficits reemerged in 1991 primarily as a result of 

the recession. In 1996, a newly elected government embarked on a renewed 

deficit reduction effort that culminated in underlying budget surpluses 

since fiscal year 1997-98, measured on a new definition of fiscal balance.4

Recent Reforms Over the past two decades, the government instituted numerous 

management and budgetary process changes aimed at making delivery of 

government services more efficient. These reforms sought to highlight 

budgetary decisions, thus making them more transparent.5

 Reforms 

continued in the latter half of the 1990s when the government introduced 

the Charter of Budget Honesty to further improve fiscal performance 

through increasing transparency and accountability of fiscal policy. 

Following a comprehensive review of government operations conducted in 

1996 by the National Commission of Audit (NCOA),6

 the new public sector 

reform agenda emphasized (1) putting the public sector on a more 

businesslike footing, (2) fostering a more competitive environment, and (3) 

building a performance culture. The Financial Management and 

Accountability Act 1997 introduced devolution of greater responsibility for 

Commonwealth financial administration to departments and agencies, 

along with the means with which to hold chief executives accountable for 

exercising their management prerogatives. An accrual-based, resource 

4

The term surplus/deficit can refer to three measures of budget balance. Prior to fiscal year 

1996-97, it referred to the headline cash balance, measured as the difference between 

revenue and cash outlays. Beginning in fiscal year 1996-97, the measurement of the 

surplus/deficit changed from a headline cash basis to an ‘underlying cash’ basis, which 

excludes the net effects of advances, loans, and equity transactions such as sales and 

purchases of capital assets. If a headline cash measurement is used, Australia achieved a 

small surplus of about one-half percent of GDP in fiscal year 1996-97. Beginning in fiscal 

year 1999-2000, with the implementation of the new accrual budgeting framework, the fiscal 

balance has been adopted as the new measure of fiscal position. 

5

The reforms can be sorted into two broad initiatives—the Financial Management 

Improvement Program and Program Management and Budgeting. Reforms restructured 

departments into portfolios, introduced budgeting using forward estimates over a 3-year 

period, and required that departments provide an “efficiency dividend,” i.e., budget savings, 

through increased efficiency.

6

NCOA was established by the government in March 1996 to review and report on the state 

of fiscal position and to advise the government on the management of its finances in order 

to improve Australia’s medium- and long-term fiscal position.
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management framework that integrated budgeting, reporting, and 

accounting on the same basis was seen as the tool that would allow the 

government to move closer to its goals of efficiency, transparency, and 

performance management.

Use of Accruals in 

Financial Management

Australia has progressively extended the use of accrual accounting across 

government, first requiring audited financial statements at the 

departmental level, then recommending audited whole-of-government 

reports, and finally budgeting on an accrual basis. The progressive 

application of accrual in government came about as decisionmakers in 

both the executive and legislative branches became increasingly convinced 

of the need for better alignment between budgeted amounts and financial 

information on actual performance. 

Implementation Timeline Australia extended the use of accrual accounting progressively across 

government by making continual modifications to cash reporting and 

improving the reporting of assets and liabilities. In the early 1990s, as the 

government increased the use of contracting out for services, managers’ 

needs for new information to better price goods and services, manage 

assets and liabilities, and administer contracts, spurred the search for new 

ways to measure the costs of performance. By fiscal year 1994-95, 

departments had fully transitioned to reporting their operations on a full 

accrual basis and publishing financial statements, which are audited by the 

Australian National Audit Office (ANAO).7

 For the year ending June 30, 

1998, the Commonwealth government as a whole received an unqualified 

audit opinion on its financial statements. 

In April 1997, the government agreed to the implementation of accrualbased outcome and output budgeting for the fiscal year 1999-2000 budget. 

By November 1998, all departments and agencies had agreed with their 

ministers on the desired outcomes and the contributing outputs to achieve 

those outcomes. In the first part of 1999, departments and agencies 

assigned accrual-based prices to those outcomes. The fiscal year 1999-2000 

budget, tabled in May 1999, was the first budget to implement the full 

7

The Auditor General Act 1997 grants to ANAO the ability to conduct financial statement 

and performance audits of Commonwealth agencies, authorities, and owned and controlled 

companies. ANAO also provides professional advice and assistance in relation to auditing 

and accounting matters generally with the emphasis on practical guidance.
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accrual-based outcomes and outputs framework including accrual budgets 

and accrual reporting. Though this budget expresses funding in accrual 

terms, it is still considered transitional because it allocates funding to 

departments based on the full accrual expenses of department inputs 

necessary to provide the outputs that the government plans to contribute to 

the achievement of outcomes that the government has decided to fund. The 

Australian model seeks to move departments and agencies to a system 

where they will justify the price of their outputs as far as possible by 

comparison with other suppliers. Officials informed us, however, that it 

would take a few years before they could successfully determine proper 

benchmarked prices.

Factors Driving Adoption of 

Accrual Budgeting

The adoption of accrual budgeting was spurred by recommendations from 

both a parliamentary committee and a government commission. In 1995, 

the Joint Committee on Public Accounts (JCPA) endorsed the preparation 

of audited consolidated financial statements for the government beginning 

with the 1997-98 financial year.8

 The committee further suggested that the 

Commonwealth adopt accrual budgeting once the first audited whole-ofgovernment financial statements were tabled in Parliament.

In 1996, the NCOA recommended an integrated resource management and 

accountability framework that would focus explicitly on outputs and 

outcomes, identify the full cost of resources consumed by a program, and 

facilitate the competitive tendering and benchmarking processes. In an 

assessment of government operations and fiscal position, NCOA noted that 

the existing financial management information systems maintained for 

budget formulation purposes were predicated on the need to provide the 

government with forward estimates through a sophisticated but still cashbased system. While all Commonwealth entities were required annually to 

table audited financial statements prepared on an accrual basis, NCOA 

found that few had implemented accrual standards in such a way as to 

enable them to budget, track, and manage their programs based on a 

knowledge of their full costs. Proponents of NCOA’s framework believed 

that by putting the onus on departments and agencies to manage on a 

businesslike footing, the new accrual-based, resource management 

framework would force greater attention on cost data. 

8

Financial Reporting for the Commonwealth: Towards Greater Transparency and 

Accountability, Parliament of the Commonwealth of Australia, Joint Committee of Public 

Accounts, Report 341, November 1995.
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NCOA also determined that an accrual framework would support the 

accountability needs of the public and Parliament by increasing 

transparency and comparability in the government’s financial activities at 

the departmental, aggregate budget, and whole-of-government levels. 

According to finance officials we interviewed, accrual budgeting was 

grounded in the belief that in order to be useful, the costs of expected and 

actual performance should be budgeted and reported on the same basis. 

Applying consistent standards to the accounting of various items, such as 

purchases and sales of physical assets, enables better comparisons 

between (1) the costs of expected and actual performance, (2) the total 

costs accruing to different departments delivering similar outputs, and

(3) the costs of public versus private sector provision of services. 

Consistent information is also crucial to the appraisal of performance in an 

environment of devolved responsibility where executives and managers are 

given discretion to determine how and by whom services are delivered and 

how operations are financed and organized. 

NCOA’s findings and recommendations found resonance among some 

members of Parliament who had voiced concerns that the disconnect 

between budgeting and financial statement reporting discouraged the use 

of financial statement information for decision-making. Additionally, these 

parliamentarians believed that continued existence of a cash-based 

budgeting system would impede the acceptance of accrual accounting and 

reporting in government departments and create confusion for those trying 

to monitor the financial position of government. Finally, cash budgeting 

was perceived as failing to effect the behavioral changes necessary to 

achieve better and more efficient government. 

Once the government decided to adopt accrual standards for budgeting, it 

also determined that the budget should follow all applicable accounting 

standards developed by official standard-setting bodies.9

 The 1999-2000 

budget was reported against two accrual standards. The first, the 

Australian Accounting Standard No. 31 ‘Financial Reporting by 

Government’ (AAS31) is the relevant accounting standard for financial 

9

In Australia, there are two important accounting standard-setting bodies. The Public Sector 

Accounting Standards Board (PSASB) was established in 1983 to formulate, develop, and 

maintain reporting standards of relevance to public sector entities. PSASB works closely 

with the Australian Accounting Standards Board, which is responsible for developing 

standards for private companies, to jointly develop and promulgate Statements of 

Accounting Concepts and Australian Accounting Standards that are applicable to both the 

public and private sectors. It is planned to merge the two boards during the year 2000.
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reporting by governments. The second, the Australian Bureau of Statistics’ 

accrual-based Government Finance Statistics (GFS) standard is consistent 

with international standards used by the International Monetary Fund and 

the United Nations. In areas where departures from applicable standards 

were necessary—for example, the budget covers the general government 

sector instead of the whole-of-government sector covered by financial 

reporting—the budget documents identify these exceptions. 

Summary of Accrual 

Budgeting System

Australia’s accrual-based model of budgeting sought to change 

appropriations from a cash to an outcome-output framework, with outputs 

priced on an accrual basis and tied to the achievement of outcomes. While 

the old cash-based budgeting framework focused on measuring inputs and 

monitoring outcomes, the links between inputs and outcomes have often 

been unclear. The new accrual framework seeks to address this problem by 

switching the focus from measuring inputs to measuring outputs, thereby 

achieving a more direct link to outcomes. 

Under the new accrual budgeting framework, departments work with their 

ministers to specify both outputs and outcomes. Specification of output 

requires the identification of the price of output and other key attributes, 

such as quantity and quality, whereas specifying outcomes involves 

providing performance information on the achievement of planned 

outcomes and the contribution of outputs to those outcomes. Under this 

new model, departmental executives are held accountable for the delivery 

of both outputs and the contribution their agencies’ outputs make to the 

achievement of outcomes. This approach differs from the New Zealand 

model. While under the Australian model, ministers are responsible for 

defining outcomes and for ensuring that outputs to be supplied by 

departments produce those outcomes, the New Zealand model holds 

departmental executives responsible only for the delivery of outputs, and 

not outcomes. 

The new accrual framework also changes the primary measure of the fiscal 

position from an underlying cash balance—net of advances—to what is 

referred to as a fiscal balance. The fiscal balance, like the underlying cash 

balance, measures the government’s contribution to net lending (the 

national investment/saving imbalance) and hence to the external current 

account balance. Fiscal balance is a measure in the GFS operating 

statement. Since the measure is consistent with GFS standards and 

concepts it is also consistent with international standards. However, it can 

also be derived by making adjustments to the standard operating result. 
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Figure 3 illustrates the translation from the accrual-based net operating 

result to the fiscal balance.

Figure 3: Reconciliation of the Accrual Operating Result to the Fiscal Balance

These adjustments bring the operating result to a measurement closer to 

net lending. For example, purchases of property, plant, and equipment are 

subtracted from the operating result while proceeds from sales of property, 

plant, and equipment are added to the operating result. Officials in 

Australia argued that a measure that approximates net lending (rather than 

the operating result) ensures consistency with the National Accounts 

concepts, thus allowing a more ready assessment of the budget’s impact on 

the economy. As we reported in our previous work, Australia’s fiscal 

policies have been developed largely in response to concerns over low 

national saving and high net foreign debt and their impact on Australia’s 

international competitiveness.10 This is consistent with the United Nations’ 

System of National Accounts 1993. In the same manner, the fiscal balance 

measures the government’s net lending and hence its contribution to, or 

detraction from, the private saving pool. In this area as well as in its focus 

on outcomes, the Australian accrual model differs from New Zealand’s in 

that Australia puts more emphasis on retaining a net lending measure of 

10Budget Surpluses: Experiences of Other Nations and Implications for the United States 

(GAO/AIMD-00-23, November 2, 1999).

Operating Result

+ revaluations/writedowns from superannuation

+ net writedown of assets

+ net foreign exchange losses

+ other economic revaluations 

-/+ profit/(loss) on the sale of assets

- cost of asset sales

= Net Operating Result per Australian Bureau of Statistics Standards (Saving Proxy)

- purchase of property, plant, equipment, and intangibles

- assets acquired under finance leases

+ proceeds from sales of property, plant, equipment, and intangibles

+ depreciation and amortization

= Fiscal Balance
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fiscal position whereas New Zealand uses the accrual operating result as a 

primary measure of the impact of its fiscal policies. 

At a broader level, officials we spoke to considered the main advantage of 

accrual measures (as opposed to cash) to be a more comprehensive 

indication of the total activity of government and the long-term effects of 

current policy. They also suggested that cash measures do, however, have 

some advantages for tracking expenditures in a fiscal year and helping to 

identify the short-term effect of fiscal policy on the economy. Consequently, 

cash indicators for the headline and the underlying balance will continue to 

be produced.

Structure of Appropriations Figure 4 shows the financial statements used in presenting the 

Commonwealth’s fiscal year 1999-2000 budget. The first three financial 

statements are similar to the primary financial statements used in the 

private sector and are based on Australian accounting standards.11 The 

government also submitted a fourth statement, the capital budget 

statement, to present information on capital transactions.12

11The fiscal year 1999-2000 budget was prepared in accordance with applicable Australian 

Accounting Standards (AAS) with several exceptions. First, the budget covers the general 

government sector instead of the whole-of-government sector covered by AAS. Second, 

dividends are recorded in the year declared instead of in the year earned. Third, taxes 

collected on behalf of others are not recognized in the budget. Fourth, revenue is recorded 

on a different basis as explained in a later section.

12The Capital Budget Statement includes information on all capital expenditures, which may 

be funded by the internal funds of each department—i.e., cash from operations, cash 

appropriations made by the government in previous years, and sales of agency assets—

and/or from capital injections and loans. This statement is different from Appropriations Bill 

2, which covers only projects requiring capital injections or loans.
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Figure 4: Financial Statements Used to Represent the Government’s Budget

Appropriations for each department or agency are for the financial 

resources, measured on an accrual basis, required to produce outputs that 

contribute to government outcomes. The output-outcome structure is 

determined through the strategic planning process, in which departments 

and their ministers first define desired outcomes, then define the outputs 

that, if delivered, would lead to the achievement of those outcomes. 

Appropriations make a differentiation between departmental items 

(controlled by departments) and administered items (where departments 

have no discretion and where expenses arise when recipients meet 

eligibility criteria, e.g., loans and social security payments). Appropriation 

Bill 1 includes recurring departmental and administered items. 

Appropriation Bill 2 includes requests for capital injections and funding for 

new outcomes. 

Treatment of Specific 

Budget Items

Budgeting and reporting in Australia follow accrual accounting standards. 

This means that assets are capitalized and depreciation expense recorded 

over the life of the asset. Liabilities are recorded when they are incurred, as 

follows: 

• Public sector employee pension: Under accrual budgeting, 

departments pay into a centralized pension fund an amount equal to the 
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public pension accruing to current employees, as well as the interest on 

or any changes in the outstanding liability due to past services rendered. 

Generally, changes in the value of the outstanding liability occur as a 

result of revaluation in the number of salary earners and assumptions 

relating to wage growth, inflation, and the expected rate of return on 

investment. The public pension expense is booked as a departmental 

expense on the department’s operating statement, incorporated into the 

prices of outputs, and thus included in the department’s request for 

funding. The centralized pension fund records these contributions as 

revenues and uses cash received to make payments to current retirees. 

At the end of the year, the central pension fund books an actuarial 

liability in the whole-of-government financial statements.

• Capital: Under accrual budgeting, the annual cost of using capital 

assets, namely depreciation and a cost-of-capital charge, is recorded in 

the operating statement and thus incorporated into the cost of the 

departments’ outputs. The departments receive appropriations for these 

noncash expenditures. The cost-of-capital charge is funded based on the 

beginning asset balance and repaid to the government based on the 

ending asset balance. Managers have the freedom to optimize their asset 

base, which includes purchasing replacement assets by using funds 

accumulated from this depreciation expense. Departments with 

adequate reserves can purchase assets subject to ministerial approval, 

which is required even if the proposed purchase is to be financed 

through a finance lease or other financing arrangement that would not 

require an immediate cash outlay. Departments with inadequate funds to 

replace assets have to request a capital injection—an appropriation—

for the difference between funds required and available reserves. The 

cash flow statement will outline most cash outlays for the purchase of 

property, plant, equipment, and intangibles while the capital budget 

statement will record total capital expenditures.

• Inventories: Departments and agencies can use one of several 

generally accepted methods for valuing inventory. Expenses are 

recorded when inventories are used, not when purchased or when the 

cash outlays occur. Inventory standards apply to only a few departments 

as most are not accumulating inventories and have no incentive to carry 

large stockpiles of supplies.

• Insurance, loans, and guarantees: Loans are treated as an 

administered expense and shown on the department’s budget as cash 

outlays when loans are disbursed and cash receipts when payments are 

collected. 
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• Social insurance: The social security and old-age pension programs 

are financed from general government revenue. Social security is 

means-tested and is a supplement to occupational-based pension 

arrangements. It will continue to operate on a “pay-as-you-go” basis with 

the budget reflecting the total accrued expense for the current year, 

even if cash has not been disbursed. Neither the budget nor the financial 

statements of the government recognize the future commitments of the 

government. In addition, the government treats the Superannuation 

Guarantee13 as general revenue, and does not accumulate it to offset 

future benefits. 

• Revenues: Revenue in the budget is recognized when the taxpayer 

makes a self-assessment or when the Australian Taxation Office or 

Australian Customs Service issues an assessment. This recognition basis 

acknowledges that the government cannot reliably forecast or properly 

value revenues at the time that the economic activity that gives rise to 

the tax liability occurs. Under the new accrual framework, the 

government makes an adjustment to receivables to account for 

uncollectible taxes. 

13The government requires that employers pay a set percentage of each employee’s wage 

into a superannuation fund, generally private, of the employee’s choosing. Consequently, 

these payments do not affect the government’s budget. Employers who do not pay 

superannuation will pay to the government a fee—the Superannuation Guarantee Charge—

equivalent to the contributions (plus interest) that they should have paid directly to a 

superannuation fund on behalf of their employees. 
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Aggregate Budget Measure As shown in figure 5, the government provided several fiscal measures in 

the 1999-2000 budget: (1) a cash balance (called headline cash balance),

(2) an underlying balance (called underlying cash balance), (3) an 

operating balance (called the operating result), and (4) a fiscal balance. 

Officials from the Treasurer’s Office informed us that while the two 

objectives of the budget—positively affecting the economy in the short 

term and focusing attention on managerial issues—are not at odds with 

each other, they necessitate the use of different measures. They argued that 

the short-term focus of the former objective is best served when described 

on a cash basis while the medium- to long-term focus of the latter purpose 

is best described on an accrual basis. Thus, while the accrual-based 

operating balance provides information that can be used to address 

medium- to long-term issues, Australian officials we spoke with felt that a 

measure that better approximates cash—the fiscal balance—would better 

assist the government in the conduct of fiscal policies. These officials 

believed that the fiscal balance, which is derived by making adjustments to 

the operating balance, is a better indication of the government’s 

contribution to net lending (the national investment/saving imbalance).14

14The Australian government has repeatedly expressed concern over the low rate of national 

saving and the country’s dependence on foreign sources to make up the difference between 

the saving rate and the investment demand. Deficit and surplus policies of the Australian 

government have been articulated within the framework of reducing the government’s call 

on national saving and increasing the government’s contribution to net lending.
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Figure 5: Measures of Fiscal Position

Key Differences Between 

Cash and Accrual 

Key differences between accrual and cash amounts occur because of 

timing. Timing differences mean that the bottom line—the surplus or 

deficit—is affected in either direction by accrual or cash recognition 

depending on the activities undertaken by the government in a particular 

year. This timing difference is most apparent for revenues, asset purchases, 

public employee pensions, and interest expense. (See figure 6.) For 

example, cash outlays for the purchase of assets decrease the cash balance 

in the year the cash is paid under a cash system, but have no effect on the 

deficit/surplus under an accrual system, as replacement assets will 

eventually be purchased from depreciation expenses accumulated over the 

life of the asset. In succeeding years, as the asset is put into service, 

depreciation expense decreases the accrual-based operating balance, but 

has no effect on the cash balance. In most instances, because the cash basis 

tends to recognize large capital items all at once while the accrual basis 

spreads the cost of purchase over the useful life of the asset, accrual 

measurements generally smooth out expenses. 
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Figure 6: Reconciliation Between Operating and Cash Balances

Figure 7 shows the differences between the cash and accrual balances as 

measures of the fiscal position. In the fiscal year 1999-2000 budget, the 

estimated cash surplus is A$23 billion, compared to an operating surplus of 

A$5.7 billion, or a difference of 2.8 percent of GDP. The difference is 

attributed mostly to planned asset sales totaling about A$16 billion. 

Similarly, in the fiscal years 2001-02 and 2002-03 budgets, planned asset 

sales are projected to cause the cash balance to be substantially larger than 

the operating result. By contrast, in the fiscal year 2000-01 budget, the cash 

surplus is expected to be smaller than the operating surplus due to planned 

asset purchases.

Operating balance (accrual)

+/- Changes in noncash expenses (statement of financial performance):

+ Depreciation expense

+ Provision for bad and doubtful debts

+/- Reevaluation of assets

+/- Net losses/(gains) on foreign exchange

+/- Increase/(decrease) in employee entitlement, (e.g., pension liabilities)

+/- Losses/(gains) from sale of assets

+/- Other noncash items (e.g., cost of capital)

+/- Movements in working capital (statement of financial position):

+/- Decrease/(increase) in receivable (e.g., revenue, loan receivables)

+/- Increase/(decrease) in payables

+/- Decrease/(increase) in other financial assets

+/- Decrease/(increase) in inventories

+/- Other items

 +/- Sale/(purchase) of assets

 +/- Other investing items

= Cash Balance
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Figure 7: Estimated Cash Balance Compared to Estimated Accrual-Based Operating 

Result, Fiscal Years 1998-99 Through 2002-03

Source: Budget Strategy and Outlook, 1999-2000.

Views on Implications 

for Decision-making

The fiscal year 1999-2000 budget is the first accrual-based budget. 

Consequently, Australia does not yet have any actual experience on which 

to fully assess its implications for decision-making. Nevertheless, officials 

and managers we spoke with anticipated that accrual budgeting would 

bring about better fiscal and managerial decision-making. Officials expect 

that

• the greater focus on maintaining ongoing budgetary health will result in 

better decisions that are sustainable in the long run;

• the output and outcome focus will result in greater scrutiny of 

government objectives and services and lead to improved budget 

decisions; 

0

1

2

3

4

Percentage of GDP

1998-99 1999-00 2000-01 2001-02 2002-03

Fiscal year

Cash balance Operating (accrual) balance
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• the ability to make comparisons, and ultimately, to benchmark price and 

performance against private sector entities will spur the public sector 

towards achieving better results with fewer resources;

• the accrual framework will improve transparency and accountability; 

and 

• the accrual budgeting and reporting framework will bring about better 

asset management. 

Further, NCOA reported that on an aggregate budget level, accrual-based 

budget projections would provide a more appropriate measure of the 

ongoing budget balance. By highlighting instances where revenues may not 

be sufficient to cover all expenses over the forward estimate—even though 

cash receipts may be available to meet all cash obligations—accrual 

budgeting helps focus legislative attention earlier if the asset base is being 

run down or increasing levels of liabilities are being accumulated. With 

accrual-based projections it also would be possible to see that a projected 

cash shortfall and a resulting increase in borrowing may be more than 

offset by an increase in assets and future productive capacity. While the 

JCPA acknowledged that reporting on a cash basis is simple and that a cash 

deficit or surplus best captures the net short-term economic impact of the 

budget, it also argued that accrual budgeting makes possible the 

assessment of the government’s management of its asset base, its liabilities, 

and its long-term fiscal strength. Further, NCOA noted that accrual 

budgeting and reporting would not detract attention from cash because the 

cash flow statement, one of the principal financial statements required by 

the accrual framework, will provide the cash information. 

Accrual-based budgeting is expected to improve effectiveness and 

efficiency of government programs by centering the budget discussion on 

what departments and agencies are expected to deliver, i.e., the quantity 

and quality of outputs rather than inputs. According to government 

officials, discussions that revolve around outcomes and outputs would 

necessitate examination of all the costs necessary to deliver those 

outcomes and outputs. Officials contrasted the new accrual framework to 

the former cash-based system where departments were guaranteed a 

budget based on the previous year’s costs and the budget debate 

concentrated only on new spending proposals and saving options—only 3 

to 5 percent of the budget. They thought that budget data presented as lineby-line input costs provided a lot of detail without giving decisionmakers 

adequate information to focus on what the government was doing and 

whether it was effective. In contrast, officials believed that the outcome 

and output focus of the new accrual system would shift the budget debate 
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toward deliberating on the bigger picture, i.e., the objectives of the 

government and the “totality” of how a department manages its operations 

and assets. 

On the managerial front, officials believed that the new accrual framework 

would improve incentives to manage better with fewer resources by 

making it possible to compare performance between government entities 

and between public and private sector performance. By using a consistent 

basis to measure the cost of output and eliminating the distortions inherent 

in a cash system, accrual standards provide an analytical base from which 

to compare the costs of one department with another. For example, a 

department would no longer appear more efficient just because it used less 

cash in a year if, at the same time, it had accumulated more liabilities and 

consumed more of its asset base. Conversely, a department would not 

automatically be judged a poor performer because it spent a large amount 

of cash in one year to purchase an asset, even though the asset would 

enable it to operate more efficiently in the future. Finally, by accounting on 

a similar basis as private sector entities, accrual budgeting allows for 

greater comparability with the private sector. Ultimately, it is hoped that 

the new accrual system will deliver information so that decisions can be 

made as to whether a service or good should be purchased from a 

government department or a private sector entity. Benchmarking, both 

between departments and against private entities, is an important objective 

of the Australian accrual budgeting, reporting, and accounting model.

Officials further expected that the ability to retain at least a share of their 

operating surpluses would lead to better performance by improving 

management incentives to seek efficiencies continually and improve output 

delivery, ultimately leading to better outcomes. The government reasoned 

that withdrawing operating surpluses as they occur or reducing the 

departmental budget concurrent with the expected efficiency would 

reduce the incentive to achieve an operating surplus, and, ultimately, the 

incentive-driven efficiency gains.

Officials believed that standardized and consistent financial information 

would improve external reporting and facilitate review of government 

performance, thereby advancing the Commonwealth’s agenda of greater 

accountability and transparency. They pointed at many research findings 

indicating that reporting information on planned performance on a cash 

basis and actual performance on an accrual basis through financial 

statements provided conflicting signals and incentives. Studies also found 

that managers held accountable for the budget on a cash basis failed to use 
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financial data in the decision-making process. The government hoped that 

information consistency would provide for better assessment of planned 

and actual performance, and, consequently, lead to better results. 

Some officials expressed skepticism that financial reporting on an accrual 

basis necessitates budgeting on that basis. These officials pointed out that 

the basic budget of the Commonwealth involves handing out cash. 

Consequently, it makes very little difference whether these transactions are 

measured on an accrual or a cash basis. However, even these officials 

conceded that there might be greater potential for managerial 

improvements. For example, finance officials have repeatedly pointed out 

serious degradation of physical property at the Federal Airport Authority. 

However, because of a minor recession in the early 1990s, and because 

under cash-based budgeting any large cash outlay to address the physical 

degradation would have a significant impact on one year’s fiscal balance, 

successive governments ignored the need to take actions to improve and 

maintain the asset base. As it now prepares for privatization of the entity, 

Parliament finds that the degradation is so serious that it needs to spend 

A$100 million just to be able to sell the property. NAO officials speculated 

that, had accrual accounting standards been in place that allowed for the 

capital spending to be spread over the life of the asset, instead of a cash 

budgeting system where the entire amount of the spending needed to be 

recognized at the time the cash was disbursed, decisionmakers might have 

taken earlier and more timely actions. Ultimately, accrual budgeting may 

help address the tendency under accrual financial reporting to maintain 

and manage to a cash-based system and then use adjustments at the end of 

the accounting period to construct general-purpose financial reports.

Proponents expect that clearer distinction between capital and operating 

costs will yield important benefits in the area of capital. In the past, capital 

was not treated consistently. For example, an asset that cost less than 

A$250,000 might have been treated as an operating cost and included in 

Appropriation Bill 1—therefore not subject to changes in Parliament—

whereas another asset costing the same amount might have been viewed as 

a new project and submitted as part of Appropriation Bill 2—and so 

subjected to a higher level of scrutiny. In the new model, all transactions 

requiring an appropriation in the form of equity injections or loans will 

appear in Appropriation Bill 2. In addition, the capital budget statement—

one of the four primary budget statements—will also include details on 

every capital project, whether it is to be funded through capital injections 

or loans, or from departments’ accumulated depreciation. Officials 

informed us that although under the new framework departments will have 
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flexibility to replace assets through accumulated depreciation, in the 

beginning departments will not have accumulated adequate funds to 

replace old assets, much less purchase new assets. Consequently, officials 

expect that for some period of time, most capital asset transactions will 

appear in Appropriations Bill 2, which is subject to Senate amendments, 

and that this will help focus the debate on whether there is a need for new 

capital spending. In the long run, after these debates have occurred, 

departments can replace assets out of accumulated depreciation, though 

they will continue to provide information on their actions through the 

capital budget statement. 

Like other countries that have switched, or are considering a shift, to 

accrual, Australia also expects better asset management as a benefit from 

accrual budgeting. For example, the Department of Defence never had an 

inventory system for consumables such as bullets and ration packs. 

Accrual accounting requirements resulted in the unearthing of over 

A$2 billion in inventory. Now, incorporating the inventory costs in the 

budget will help focus attention on the oversight of these stocks. 

As an example of how accrual budgeting provides improved information 

and incentives that lead to better decisions, Treasury officials pointed to 

the resolution of what, until recently, was the difficult issue of retiring debt 

on which premiums must be paid or discounts taken. Under accrual 

standards, any premium or discount on a particular debt issue is 

recognized annually, over the life of the issuance. In contrast, the cash 

system records the full value of the repurchase premium or discount for the 

year in which the repurchased debt was cancelled or matured. Thus, under 

cash, retiring debt on which a premium is due—a good thing—could 

necessitate a cash outlay with a negative impact on that year’s bottom line, 

and was politically difficult to undertake. Under the accrual basis, 

discounts and premiums are amortized over the life of the debt. 

Consequently, early debt retirement would have no budgetary impact and 

could be made based on economic analysis alone.

Parliamentary 

Accountability and Control

While most parliamentary staff we spoke with were generally supportive of 

the new accrual framework, questions related to the balance of power and 

control over spending have arisen within the context of accrual budgeting. 

They acknowledged that accrual budgets may weaken senatorial power. 

Under the cash basis, Parliament had to pass appropriation legislation to 

approve departmental expenditures. The Senate in particular had the 

authority to make changes to expenditures proposed in Bill 2—principally 
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capital and new initiatives—and thus could make large amendments to 

government budget proposals. Under the new accrual framework, once a 

department receives the authority to purchase an asset, it could continually 

replace the asset using funds accumulated from depreciation expense, and 

thus would no longer need Senate appropriation. Similarly, if the 

department does not intend to purchase new assets from its reserves, it 

may choose to divert the cash into funding other operating areas. 

Consequently, the Senate’s constitutional authority to express disapproval 

of the government’s budget may diminish because departments can 

maintain operations while they wait for Senate action on appropriations. 

Another concern has been raised over the potential loss of important data 

that may result in a relaxing of fiscal discipline. Officials informed us that 

under the cash system, all new capital submissions showed the fiscal 

impact of these commitments for 10 years or more. While agencies are to 

continue to submit these estimates, the new capital budget statement 

provides details only for the budget year and 3 forward years like the rest of 

the budget. Since the new capital budget statement will be the focus of the 

budgeting process, ANAO officials we interviewed were concerned that 

decisionmakers would shift attention towards the shorter-term horizon, 

which could result in decisions that negatively affect the government’s 

fiscal position. Furthermore, concerns were expressed that there may be 

an incentive under the new reporting requirement to forgo fiscal discipline. 

Because the government under the new framework has to recognize only 

depreciation expense on new capital in the year a new asset is acquired, 

officials are concerned that the benefits from “announcing” new capital 

projects would outweigh the costs and result in the acquisition of many 

new capital projects. 

DoFA officials dismissed concerns that appropriating cash for noncash 

expenses may result in departments diverting available cash into expenses. 

They were confident that ex-post controls were adequate to monitor the 

behavior of departments and agencies. While they conceded that no 

mechanism exists to prevent departments from spending cash that is to be 

accumulating for depreciation for some other operating expense, such as 

increasing salaries, such an expenditure would result in an unapproved 

expense, and therefore a loss on the department’s financial statements. 

Because the DoFA plans to require monthly reporting, it expects that 

deviations would show up promptly through the routine process of 

examining departmental financial statements. A loss would be apparent in 

the analytical process, and would have to be justified to the Minister for 

Finance and Administration.
Appendix I

Commonwealth of Australia

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Implementation Issues At the time of our visit, the departments were in the process of putting 

together the first accrual budgets. Officials were able to identify several 

key challenges to implementing accrual, including (1) expanding the skill 

level, (2) achieving cultural change, and (3) developing adequate 

accounting and cost systems. 

A senior DoFA official said that improving the accounting skill of budget 

staff accustomed to operating within a cash environment is crucial to 

ensuring the smooth transition and implementation of accrual budgeting. 

The department took a survey to assess the accounting skills that already 

existed at the other departments and highlighted those skills that needed 

developing. Although individual departments had to assume the 

responsibility for ensuring that budget and other personnel were properly 

trained, DoFA worked with various consultants to develop a training 

strategy to build up the skills necessary to adopt to the accrual reforms. 

Cultural change was and continues to be a key challenge. DoFA officials 

spearheading the switch to accrual budgeting informed us that ensuring 

cultural change was a necessary ingredient to a successful transition. 

Eighteen months ago, DoFA started to address this need by convening 

representatives from every department so that they could better 

disseminate information related to the new accrual framework. The group 

served to raise awareness within departments that a change was going to 

take place and helped develop an openness and receptiveness to change. 

DoFA officials believed that this approach helped to inform managers and 

executives of the new budgeting and accounting approach and to generate 

support and buy-in for the reform.

Finally, a DoFA official identified cost accounting as an area needing 

extensive attention before the full benefits of an accrual system could be 

achieved. The shift towards appropriations based on price had created an 

increased need for cost accounting information, but there was significant 

variation in the quality of cost information systems across departments and 

agencies, indicating that this was one area in the public sector that needed 

greater attention. Improving cost information was viewed as a necessary 

next step to further financial management and to improve the effectiveness 

of accrual budgeting and reporting information for performance 

assessment.
Page 137 GAO/AIMD-00-57 Accrual Budgeting

Appendix II

Canada ApendxiI

Over the last 30 years, a series of national commissions have produced 

studies arguing that the financial management information available to 

Canadian decisionmakers needed improvement. These studies placed 

particular focus on the need to collect information on the complete costs of 

government activities. During the 1990s, the government proceeded with 

plans to improve the quality and quantity of financial information. In 1995, a 

decision was made to produce audited financial statements, on a full 

accrual basis, for the whole-of-government by fiscal year 2001-02. The 

decision regarding how to maintain the alignment between the financial 

statements and the departmental appropriation requests was deferred at 

that time. Recently, parliamentary committees and the Auditor General’s 

office have recommended changing the appropriations request to a full 

accrual basis to be consistent with the financial statements.

Background Canada is a federal system composed of a central government,

10 provincial governments, and three territories.1

 All of these governments 

are parliamentary systems. The federal government is composed of a 

Senate and a House of Commons. Members of the House of Commons are 

elected by popular vote, at least every 5 years, while senators are appointed 

by the Governor General on the recommendation of the Prime Minister. 

While the House of Commons is the main law-making body, no bill can 

become law unless it has been passed by the Senate. In general, the 

political party with the majority of seats in the House of Commons usually 

forms the government and the leader of this party becomes the Prime 

Minister.

Governmental Structure The current Prime Minister, Jean Chrétien, became Prime Minister in 1993 

when the Liberal Party regained a majority in the House after 9 years of 

Progressive Conservative Party rule. In June 1997, the Liberal government 

was reelected, winning 155 of 301 seats in the House. Throughout most of 

this century, the Liberal Party and the Progressive Conservative Party have 

dominated Canadian federal politics. Currently, however, the Reform Party 

has the second largest number of seats in the House at 59. The remaining 

seats are divided among the Bloc Québecois (44), the New Democratic 

1

Each provincial legislature is composed of a single house that is elected by popular vote. 

Provincial premiers are the leaders of the parties that hold majorities in the provincial 

legislatures. In addition, provincial legislatures may set up municipal governments, giving 

them powers as they see fit.
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Party (21), the Progressive Conservatives (19), and independent members 

(2).

Executive authority at the federal level resides in the Prime Minister’s 

Cabinet. The Prime Minister chooses Cabinet ministers from members of 

Parliament in the governing party. The Cabinet is responsible for most 

legislation; it develops government policy and is responsible to the House 

of Commons. The federal government has explicit responsibility over 

national defense, interprovincial and international trade and commerce, 

immigration, the banking and monetary system, and criminal laws. 

Provincial governments are responsible for education, property and civil 

rights, the administration of justice, the hospital system, natural resources 

within their borders, social security, health, and municipal institutions. All 

powers not specifically conferred upon the provinces are assigned to the 

federal government.

The Budget Process In recent years, reforms have been undertaken to make the Canadian 

federal budget process more open. In response to criticism of the closed 

nature of the budget process, the government began to move towards 

greater openness in 1994. In the fall of 1994, the government began 

releasing annual midyear fiscal updates that contain deficit/surplus targets 

and an economic update. In addition, after release of the midyear updates, 

a series of consultations about the next year’s budget have been held with 

members of Parliament and the public. Several officials we interviewed 

said that the prebudget consultations allow the government to put forward 

some of its ideas for new spending and tax initiatives and receive feedback 

prior to release of the Budget. 
Appendix II

Canada

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The Cabinet has the sole power to prepare and introduce budget-related 

bills. In general, neither the House nor the Senate may increase taxes or 

expenditures.2

 The government, led by the Ministry of Finance, prepares its 

budget, which is tabled in, or presented to, Parliament. The government’s 

budget is tabled in the House of Commons by the Finance Minister, usually 

in mid-February, giving the government’s overall fiscal plan for revenues 

and expenditures and their relationships to the aggregate measures used to 

set fiscal targets. In addition, the Budget sets forth detailed spending 

proposals for the government’s new initiatives. The Main Estimates, on the 

other hand, are the detailed plans for all government expenditures, by 

department and agency, and are tabled by the President of the Treasury 

Board Secretariat (TBS) several days after the Budget.3

 The legislation 

necessary to implement the Main Estimates and Budget are also tabled and 

are referred to as “money bills.” The Estimates are required to be tabled by 

March 1 and are usually passed before Parliament adjourns in late June. As 

the fiscal year begins on April 1, Parliament approves an “interim supply,” 

allowing the government to spend the funds necessary for ongoing 

operations during this period.

The Budget and Main Estimates are neither changed nor debated to any 

significant degree in Parliament. Failure to pass any of the associated 

money bills would signal a lack of confidence in the government and 

almost always lead to new elections. Observers note that this does not 

mean the government has a free hand. It must consult extensively with 

Parliament—at least with members of the governing party—prior to 

introducing any of these bills to ensure passage. Similarly, the government 

would likely withdraw certain aspects of the budget framework if majority 

support were not certain.

The Economy and the 

Budget 

During the 1980s and 1990s, Canada experienced two short but severe 

recessions and two lengthy periods of growth. As a result of the first 

recession in fiscal year 1981-82, unemployment soared from less than

8 percent in 1981 to nearly 12 percent in 1983. The economy rebounded 

strongly from the recession, with real economic growth above 5 percent in 

2

Members are allowed to propose a decrease in a tax or expenditure, but such actions are 

rare. 

3

TBS is an administrative arm of the Treasury Board—a committee of ministers—and 

provides advice to the board on the preparation of the government’s expenditure budget, the 

monitoring of program spending, and other responsibilities.
Appendix II

Canada

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both 1984 and 1985. The strong recovery, however, eventually led to 

inflationary pressures, and the Bank of Canada responded by tightening 

monetary policy in late 1987. When economic activity slowed in late 1990, 

the bank began to gradually lower interest rates. However, by 1991, the 

Canadian economy was again in recession. The unemployment rate rose 

from about 8 percent in 1990 to over 10 percent in 1991, and remained 

above 10 percent until 1995. Growth finally began to pick up in mid-1993, 

was even stronger in 1994, but began to slow again in 1995. In 1997 and 

1998, growth picked up again. 

After struggling with large deficits for over two decades,4

 Canada achieved 

a federal budget surplus in fiscal year 1997-98 and expects another one for 

fiscal year 1998-99. These results reflect several years of significant fiscal 

restraint, particularly on the spending side of the budget. Such restraint 

was prompted by concerns that a high and rising debt burden—at both the 

federal and provincial level—was a major obstacle to the nation’s economic 

future. In response, the federal government’s strategy since the mid-1990s 

has been to reduce the deficit and achieve a balanced budget in accordance 

with a specific set of fiscal targets. The government has consistently 

bettered these targets, in part due to its deliberately cautious approach to 

budget planning. Given this track record, the government’s official target of 

a balanced budget implies a policy of at least modest surpluses. The 

government recognizes that its cautious planning could result in surpluses 

by describing its fiscal goal as “balance or better.”

4

For a detailed discussion, see Deficit Reduction: Experiences of Other Nations

(GAO/AIMD-95-30, December 13, 1994) and Budget Surpluses: Experiences of Other Nations 

and Implications for the United States (GAO/AIMD-00-23, November 2, 1999).
Appendix II

Canada

Page 141 GAO/AIMD-00-57 Accrual Budgeting

Recent Budgetary Reforms For more than 30 years, various national commissions have reported on the 

need to improve the financial information available to key decisionmakers 

in Canada. The Financial Information Strategy (FIS) was first announced in 

1989, and through FIS Canada hopes to achieve improvements in the 

government’s accountability framework as well as efficiencies in program 

and service delivery. To accomplish FIS’ objectives, Canada plans to 

decentralize many of the financial reporting responsibilities to the 

departments and to use accrual accounting concepts and new reporting 

structures to provide departmental managers with better tools for financial 

management. Under the current financial management regime, financial 

information is collected, and departmental spending controlled, at the 

central level by TBS and the Receiver General.5

 In 1995, the Minister of 

Finance announced the government’s decision to adopt full accrual 

accounting, but set no timetables for implementation. Later that year, TBS 

adopted a plan to prepare audited financial statements, on a full accrual 

basis, by 2001. Departmental financial statements must be capable of 

withstanding the test of audit. At that time, however, a decision on whether 

to change the departmental appropriation to a full accrual basis was 

deferred.

In 1996, a parallel reform effort to improve reporting to Parliament was 

begun. A number of agencies participated in a pilot program to produce 

Performance Reports in the fall—during prebudget consultations—that 

present the results achieved by the agencies in accomplishing the plans set 

forth in the spring in the Reports on Plans and Priorities.6

 Members of 

Parliament have indicated that having these reports during the prebudget 

consultative process has proven useful, and the pilot has been extended to 

all departments. In order to improve the link between the costs of 

resources consumed and the results achieved in providing a public service, 

the government has announced its intention to include proposed 

(budgeted) and actual departmental financial statements on a full accrual 

5

The Receiver General of Canada manages the finances of the Canadian government. It 

provides banking and cash management services and maintains accounting records.

6

The government request to Parliament for authority to spend public monies consists of 

three parts. The Government Expenditure Plan (Part I) and the Main Estimates (Part II) 

contain financial information. Part III is divided into two parts. The Reports on Plans and 

Priorities, published at budget time, focus on departmental plans and priorities for the 

coming year. The Performance Reports in the fall present the results achieved by the 

agencies.
Appendix II

Canada

Page 142 GAO/AIMD-00-57 Accrual Budgeting

basis within the Part III Reports on Plans and Priorities and the annual 

Performance Reports, but did not establish a time frame for doing so.

In 1997, the government announced the Modernization of Comptrollership 

initiative, a broad reform initiative to improve management in the public 

sector. The new initiative has incorporated the FIS initiative, which 

continues to play an integral role in meeting the broader objectives of 

better financial management. Modernizing Comptrollership takes the 

theme of decentralization of accountability a step further than FIS by 

incorporating a human resource component to ensure that managers have 

the training and skills they need to make decisions in the new environment, 

a risk management component to provide guidance to managers on how to 

manage their programs and departments in an environment of scarce 

resources, and a performance reporting and results initiative to link 

resources to results. Because these efforts depend heavily on the 

information provided through accrual accounting, they complement FIS.

In 1998, the House of Commons Standing Committee on Public Accounts 

argued that to help ensure the success of the FIS Initiative, the government 

and the Parliament should also appropriate funds on a full accrual basis. It 

recommended that TBS determine the best possible options to move the 

appropriations process to a full accrual basis and to report to Parliament 

regularly on the progress made in developing these options. This 

recommendation was based largely on the recognition that departmental 

managers have long been held accountable only through the appropriations 

process. If funds were appropriated on the same basis as they were 

reported, the committee believed decisionmakers would make better use 

of accrual-based information. TBS plans to develop a number of models for 

consultation with a variety of stakeholders, officials in the Secretariat, staff 

from the budget and accounting offices in the various departments and 

program managers.

Use of Accruals in 

Financial Management

Timeline: Progression of 

Use of Accruals

Canada was one of the first countries in the world to start moving away 

from a cash-based reporting system to an accrual basis in its financial 

statements. A number of significant expenditure items are reported on an 

accrual basis in the financial statements. For example, public sector 
Appendix II

Canada

Page 143 GAO/AIMD-00-57 Accrual Budgeting

employee pension costs are recorded on an actuarial basis and fully 

accrued and gains and losses in the pension fund are fully amortized. 

Furthermore, loans, investments, and advances are subject to an annual 

revaluation to reflect estimates of changes from carrying value. This 

allowance for valuation for loans, investments, and advances represents 

the estimated losses/gains on these assets at year-end. The move to full 

accrual reporting in the whole-of-government financial statements for 

fiscal year 2001-02 will most notably include the full capitalization of all 

assets and related depreciation accounts.

Canada also budgets for some items on an accrual basis. For example, as in 

the financial statements, the future pension costs for current employees 

are accrued and included in the departmental budget estimates. 

Adjustments for the amortization of the net gains and losses are made once 

the budget is consolidated and not allocated to the individual departments. 

The budget also includes in the agencies’ appropriations request—the 

Estimates—the expected payment needs for accounts payable.7

 However, 

financial assets such as loans, investments, and advances are treated as 

nonbudgetary items8

 and tangible capital is expensed, not accrued. Tax 

revenues are budgeted on a cash basis but nontax revenues are accrued.9

Factors Driving Adoption of 

Full Accrual Budgeting

Canada appears to have rejected a sweeping approach to public 

management reforms favoring, instead, more gradual reform. The call for 

the Estimates to be presented on an accrual basis should be viewed as yet 

7

Accounts payable that are due and payable at year-end are accrued by the government of 

Canada and charged to its appropriations. A number of liabilities are accrued centrally at 

year-end that are only reflected in appropriations in the year that payment is made. For 

example, new spending proposals included in the Federal Budget and meeting the criteria 

for recognition at year-end would be included in this adjustment. Other liabilities, such as 

contractual obligations and contingent liabilities, are disclosed in the notes to the 

government’s financial statements and not charged to the deficit/surplus.

8

Departments are voted authority or have enabling authority to make loans not to exceed an 

approved book value. In effect, authority is granted to lend but this does not have budgetary 

impact. While revaluation adjustments at year-end affect annual financial reports, it is only 

when loans in default are written off that parliamentary appropriations are required and the 

deficit/surplus is affected. Concessionary loans are made infrequently but require 

parliamentary appropriations and affect the budget aggregate (deficit/surplus).

9

Nontax revenues include return on investments such as interest on loans and advances, 

dividends from investments, and transfer of profits and surpluses and other nontax 

revenues such as proceeds from the sale of assets, service fees, licenses, permits, etc. 

Nontax revenues totaled about 6.5 percent of total revenues in fiscal year 1997-98.
Appendix II

Canada

Page 144 GAO/AIMD-00-57 Accrual Budgeting

another incremental step in furthering efforts to improve financial 

information available to Canadian decisionmakers. Officials at the TBS and 

the Office of the Auditor General (OAG) said that once there was a decision 

to change the accounting treatment for capital, they thought it important to 

consider changing the budgetary treatment to ensure alignment. Since 

pensions and accounts payable were already accrued in the budget, 

tangible capital and tax revenues were the only budgetary items remaining 

for which cash and accrual treatment significantly differed. 

As part of a recent performance audit on the government’s FIS initiative,10

OAG said that by appropriating funds on an accrual basis, the government 

and the Parliament would strengthen FIS by putting budgetary 

accountability and reporting on the same basis. The audit found that in 

implementing FIS, the government had focused its attention on ensuring 

that departments were implementing their new financial systems and on 

ensuring that those systems could produce the information necessary to 

produce the government’s annual financial statements. Missing, OAG 

found, was a plan to make the full accrual financial information available to 

all managers within departments and agencies, not just those with financial 

reporting responsibilities. The Standing Committee on Public Accounts 

concurred with the OAG report and recommended that TBS determine the 

best possible options for moving the appropriation process to a full accrual 

basis. Although the process of developing these options is only in its 

earliest stages, TBS’ consultative process has begun in the hopes that it will 

give stakeholders a better idea of what they are gaining and what might be 

lost in terms of financial information presented. 

OAG also believes that FIS would support the parallel initiative on 

performance management and accounting for results since it could provide 

improvements in the government’s ability to link costs and results. 

Similarly, in its 1997 report entitled Accounting for Results, TBS said that 

FIS aims to enhance government decision-making and accountability and 

to improve organizational performance by providing more complete 

information on the costs of programs and activities. A senior TBS official 

10Under the 1977 Auditor General Act, OAG responsibilities were clarified and expanded to 

include a broad mandate to examine how well the government managed its affairs. The act 

also gives OAG authority to conduct value-for-money or performance audits. These 

performance audits help inform legislators on how well the government is implementing its 

policies and programs. While OAG does not question the merit of a particular government 

policy, it does help legislators judge how well those policies were implemented and does 

make recommendations on ways in which implementation can be improved.
Appendix II

Canada

Page 145 GAO/AIMD-00-57 Accrual Budgeting

told us that the adoption of full accrual accounting for budgeting and 

reporting is considered a milestone in gaining the ability to fully cost the 

resources consumed relative to the services provided and results achieved 

by government programs and activities.

Summary of Accrual 

Budgeting System

Structure of Appropriations Key issues regarding the structure of accrual appropriations have yet to be 

resolved. TBS expects that eventually the accrual appropriation model will 

be represented by the three primary statements found in public and private 

sector financial statements (1) a Statement of Operations, (2) a Statement 

of Financial Position (Balance Sheet), and (3) a Cash Flows Statement. If 

such a format is adopted, votes could be assigned to each department’s 

Statement of Operations and represent approval of the department’s 

projected expenses during the year. Likewise, a vote on a department’s 

Statement of Financial Position would signal approval the department’s 

plans for disposal and acquisition of new capital. Both the Statement of 

Financial Position and the Statement of Operations would reconcile to the 

Cash Flows Statement and thus approval of the first two implies approval 

of the department’s cash requirements.
Appendix II

Canada

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Description of Aggregate 

Budget Measure

Canada’s main measure of the federal surplus/deficit—called the budgetary 

balance—is calculated on a modified accrual basis which includes the 

accrued costs of public sector pensions and certain accounts-payable 

transactions. Canada also reports a cash-based measure or financial 

requirements/surplus—roughly equivalent to the government’s borrowing 

requirements. In recent years, the financial requirements/surplus has 

recorded significantly lower deficits or higher surpluses than the budgetary 

balance (see figure 8). This is largely because public sector pensions and 

other adjustments are accrued in the budgetary balance while the financial 

balance is a cash-based amount. The nature of the items accrued in the 

budgetary balance requires that an expense is recognized in the budget 

before the cash is needed to pay the expense. Thus, under the government’s 

cautious fiscal policy framework,11 accrual treatment of these items 

reduces the resources available for other spending. If accrual budgeting for 

capital is implemented the opposite would be true. If no adjustments were 

made to the Estimates for the accrual treatment of capital, the budgetary 

balance would capture only the annual depreciation charge instead of the 

cash needed to acquire the asset. The financial balance would, of course, 

recognize the cash needed to acquire an asset.

11The budget seeks to match expected revenues to budgeted expenditures, thus seeking a 

balanced budget. However, budgeted expenditures include a C$3 billion Contingency Fund 

that can be used for emergencies while permitting the budget to stay in balance. If no 

emergency arises, the Contingency Fund will be used to pay down debt.
Appendix II

Canada

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Figure 8: Alternative Measures of the Fiscal Balance—Budgetary Balance Versus Financial Requirements/Surplus

Note: Aggregate balances for fiscal year 1998-99 are estimates and for fiscal years 1999-00 and 2000-

01 are projected.

Source: The Budget Plan 1999.

Cash Flows Versus Accrual 

Operating Balance: Key 

Differences Between Cash 

and Accruals

In fiscal year 1997-98, the budgetary surplus was nearly C$3.5 billion—

about 0.4 percent of gross domestic product (GDP)—while the financial 

surplus was about C$12.7 billion. As previously noted, this is largely the 

result of accruing spending items that require more resources under 

accrual measurement than would be required if budgeted on a cash basis. 

Given this pattern, Canada achieved a financial surplus in fiscal year 1996-

97—1 year earlier than it reached a budgetary surplus, its primary measure 

of fiscal position. 

Views on Implications 

for Decision-making 

Canada has only started to consider how to develop and present its 

Estimates on an accrual basis and thus has only begun to address issues 

relating to the impact this information will have on the budget—the main 

tool used to develop and implement the government’s fiscal policy. 

-50000

-40000

-30000

-20000

-10000

0

10000

20000

in millions of Canadian dollars

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Fiscal year

Budgetary balance Financial requirement/surplus
Appendix II

Canada

Page 148 GAO/AIMD-00-57 Accrual Budgeting

Proponents of accrual budgeting in OAG and TBS believe that the greatest 

benefits will come as a result of improved managerial decision-making. 

They base their expectations on the experiences of other countries, such as 

New Zealand, and certain Canadian provinces, such as Alberta, which 

already adopted full accrual budgeting. TBS plans to consult with 

departmental managers as well as with Parliament over the course of the 

coming months.

Concerns have been raised that the accrual treatment of capital could 

dilute the meaning of budgetary balance, which has been very important in 

gaining the public’s understanding and support of the current government’s 

fiscal policy agenda. For example, if the budget includes only the 

annualized depreciation costs, the concept of budgetary balance essentially 

ignores the means of financing asset acquisition. Critics argue, for example, 

that if only a fraction of the cost of acquiring an asset is recognized in the 

budget it could lead to an erosion of the fiscal discipline and adversely 

affect the debt to GDP ratio—an equally important fiscal target given 

Canada’s high debt levels and debt-service costs. A TBS official believes 

that the budget presentation formats under consideration will afford 

sufficient transparency to clearly present planned and actual cash 

requirements through the Statement of Cash Flows.

Similar unresolved concerns have been raised with respect to capitalizing 

assets in the financial statements. With the decision to fully accrue tangible 

capital assets in Canadian governments’ financial statements, the Public 

Sector Accounting Board (PSAB)12 issued a standard calling for 

governments to adjust their operating results (revenues less expenses) to 

reflect the net change in capital assets. This adjustment effectively nets out 

the depreciation expense charged and adds/subtracts the total value of 

assets sold/purchased in that reporting period. However, some provincial 

governments are arguing for a change that would free them from the asset 

reporting standard. 

12In 1981, the Canadian Institute of Chartered Accountants (CICA) established the Public 

Sector Accounting and Auditing Board, now referred to as PSAB. PSAB has the authority to 

issue recommendations and guidance with respect to matters of accounting in the public 

sector. Recommendations are developed in accordance with an extensive process of 

consultation and debate (“due process”) with a national network of associates of CICA who 

represent the preparers, auditors, and users of government financial statements. Under 

PSAB’s Terms of Reference, the board consists of 12 members, 8 of whom represent 

government entities responsible for financial reporting and auditing.
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Proponents of accrual budgeting at TBS and OAG believe that most of the 

benefits of the shift to an accrual-based budget will come as a result of 

improved managerial decisions. OAG officials, while instrumental in 

promoting the shift to accrual appropriations, were unable to provide 

specific examples of how certain decisions would be made differently if 

managers were held to account for appropriations measured by accrual as 

opposed to those measured by cash. They most frequently point to 

improvements made in asset management to make their case, arguing, for 

example, that lease/purchase decisions would not be skewed in favor of the 

lease under accrual budgeting. However, skeptics argue that if the fiscal 

framework is still set to a cash-based debt to GDP ratio, managers will still 

be constrained in their lease/buy decision. In fact, they argue that managers 

have always had the information to make “better” lease/buy decisions. 

Instead, the decisions that were made were done so under strict borrowing 

constraints. If fiscal policy is to continue to focus on debt levels, borrowing 

constraints will still limit the ability of the manager to obtain the cash 

needed to buy an asset even though the “budget” would only record the 

annualized depreciation expense.

Implementation Issues Most of the other countries in our study have approached accrual 

budgeting and its implementation differently than has Canada. Canada 

followed a more incremental path in choosing to accrue pensions and 

accounts payable and is still making decisions about other items, such as 

capital. Canada has only recently taken the first steps towards the adoption 

of a full accrual budget by approving the decision to go forward with plans 

on how best to present their Estimates on an accrual basis for capital. 

Critical issues, such as reconciliation of the Estimates with fiscal policy, 

have yet to be worked out. 

Two critical implementation issues have been identified—the need for 

training in accrual concepts and in new management strategies, and the 

importance of a significant cultural change. Because this effort is in the 

early stages, these have yet to be resolved. According to officials in OAG 

and TBS, while most of those who will work in the departments on the new 

decentralized accounting systems have some experience with accruals, 

most of those who work on budgeting do not. Training for budget 

development staff is expected to be extensive over many years. In addition, 

new skills will be needed in TBS. As the central agency for financial 

information, TBS will no longer control spending the same way it did in the 

past. Instead, it plans to offer guidance to the departments and review the 
Appendix II

Canada

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departments’ financial statements and budgets from a financial analysis 

perspective.

OAG also recognized in its recent report that to ensure the success of FIS, 

central agencies still need to secure departmental “buy-in” and the 

departments must put in place the necessary systems and training needed 

to achieve success. We found in New Zealand and Australia that top-level 

support and commitment to reforms were viewed as key elements to 

successfully implementing accrual budgeting. 
Page 151 GAO/AIMD-00-57 Accrual Budgeting

Appendix III

Iceland ApendxiI

Iceland began to consider reforms of its public sector in the early 1990s 

partly in reaction to internal pressures brought on by years of deficit 

spending and high inflation rates. Iceland’s accession to the European 

Economic Area in 1994 and the requirements for membership also 

encouraged an atmosphere conducive to public sector reforms. While the 

goals of Iceland’s reform efforts are broad, as in many of the other 

countries in our study, Iceland has approached this effort incrementally. 

Many specific reforms have already been enacted and implemented, such 

as the Financial Reporting Reforms which address the issue of accrual 

budgeting; however, at the time of our visit initiatives to adopt performance 

goals and manage for results were only in their infancy.

Background Iceland is a parliamentary democracy with a President, Prime Minister and 

Cabinet, and a judiciary. The Parliament, or Althingi, has 63 members. Each 

minister in the Cabinet is a member of the Althingi. The President has 

limited powers, with the Prime Minister and Cabinet ministers exercising 

most executive functions. Iceland considers itself a “modern welfare state.” 

The Ministry of Health and Social Security comprises nearly 40 percent of 

the central government budget. It finances hospitals, health care services, 

and old-age and disability pensions. The Education Ministry is the second 

largest ministry and is responsible for higher education. Primary and 

secondary schools are run by local governments. Together these two 

ministries account for more than half of the government budget. Iceland 

does not have a military force.

Government Structure The present government, a coalition of the conservative Independency 

Party (IP) and the centrist Progressive Party (PP), came into office 

following parliamentary elections in 1995, succeeding a coalition of the 

Independency Party and the Social Democratic Party which had been in 

office since 1991. The IP-PP coalition continues in office following the 

parliamentary elections in 1999. Iceland’s Prime Minister is Mr. David 

Oddsson who has led both coalitions since 1991.

There are two levels of government in Iceland—local and central. Local 

governments are elected and have the authority to levy taxes and enter into 

contracts for public works projects that require central government cost 

sharing. Primary schools are run and financed locally whereas secondary 

schools—roughly from age 16 and on—are run and financed by the central 

government. The central government and local governments share costs 

for certain investment projects, such as local hospitals, community health 
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centers, and nursing homes. In most cases the central government paid

85 percent of the costs and the local governments were responsible for the 

remainder. In the past these cost-sharing obligations led to 

intergovernmental pressures as local governments went forward with 

investment projects despite central government budget constraints. 

According to Ministry of Finance officials, in several cases local 

governments financed projects and then demanded that the central 

government reimburse them for its share, frustrating the central 

government’s efforts to set budget priorities. This issue has been 

ameliorated, however, since certain reforms were enacted in 1996. Now no 

ministry can obligate central government resources without obtaining 

authorization from the Ministry of Finance. Likewise, local governments 

must obtain agreement from the appropriate Ministry before signing a 

contract that would also require central government financial participation. 

Budget Process The government introduces its budget for the next fiscal year on October 1 

and it is normally passed a few weeks before the start of the new fiscal year 

on January 1. The annual budget is developed using the previous year’s 

budget levels as a baseline, with adjustments for inflation, new salary 

agreements, extraordinary charges, and new policy initiatives. The process 

itself is continuous as the development of the next year’s budget begins 

almost as soon as the current year’s budget is passed. 

A new budget process—“frame budgeting”—was introduced in 1991. Early 

in the budget development process, ministries are allocated a share of 

resources for continuation of existing programs based on projected 

revenues and overall fiscal policy objectives. New spending initiatives are 

given closer scrutiny by a special cabinet committee and in most cases 

ministries are expected to find funding for new initiatives through savings 

from current spending levels. 
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The Ministry of Finance prepares the budget. During the final stages of the 

budget development process there are frequent meetings that include the 

Chairman and Vice Chairman of the Budget Committee, the various 

ministers, and officials with the Ministry of Finance. A summary version of 

the budget is put to the majority members of Parliament for approval 

before it is finalized. The rest of Parliament sees the budget when it is 

introduced by the Minister of Finance on October 1. Normally the budget is 

introduced with a speech by the Minister of Finance at the beginning of the 

first reading. An extensive debate ensues that can last up to 2 days. The full 

Parliament then passes the budget to the Budget Committee where it will 

be reviewed in detail for up to 3 months.1

During this process the Budget Committee typically delegates oversight 

and review of a particular ministry’s budget to the standing committees that 

have general oversight responsibilities over those ministries. Standing 

committees have some authority to direct funding within a ministry’s 

allocation and toward the end of their review they generally hold hearings 

to communicate to the Ministry of Finance and the Budget Committee what 

they think should occur in their ministry’s budget. A report on the standing 

committee’s recommendations is then transmitted to the Budget 

Committee for further guidance.

It is generally agreed that while the Althingi must approve the budget and 

thus must approve all spending, there are few parliamentary controls over 

spending. In practice, the Althingi makes no major changes in the final 

budget from what is proposed by the Ministry of Finance. The last time 

there was a major difference was in 1987 when the total budget package 

was reduced by about 5 percent. There was also a slight adjustment of 

about 1⁄2 percent in the 1997 budget.

The Economy and the 

Budget

Iceland’s economy historically has been susceptible to inflation and is 

highly dependent on foreign trade. Inflation rose to 43 percent in 1974 and 

59 percent in 1980, falling to 15 percent in 1987 but rising again to 30 

percent in 1988. Since then, the inflation rate has dramatically fallen. 

Although monetary policy is driven largely through exchange rate targets, 

1

There are 12 standing committees in the Althingi but the two with the most prominent role 

in the budget process are the Budget Committee and the Economics and Trade Committee. 

The Economics and Trade Committee has jurisdiction over all revenues, while the Budget 

Committee oversees the expenditure side of the budget. Each committee is chaired by a 

member of Parliament with ties to the political party(ies) in the government.
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officials with the Central Bank said that fiscal policy does influence their 

strategies. The current government is committed to tight fiscal measures.

In 1995, the new government declared its intentions to reduce the deficit 

and reach a balanced budget by 1997. The government also recognized the 

need not only for a balanced budget but also for sufficiently large surpluses 

in the next few years to cover outstanding Treasury debt and future 

pension commitments. In addition, it recognized the need to generate 

surpluses to reduce the outstanding government debt. Although the 

government’s fiscal policy is described as “tight,” the Ministry of Finance 

also notes that the recent surpluses have resulted not necessarily from 

expenditure constraints alone, but are also the result of the stronger than 

expected economy and the impact this has had on revenues. 

The Icelandic economy has gone through a period of rapid growth since 

1994. Growth was particularly strong for the last four years. Inflation has 

been kept in check. The unemployment rate has been kept at nearly the full 

employment level as many large investment projects are underway. All of 

these events have resulted in an unusually large increase in real disposable 

incomes and in private consumption that contribute to above average 

revenue collections from income taxes and the value added tax. 

Iceland’s economic policy has focused, of late, on promoting and 

maintaining economic stability by shifting away from market intervention 

and towards liberalization of the markets and increased competition. The 

overriding economic policy concern of the government has been to 

maintain and strengthen the stability of the Icelandic economy to ensure 

continued economic growth and increased employment. A credible fiscal 

and monetary policy was seen as a prerequisite for this, since this would 

lead to lower interest rates and encourage private investment. In both fiscal 

years 1998 and 1999 cash budget surpluses were achieved. The fiscal year 

2000 budget is also projected to run a large cash surplus reversing the trend 

of continuous deficits since the mid-1980s. 

Recent Reforms Accrual budgeting is only a small part of the greater effort undertaken in 

Iceland over the last 8 years to promote improvements in public sector 

financial management. Senior officials with the Ministry of Finance 

indicated that the overarching theme behind all these reforms has been to 

promote transparency and accountability, specifically to recognize the full 

costs of commitments when they are made rather than when they need to 

be paid. In addition to the Financial Reporting Act, several important laws 
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have been enacted to contribute to the overall goals of reforming the public 

sector; these include pension reforms, limitations on the extent to which 

government guarantees are granted, and civil service restructuring.

Notably, in enacting financial reporting reforms, decisionmakers 

restructured the revenue side of the budget. Previously, earmarked 

revenues were often subtracted from budgeted expenditures of the 

beneficiary agencies thus masking the full economic impact of government 

finances. Now all revenues are presented together in the Operating 

Statement. These reforms also created a direct link between spending 

authority and the means of financing. In the past a separate credit budget 

was enacted that authorized the borrowing necessary to finance the 

spending approved in the fiscal budget. Now the borrowing requirements 

are directly linked to the budget through the Statement of Cash Flows. In 

addition, in order to make direct links between the budget and the financial 

statements, financial reporting reforms also require that the budget be 

presented both on an accrual and cash basis. To the extent that the accrual 

treatment of select budgetary items captures the future financial liabilities 

of the government, this aspect of the reform serves to enhance the 

transparency of the financial impact of government decisions. 

As will be explained later and in more detail, capital assets are not 

budgeted or accounted for on an accrual basis. In order to highlight the 

budgetary impact of capital decisions on future years’ budgets, the reforms 

require longer term financial plans for major capital projects. Even though 

these plans are not binding, they do provide more information on the likely 

budgetary impact of capital decisions than was previously presented.

Use of Accruals in 

Financial Management

In 1994, the government submitted the Financial Reporting Act to the 

Althingi. The act was based on work conducted over the previous 5 years 

by the Financial Reporting Commission.2

 The Commission recommended 

significant changes in the format of the budget and the financial 

statements; specifically the budget and the financial statements should be 

reported on an accrual basis, the two should be presented in a uniform 

format, and their presentation should be based on private sector reporting 

2

The Financial Reporting Commission is a statutory board established by the Financial 

Reporting Act of 1966 with six ex-officio members representing the Ministry of Finance, the 

State Accounting Office, the National Audit Office, the Bureau of Statistics, the Central 

Bank, and the National Economic Institute.
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standards as far as practicable. The Commission reasoned that given that 

the financial statements are the final report on the government’s finances 

for each fiscal year, they are the basic source of information on the 

government’s finances as a whole and for individual agencies. In addition, 

the audited financial statements should enable the government’s finances 

to be judged by their impact on the economy largely by analyzing 

changes—measured on a consistent basis and using generally accepted 

accounting standards—from one reporting period to another. They also 

noted that the statements are the framework for the Althingi to monitor 

whether its decisions in the budget have been implemented. 

Overview of Use of Accrual 

for Financial Reporting and 

Budgeting

In reviewing the applicability of private sector accrual accounting 

standards for public sector reporting and budgeting the Commission 

recommended one significant deviation. Namely, property, plant, and 

equipment (physical capital) are not reported as assets and will continue to 

be reported as expenditures when purchased. In deciding against adopting 

private sector reporting standards for capital, the Commission recognized 

that the private sector standards would make it easier to compare the 

performance of one agency with that of another and with private sector 

alternatives. However, there were also problems with implementation; for 

example, reporting depreciation requires assets to be valued and their 

useful lives estimated. The Commission found that this was in many cases 

not practicable for many government assets. It noted, in particular, 

difficulties in establishing values for large infrastructure projects, 

museums, national parks, etc. It also questioned the purpose served by 

depreciating these assets. The Commission concluded that reporting the 

annual depreciation of assets, instead of the purchase of assets, goes 

against the objective of showing how all tax revenue is allocated in a given 

year.

A second deviation from private sector reporting standards deals with the 

treatment of interest expense. The Commission noted that the private 

sector standards were currently under review and were likely to change in 

the next few years to conform to international standards. While a goal of 

financial reporting reforms was to align the public sector accounting 

standards with those in the private sector, the fact that changes in private 

sector standards were imminent led to a decision to defer changes to the 

public sector standard. The central government records all interest 

expense, even that portion of the expense that is the result of currency 

fluctuations on non-krónur denominated loans.
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The Commission also recommended a presentation format for budget 

reporting that sought to align the budget and the financial statements to 

ensure that decisionmakers, in particular the Althingi, could track the 

financial results of its budgetary decisions during the previous year. The 

budget is comprised of two key statements: an Operating Statement that 

shows accrued revenue and expenses budgeted for a given fiscal year and a 

Statement of Cash Flows from operations, investments, and financing 

activities. In addition, supplementary information includes a statement of 

accounting principles and more detailed statements of loans and 

guarantees; holdings in noncentral government activities; property, plant, 

and equipment; and changes in capital. The Statement of Cash Flows is 

generally in line with private sector practice and represents the net 

borrowing requirement. This measure is believed to give the best picture of 

the government’s impact on the economy.

Factors Driving Adoption of 

Accrual Budgeting

The primary intent of the broad financial reporting reforms is to improve 

the transparency of financial information through uniform reporting 

standards and through the recognition of the full cost of central 

government obligations when they are made. Financial reporting reforms 

have taken shape in response to new information technologies, new 

requirements of international organizations for uniform data from their 

member countries, new methodologies to illuminate the impact that 

government finances have on the economy, and increased oversight by the 

Althingi in economic and budgetary matters. As previously noted, Ministry 

of Finance officials consider accrual budgeting to be only one part of a 

broader effort to reform the public sector in Iceland. Accruing the costs of 

certain government obligations is considered to be one part of improving 

the recognition of the full costs of these various obligations.

Summary of Accrual 

Budgeting System

In two key aspects, Iceland’s approach to accrual budgeting differs 

significantly from the approaches adopted in the other countries in our 

study. First, in an attempt to satisfy all the key users of financial 

information, the Operating Statement section of the budget is presented 

both on an accrual and a cash basis. Second, as noted previously, capital is 

expensed rather than capitalized and depreciated. Although a significant 

realignment of the budget occurred as a result of the reforms, this effort 

was designed to bring more activities into the fiscal budget—creating 

linkages in the decision-making process—rather than to realign resources 

to programs and activities as in other countries in our study.
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Structure of Appropriations The main focus of the budget debate is on the Operating Statement, which 

is presented on both a cash and an accrual basis. The Operating Statement 

shows revenues by major classes, e.g., individual income tax, corporate 

income tax, and value-added tax. Revenues are followed by expenses 

organized by ministry or other major administrative categories such as 

interest expense. The difference between revenues and expenses—the 

operating balance—is only presented on an accrual basis. Passage of the 

budget provides authority to spend. 

The Operating Statement is followed by the Statement of Cash Flow, which 

reconciles any accrued gains/losses and noncash expenses to cash to 

provide information on the government’s Net Borrowing Requirement. 

Detailed departmental spending by subadministrative unit and program is 

measured on an accrual basis only and follows the Statement of Cash 

Flows. 

Treatment of Specific 

Budget Items

• Revenues are accrued. The Revenue Department in the Ministry of 

Finance calculates and estimates all revenues levied based on current 

laws using projections of income and sales. The total amount of all taxes 

levied in that year is presented as accrued revenues in the budget. The 

total revenues in the cash budget represent the sum of all cash projected 

to be received in the budget year. Uncollectible taxes and forfeited taxes 

are expensed in the accrual budget under the Ministry of Finance’s 

budget.

• Operating costs, such as salaries and supplies, are accrued but in 

practice the differences between the accrual-based costs and the cashbased operating costs are immaterial.

• Capital is expensed as acquired. Major infrastructure projects—for 

example roads, bridges, and tunnels—are expensed as work is 

completed and paid for. If a major project extends over multiple fiscal 

years, only the amount actually paid in that year is recognized in the 

annual financial statements and only the amount of cash expected to be 

paid out each year is recognized in the annual budget.

• Accounts payable are accrued but the only department with material 

accounts payable is the Public Roads Administration (PRA). PRA 

officials admitted that they have substantial flexibility to reprogram 

funds. For example, when budget estimates differed from actual work 

completed, PRA could shift funds from projects where pay-outs were 

less than anticipated or borrow from contractors until the next budget 

year. Such borrowing in essence would defer payment until new 

budgetary resources were available. In the 1999 budget, resources were 
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approved to liquidate the accrued accounts payable liability and fully 

fund new projects. The practice of deferring payments is discouraged 

and some officials hope that the longer term focus of the new road 

building plans will prevent the need for these practices to continue.

• Non-capital inventory costs are accrued, but do not differ materially 

from cash treatment. Since capital is expensed in the year it is 

purchased the budgetary impact of the accrual of any capital inventory 

expense will be the same as if treated as a cash expense.

• Public sector pensions are accrued. Pensions are centralized and 

these liabilities and their related expenses are shown in the Ministry of 

Finance’s budget—not in the budgets of the various ministries. One of 

the major goals of the reform efforts in Iceland was to improve the way 

that public sector pensions were recognized in the financial statements 

and the budget. The initial accrual of unfunded pension liabilities in the 

1989 financial statements and the resulting realization by the 

government and the Althingi of their large size was one of the issues that 

precipitated the complete review of Iceland’s financial reporting 

practices, according to Ministry of Finance officials. The realization also 

prompted changes to the public sector pension scheme. The previous 

scheme has been closed to all new employees since 1997 and in its place 

a new fully funded pension scheme was adopted. Those in the previous 

system were offered a choice of shifting to the new system with some 

benefits transferred. The accumulated liabilities of the old scheme are 

recognized in the financial statements but only the annual changes in 

those liabilities are shown in the current budget. All future liabilities in 

the new scheme are expensed on an accrual basis. 

• Iceland recognizes and has made some effort to prepare for significant 

demographic changes as a result of the aging of the population. For 

example, Iceland recently enacted pension reforms aimed at increasing 

national saving and strengthening pension plans for private workers.3

While Iceland mandates universal pension coverage for private sector 

employees, there are also two levels to Iceland’s social insurance for the 

aged—a small old-age pension program for people who have never 

entered the workforce and general welfare programs. The total 

expenditure budgeted for the former in 1999 was only Kr. 225 million (.1 

percent of total expenditures)—Kr. 200 million in cash and Kr. 25 million 

3

Private sector pension reforms were recently enacted that aim to increase national saving 

by providing favorable tax treatment on a larger share of personal income if it is invested in 

long-term pension schemes. Reforms also require the consolidation of private sector 

pension plans to ensure greater diversification of investment risk as any liability accruing to 

them would not be a government liability.
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accrued for future payments. Ministry of Finance officials said that this 

small program was being terminated and those that would have been 

eligible in the future will be taken care of through the general welfare 

programs. In contrast, the general welfare programs are very large and 

are not accrued. In 1999, the total general welfare budget for the aged 

and disabled was funded through the Ministry of Health and Social 

Security at Kr. 17.7 billion (about 9 percent of total expenditures). The 

largest share of this program, about Kr. 14.96 billion (84 percent of 

program expenditures and 8 percent of government expenditures) 

provides funds for old-age and disabled benefits. Basic old-age benefits 

are paid to all persons 67 years old and older and are means-tested. A 

Ministry of Finance official said that since there is no guarantee on the 

level of the benefits, there is no reason to accrue a liability for the costs 

of these benefits.

• Iceland makes loans to state-owned enterprises and funds, continues to 

offer below market rate student loans, and has a housing loan fund. New 

loans are booked at their net present value, incorporating any subsidy 

costs and default risks. The value of existing loans is reestimated by the 

National Audit Office. Subsidy costs are included in the Ministry of 

Finance’s budget. Operating costs of the loan programs are included in 

the individual agency’s budget. The operating balance is adjusted by 

cash flows for investing to get to the cash-based net borrowing 

requirements. The State Guarantee Act considerably narrowed the 

authority of the government to issue state guarantees, but it calls for an 

assessment of risk before a guarantee is issued and the establishment of 

a loan loss account to provide for losses on state guarantees. A risk 

premium is called for on all issues of state guarantees. 

• Ministry of Finance officials said that Iceland offers a natural disaster 

insurance program that provides funds to those who suffer from the 

effects of earthquakes, volcanic eruptions, and floods that occur 

regularly in Iceland as a result of its situation on a geographical fault 

line. The budget treatment for this insurance is cash-based. Premiums 

are not based on a formal risk assessment but the balance in the fund is 

normally enough to cover the needs that arise in a year. The costs 

associated with such disasters are normally paid for either through the 

premium balances or through a special appropriation. 

Description of Aggregate 

Budget Measure

The main focus of the budget debate is on the Operating Statement, which 

shows estimates of revenue and expenses on both an accrual and a cash 

basis. However, as recommended by the Financial Reporting Commission, 

the Operating Statement section of the budget shows the operating result 
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(deficit/surplus) only on an accrual basis even though the detailed 

presentation of both cash and accrual estimates is maintained in the rest of 

the Operating Statement. Although the cash-based deficit/surplus figure is 

not presented in the Operating Statement, the cash flow statement 

reconciles the accrual budget to the government’s borrowing requirement, 

which the Commission believes is the best picture of the government’s 

impact on the economy.

Key Differences Between 

Cash and Accruals

The only areas of the budget where there are significant differences in the 

cash and accrual treatment are in revenues, pensions, and interest. The 

oversight and administration of these activities are localized in the Ministry 

of Finance.

Cash Flows Versus Accrual 

Operating Balance

The accrual-based operating balance is adjusted for cash flows from 

operating and investing activities to get to the net borrowing requirements 

or, as in the case of Iceland since 1998, the net debt repayment potential. It 

is then further adjusted for changes resulting from financing activities, 

which detail the government’s plans to repay or restructure its debt. Key 

budget documents show a clear link between the net movement in cash 

balances and the debt reduction goals for the fiscal year. Since fiscal year 

1998, as a result of the cash flows from operating and investing activities, 

the government reduced its gross debt to GDP ratio to 34 percent from a 

high of 511⁄2 percent in 1995. The fiscal year 2000 budget also projects 

continued cash surpluses and further debt reduction to about 30 percent of 

GDP.
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Views on Implications 

for Decision-making

Iceland’s current fiscal policy has been described as tight with a goal of 

debt reduction. Iceland’s selective approach to accrual budgeting has lent 

itself well to this policy. Accrual treatment of capital in a budget usually 

means that the purchase price of the capital is not recorded when the 

actual cash outlays are made but instead is spread over the asset’s useful 

life. On the other hand, accrual treatment of many other budget items, such 

as pensions, insurance, and credit programs often result in recording a 

greater amount of budgetary resources up front in comparison to cash 

budgeting. In choosing to accrue only those items that would require more 

up front funding on an accrual basis and against accruing those items that 

would require less, Iceland effectively reserves more cash resources that 

can be used to repay debt than if the budget was only measured on cash or 

full accrual. Specifically, the budgeted surplus measured on a cash basis for 

1999 was higher than the budgeted surplus measured on an accrual basis.4

By focusing on the accrual-based surplus (which in effect reserved some 

cash for future payments), Iceland was able to use the “extra” cash to pay 

down more debt.

The impact on the rest of the budget of the use of accrual measurement for 

only select budgetary items has been to constrain spending in other areas 

in order to meet or exceed fiscal targets. The budget shows the 

deficit/surplus only on an accrual basis. At the time of our visit Ministry of 

Finance officials expressed concern that if they showed a large cash 

surplus there would be increased pressures to spend, reducing the amount 

available to buy back debt. The cash-based surplus number could be easily 

arrived at by summing the cash column, but Ministry of Finance officials 

acknowledged that they hoped to focus the debate on the accrual measure 

of fiscal position. 

Unlike in many of the other countries in our study, the approach taken for 

accrual budgeting in Iceland is not anticipated to affect managerial 

decision-making at the ministry level. In most of the other countries, the 

capitalization of assets will result in the most significant changes to 

individual department or agency budgets. In Iceland, however, assets are 

not capitalized and pension expense—the only other budget item that is 

significantly different under accrual budgeting—has been consolidated in a 

4

In fiscal year 2000 the cash-based surplus is projected to be 33 percent higher than the 

accrual-based surplus.
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central agency and will not influence managerial decision-making at the 

agency level. 

Senior officials with the Ministry of Health and Social Security disagreed 

with the Financial Reporting Commission’s decision against the 

capitalization of assets. The Ministry of Health and Social Security is the 

largest in terms of budgetary resources and is capital-intensive with stateowned hospitals and very expensive medical equipment. As new medical 

technologies are developed, the ministry must perform cost analyses to 

determine whether it should make the investment to develop expertise in a 

new technique—or purchase new equipment—or whether it is more cost 

effective to send its citizens abroad for treatment.5

 This information has 

been collected on an accrual basis and analyzed for many years in the 

ministry because it needs the information and analysis to perform its 

functions. In essence it must maintain two sets of books because the 

accrual information is not requested by the Ministry of Finance, the 

Cabinet, or the Althingi. From a managerial perspective, therefore, the 

ministry sees great value in capitalizing assets.

In a broad managerial sense, however, the package of public sector 

employee pension benefits may be scrutinized more heavily by various 

decisionmakers and the public than in the past as a result of the adoption of 

accrual treatment of those benefits in the budget. In 1998 the Ministry of 

Finance negotiated a new wage agreement with public sector employees.6

Pensioners receive a pension tied to the base salary of the person who is 

currently in the job; therefore, wage renegotiations have a direct impact on 

the pension liability. According to the editor of one of the leading 

newspapers, there is the perception that public sector employees receive 

better salaries, pensions, and other benefits than workers in the private 

sector receive. When the new wage agreement was announced concern 

was raised regarding its costs, but it was not until the June reestimates of 

the budget—on an accrual basis—were announced in August that the full 

costs were known. There was a great deal of public outcry in the press and 

5

In Iceland health care is provided to all citizens. In addition, citizens of other countries are 

offered health care if they are visiting or working in Iceland. If a health care provider in 

Iceland treats a citizen of another country, Iceland must provide cost information, prepared 

under generally accepted standards, in order to collect payment from the health plan in the 

other country.

6

The Ministry of Finance is responsible for negotiating the wage agreements with public 

sector employees; no parliamentary agreement is required.
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among parliamentarians regarding the cost of this agreement; specifically, 

there were concerns that the full cost should have been known before the 

agreement was reached. Ministry of Finance officials said that it was very 

difficult to estimate these costs as the agreement was being negotiated, but 

added that in the future the full costs of new policy decisions will likely be 

more fully debated before any agreements are reached. There is no longer 

support to give something in the short term that is costly in the long term.

Efforts are underway to implement performance management strategies, 

such as developing ministerial goals and objectives, increasing 

accountability for results through performance contracts, and outsourcing 

some government functions. These efforts are only in their very early 

stages of implementation and ministry officials have not tied budgetary 

resources to results. 

Implementation Issues Unlike many of the other countries in our study, Iceland mitigated the costs 

and time required to train ministry staff in accrual concepts by 

consolidating the development, analysis, and presentation of the 

methodologically complex accrual estimates within the Ministry of 

Finance. Officials from the Ministry of Finance said that ministry and State 

Accounting Office staff were trained accountants and did not have 

difficulty adjusting to the new measurement techniques.
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Appendix IV

The Netherlands ApendxiIV

In the 1980s, the Netherlands found itself in circumstances similar to those 

of many other industrialized countries with burgeoning deficits, high 

unemployment, and declining public confidence in the public sector’s 

ability to deliver promised services and programs. In response the 

government sought not only to reduce the deficit but also ways to reduce 

the public sector’s role in the economy—largely through privatization, 

deregulation, and decentralization. Since 1992, the Netherlands 

increasingly has adopted performance management initiatives to achieve 

these objectives and to improve the efficiency of the public sector. The 

government viewed accrual budgeting and financial statement reporting as 

providing the framework necessary to manage for results. An accrual 

framework is being applied only in those specific agencies where it was 

deemed useful in promoting results-oriented management. When the first 

agencies began employing accrual measurement in 1994 it was seen as a 

pilot effort, but there is no plan for these agencies to revert back to a cash 

basis of accounting and budgeting. Cash-based budgeting continues at the 

aggregate level to record total expenditures and receipts and remains the 

focus for fiscal policy decision-making.

Background The Netherlands is a parliamentary democracy under a constitutional 

monarch. Its government is based on the principles of ministerial 

responsibility and parliamentary governance. The national government 

comprises three main institutions: the Monarch, the Council of Ministers, 

and the Parliament. The Council of Ministers plans and implements 

government policy. Most ministers also head government ministries. The 

ministers are responsible to the Parliament, but unlike the British 

westministerial system, Dutch ministers cannot simultaneously be 

members of Parliament. There are 12 provinces, each governed by a locally 

elected provincial council and a provincial executive appointed by 

members of the provincial council.

Government Structure The Dutch Parliament consists of two houses—the First and Second 

Chambers. The First Chamber has 75 members elected by the 12 provincial 

councils. As a general rule they meet for only about 1 day per week and 

usually consider broad policy issues, focusing little attention on budget 

issues. The Second Chamber consists of 150 members elected for 4-year 

terms on the basis of a nationwide system of proportional representation. 

Members represent the whole country rather than individual districts and 

are normally elected on a party slate, not individually.
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Only the Second Chamber may initiate legislation and amend bills 

submitted by the Council of Ministers. All legislation passed by the Second 

Chamber must be approved by the First Chamber before it can become law. 

Both Chambers may question ministers and other government officials 

about proposed or existing programs.

The Monarch appoints the formateur who forms the Council of Ministers 

after the elections. Historically, Dutch governments have been based on the 

support of a majority in both houses of parliament. The current 

government is a three-way coalition formed in August 1998 and led by 

Prime Minister Wim Kok of the Labor Party. The three-way coalition 

government holds 97 of the 150 seats in the Second Chamber. Prime 

Minister Kok also led the coalition that governed from 1994 to August 1998.

Economy and the Budget The Dutch economy, like most other Organization of Economic 

Cooperation and Development (OECD) economies, experienced sluggish 

growth and rising unemployment in the late 1970s and early 1980s. In 1982, 

the Netherlands found itself in its most severe post-war recession with 

negative growth in its gross domestic product (GDP), measured at -1.2 

percent in both 1981 and 1982. A new government was formed in late 1982 

and faced what many considered an unsustainable situation. Government 

debt had doubled since the early 1970s and total government outlays 

exceeded 60 percent of GDP. The deficit (9.5 percent of GDP in 1983) was 

putting an upward pressure on interest rates, hindering growth in the 

private sector. Although the budget deficits were exacerbated by a 

slumping economy, much of the budget stress was structural, reflecting the 

predominance of transfer payments in the budget. The government 

estimated that only half of the increase in the deficit could be attributed to 

the business cycle. There were widespread concerns about the 

implications of the structural deficit for financial markets and business 

investment. 

Reducing the deficit was the principal objective of the governing coalition 

that formed in 1982. Actual government spending fell 2.5 percent by 1986 

and, while the deficit also fell, it was still about .75 percentage points above 

the goal set by the government. A new coalition government formed in 1986 

called for renewed fiscal restraint and set goals for further deficit 

reduction. Most of the real cuts in spending were in public investment; its 

share of GDP had been declining steadily since the 1970s but reached 

historic lows in the late 1980s. Real cuts in public sector wages and transfer 
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payments were achieved, however the number of recipients did not 

decline. Instead, wages and benefits did not grow as rapidly as inflation. 

The economy improved in the late 1980s and reforms to the country’s 

disability benefit system and lower subsidies for housing, public 

transportation, and education ameliorated some of the budget’s structural 

imbalance. Given the size of the public sector, greater productivity was 

viewed as an important step in meeting new spending pressures under tight 

fiscal constraints. In the early 1990s, the government sought further 

improvements in management of the public sector through the introduction 

of market discipline and market processes. The government hoped that 

small improvements in productivity combined with modest wage increases 

would lead to savings of about a quarter percent in public sector wage bills. 

Government finances have improved substantially since 1994. The coalition 

government in power from 1994-1998 took actions that resulted in a 

reduction in the deficit from 3.8 percent of GDP in 1994 to about 1 percent 

of GDP in 1999. Similarly, since 1994 the debt-to-GDP ratio has been 

reduced from about 78 percent to 64 percent. The Netherlands is firmly 

committed to the European Economic and Monetary Union and was able to 

comply with the convergence criteria established in the Maastricht Treaty.1

1

An important condition for successfully moving to a single European currency on 

January 1, 1999, was that the economies of the participating countries should converge 

towards each other and, at the same time, remain healthy.
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The economy peaked in 1998 with strong 4 percent growth in GDP, sharply 

falling unemployment, and moderate inflation. GDP growth for 1999 and 

2000 is expected to slow to about 2.75 and 2.5 percent, respectively, but 

unemployment is expected to remain low at about 5 percent of the labor 

force. The fiscal and budgetary policies of the current coalition government 

seek to maintain the momentum achieved by previous governments in 

shrinking the deficit, reducing the debt-to-GDP ratio, and rebalancing the 

public sector’s role in the economy largely through deregulation. In 

addition, this government has stated its commitment to enhancing the 

infrastructure base. When the government put together its fiscal year 19992

budget it estimated economic growth at about 2.25 percent. Based on 

trends for the first half of the year, the growth rate is expected to reach 2.75 

percent. As a result of the better-than-expected economic performance in 

1999, the government’s fiscal year 2000 budget plans to reduce the deficit to 

about one-half percent of GDP while providing for tax cuts3

 and investment 

in environmentally conscious improvements in public sector 

infrastructure.

Budget Reforms Faced with daunting deficits in the early 1980s, the government developed 

plans to improve financial accountability and the efficiency and 

effectiveness of the public sector. Government officials also began to 

explore ways to shrink the public sector’s role in the economy. Many 

different approaches were taken to streamline government; privatization, 

deregulation, and decentralization were chief among them. A 1998 study 

reported that the fact that few entities were actually privatized was 

attributed, in part, to the fact that the cash-based accounting systems then 

in use did not provide enough insight into costs to permit fair prices to be 

estimated by either potential buyers or the government.4

2

The fiscal year corresponds to the calendar year.

3

The governing coalition agreed to set aside half of any revenue “windfalls” for tax reduction 

and the other half for deficit reduction.

4

Haffner, Robert C. G. and Koen G. Berden, “Reforming Public Enterprises − Case Studies: 

The Netherlands,” Public Management Service, OECD, 1998.
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The Netherlands made significant progress improving the quality and 

timeliness of its financial accounting system during the late 1980s. 

However, instead of again attempting privatization of some public entities, 

in 1992 the government sought to improve the effectiveness of public 

sector activities by focusing on a more results-oriented performance 

management model. Taking an incremental approach to change, the 

government and Parliament decided to allow a few government entities to 

operate as if they were in the private sector. Parliament further insisted 

that before an entity could shift to this new framework it needed to define 

clearly the products it intended to provide and describe how it intended to 

achieve any promised efficiencies. Accrual accounting and budgeting was 

thought to be useful in achieving such efficiencies. The Ministry of Finance 

noted that some activities could be better supported through the use of 

accrual measures to spur a more results-based management focus. 

Specifically, a government report found that accrual measurement would 

facilitate a better costing of some government activity.5

 The Ministry of 

Finance reasoned that efficiency gains could be achieved through this more 

results-oriented environment if expected outputs were more clearly 

articulated and the associated costs of producing those outputs were better 

aligned. 

Adoption of an accrual framework, even for a limited number of public 

entities, required an amendment to the Government Accounts Act which 

required cash treatment for both budgeting and financial reporting on 

budget execution. The selected entities were deemed “agencies”—a new 

subdivision of government. According to parliamentary staff, once the 

Government Accounts Act was amended, entities could volunteer to 

become agencies. The first four new agencies were created in 1994. Over 

the years, many more entities have elected to participate. Currently there 

are 22 agencies and 10 more entities are considering becoming agencies. 

The share of public sector expenditures currently made by agencies is 

small—only about 5 percent. However, they are labor intensive, employing 

about 25 percent of all public sector employees. The Dutch Tax 

Department recently applied for agency status and, if its application were 

approved, the share of public sector employees in agencies would rise to

50 percent. However, because most of the Netherlands’ budget is transfer 

5

Public sector accounting standards largely mirror those used in the Dutch private sector. 

Municipal governments in the Netherlands use accrual-based standards for financial 

statement reporting and budgeting. Discussions are ongoing in the Ministry of Finance on 

whether these standards need to be reviewed for applicability to the public sector.
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payments, the share of total public expenditures budgeted on an accrual 

basis will remain small. The rest of government still budgets on a cash basis 

and, when all department and agency budgets are consolidated, the fiscal 

balance is reported on a cash basis. 

Capital investment suffered in the 1980s even as the Netherlands tried to 

rein in spending on social programs. Parliament’s Public Expenditure 

Committee promoted the adoption of a separate capital budget, which 

successive governments also supported. However, there were also many 

who opposed this separation, arguing that a capital budget would highlight 

the lack of capital investment and that, by accruing only the depreciation 

costs, a capital budget would provide greater incentives to spend the 

scarce cash available in the Treasury. In the end, the overriding fiscal policy 

goal at the time was to bring the deficit to within the European Union’s 

(EU) requirements. The EU deficit targets are cash-based and the 

government at the time felt that a shift to a full accrual-based capital budget 

could be deferred.

Structure of Agencies’ 

Accrual Appropriations

The government’s budget is developed and presented to the Parliament by 

government ministries. Agencies are sub-units of ministries; their budgets 

are approved and appropriated through the various ministries as prices 

paid by the ministries for outputs. At the ministerial level, appropriations 

are cash-based even though the amounts appropriated are based on the 

agencies’ accrual-based costs. For example, the Prison Service is a line 

item in the budget of the Ministry of Justice.6

 In this output budgeting 

framework, the Ministry of Justice buys the services, for example, the 

number of prison beds it needs that year (a proxy for the number of 

prisoners), from Prison Services. The Ministry of Justice is appropriated 

funds on a cash basis to buy services from the Prison Service, which are 

priced on an accrual basis.

While the goal of this framework is to encourage agencies to benchmark 

their prices against other providers—public or private—of similar services, 

this has been done infrequently. Instead, the price usually reflects the costs 

of production. Thus, in the above example, the price the Ministry of Justice 

agrees to pay the Prison Service is based on the accrual-based costs the 

6

In most cases an agency is one line item within its Ministry’s budget. However, there are 

some very small agencies that may be included with other program expenses within a line 

item in their ministries’ budgets.
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agency will incur in providing the service. This price will include many 

noncash expenses, such as depreciation, which are part of the costs. The 

lack of widespread benchmarking to determine prices was attributed to 

inexperience with accrual measures, the recent accession of many new 

agencies in the program, and the fact that for some of the services these 

agencies provide there is no private sector equivalent that can be used for 

benchmarking. Ultimately, as more agencies become accustomed to 

accrual measurement, there is an expectation that they should be able to 

benchmark their prices. In theory, this will lead to the identification of 

efficiencies as agencies seek to compete with providers of similar services.

Agencies must produce a set of accrual-based financial statements at yearend. These statements are audited by the Netherlands Court of Audit and 

presented by mid-May for the fiscal year that ended the previous 

December. Budget development begins in the ministries about this same 

time and, as input to budget development, the agencies’ previous year’s 

statements are reviewed by the cognizant ministry, the Ministry of Finance, 

and ultimately the Parliament. An agency’s operating result is scrutinized to 

ensure that the appropriated price was sufficient to cover all costs and that 

the agency is not operating at a loss. 

A change was recently made to the way agencies finance future capital 

investments. Prior to the change, agencies accumulated depreciation 

funding until they could finance a capital investment. Agencies can now 

borrow money for such investments from the Treasury. Agencies will use 

their accumulated depreciation and other savings7

 to repay the loan. 

7

Also effective in fiscal year 2000, a 5 percent cap was placed on the amount an agency can 

carry forward from one year to the next, exclusive of depreciation. Reserves greater than 5 

percent of its total appropriation signal the need for the agency to lower its price 

(essentially its budget request).
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Since the agencies are still part of the public sector, significant controls are 

placed on their ability to freely manage all their assets including “savings” 

and capital assets. For example, any proposed capital acquisition is 

reviewed by an agency’s ministry to evaluate its relevance and need. 

Capital acquisition plans are presented through the agency’s budgeted cash 

flow statement. Any new loans are noted and plans for such financing are 

presented by the agency for approval to its ministry and then to the Council 

of Ministers. All capital acquisition requests must fit within the 

government’s financing constraints and thus the Ministry of Finance must 

also evaluate the effect the individual plans will have on the deficit before 

they can be approved.8

 Parliament reviews both the most recent audited 

financial statements and the budgeted financial statements that are used to 

develop the price paid to the agencies for their services. However, no 

specific vote is taken on an agency’s capital acquisition plan.

Starting this fiscal year—January 1, 2000—new agencies will have to pay 

for all assets on their balance sheets when they become agencies. In 

essence they are purchasing their assets from their ministries. These new 

agencies will be able to borrow from the Treasury to finance the initial 

asset purchase. The interest paid on the loans will approximate the cost of 

capital, i.e., the opportunity cost of holding the assets. The agency’s price—

and thus its appropriation—will include this cost of capital. Highlighting 

the cost of holding these assets provides incentives for the agency to better 

manage its capital base.

As in other countries, significant differences exist in the Netherlands 

between the cash needed for pension payments to retirees and the accrued 

costs of current employee pension liabilities. The Dutch public sector 

employee pension plan is separate from the rest of the government budget. 

For agency employees, the employer’s share of pension costs is transferred 

directly to this fund and invested. So, while accrued pension costs are 

included in the agencies’ appropriations, they are immediately transferred 

out of the agencies’ control to the general pension fund. 

Agencies are permitted to sell their services to entities other than the 

central government and earn additional revenues, but this has not yet 

occurred. For example, if the Prison Service finds itself with excess 

8

The deficit/surplus is still largely a cash-based number. Loans for new capital injections are 

considered outlays and are netted against payments made on existing loans to determine the 

net effect on the deficit/surplus.
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capacity it could take in prisoners from other countries and supplement its 

Dutch appropriation. However, the cognizant Ministry, the Council of 

Ministers, and the Parliament all have considerable influence over these 

transactions due to their oversight of the agency’s financial statements. 

Essentially, they must agree on the agency’s income statement and approve 

of its plans to take in more income. There are also rules that apply to 

ensure that these public sector agencies do not unfairly compete against 

the private sector, as agencies are not subject to taxation on this income as 

the private sector would be. Currently, the greatest concern is that any 

decision to offer services outside the Netherlands be weighed against the 

agency’s capacity to serve the Dutch people. For example, overcrowded 

prison conditions could result if the Prison Service management was driven 

by price competition alone.

Views on Implications 

for Decision-making

Although accrual budgeting is used for internal cost allocation, it has little 

impact on fiscal policy since the surplus/deficit is essentially a cash-based 

number. Accrual budgeting coupled with management reforms was 

primarily undertaken to achieve management efficiencies. The government 

believes that clearly specifying the outputs agencies are expected to 

produce and aligning resources to the outputs provides greater 

transparency in agency operations. Senior budget officials point to the 

Prison Service for examples of how such benefits could manifest 

themselves. When providing services—i.e., the number of prison beds per 

year—the outputs are spread throughout various facilities. According to 

these officials, the costs of housing, feeding, and guarding a prisoner 

should be similar for all facilities. But under the traditional cash-based 

framework, the costs differ primarily because of capital acquisitions or 

renovations. Accrual budgeting as implemented in the Netherlands seeks to 

even out those spikes. Once those costs are evenly allocated, if differences 

continue to exist, price benchmarking between prisons and other cost 

analyses can be performed that should encourage price competition. 

According to officials, this could lead to lower government expenditures. 

The selective approach to accrual budgeting taken in the Netherlands 

permits the benefits of accrual accounting to be realized for cost 

accounting purposes and for agency decision-making, while preserving the 

cash figure for comparative purposes within the European Monetary 

Union.
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Appendix V

New Zealand ApendxiV

New Zealand adopted accrual budgeting as part of a systematic program of 

sweeping reforms in both the private and the public sectors that started in 

1984. In the public sector, the government aimed (1) to reduce its role in the 

economy through corporatizing and privatizing government entities and

(2) to extract efficiencies and increased accountability from the remaining 

public sector. Accrual-based reporting was adopted as a tool in these wider 

management reform efforts. It was seen as providing a coherent framework 

for systematically determining the output of government, then evaluating 

performance and accountability in the new decentralized management 

system. Budgeting was transitioned to a full accrual basis to provide a 

direct link between the budget, the financial statements, and the results of 

government activities. 

Background New Zealand has a unicameral parliamentary system with 120 members 

elected for 3-year terms, with the most recent election occurring in 

November 1999. It has a mixed-member-proportional electoral system, in 

which half of Parliament is elected directly as district representatives, 

while the other half is appointed by each party from its own candidates in 

proportion to the percentage of the popular vote it receives. The 

government is headed by the Prime Minister who, along with other Cabinet 

members, can often make administrative or regulatory changes without 

public input or legislative approval. Prior to the change to proportional 

representation, the New Zealand government traditionally was controlled 

by either one of the two major parties—the Labour Party or the National 

Party. In 1996, as a result of the introduction of proportional representation 

that enabled minor parties to have greater representation in Parliament, the 

National Party entered into an agreement with the New Zealand First Party 

to form a coalition government. In 1999, another coalition government was 

formed comprising the Labour and Alliance parties.

The Budget Process The governing party or Coalition party in power has control over the entire 

budget process. The government, through the Department of the Treasury, 

prepares the budget for presentation to Parliament. Before the budget is 

released, the government releases the Budget Policy Statement (BPS) 

setting forth the strategic objectives for the upcoming fiscal year (which 

runs from July 1 to June 30) and the following 3 years. These objectives 

help define the framework within which new initiatives and programs 

proposed by departments are to be evaluated. New programs constitute a 

small part of the overall budget, as most of the budget goes to fund core 

services. New programs are proposed, considered, and approved prior to 
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the public presentation of the Budget Economic and Fiscal Update (the 

budget). The budget sets forth the government’s overall plan for revenues 

and expenditures that fulfills the strategic objectives announced in the 

Budget Policy Statement. The Minister of Finance also presents the 

Estimates of Appropriations, which provide detailed information by 

department and agency, to accompany the budget.

Concurrent with the presentation of the budget, the government is required 

to release the Fiscal Strategy Report (FSR) to report on whether the actual 

budget decisions contained in the budget are consistent with the 

government’s short-term fiscal intentions set out in the most recent BPS. 

Where those intentions have changed, the government is required to state 

the reasons for the departure. The FSR is to contain projections of fiscal 

trends over a ten-year period, as well as an assessment of the consistency 

of these outlooks with the objectives for medium- to long-term fiscal policy 

stated in the most recent BPS. Again, any inconsistency with the BPS has to 

be explained.

While the New Zealand Parliament has power to control government 

finances and appropriate expenses, in reality the budget is usually passed 

without much change. The failure to pass a budget would signal a lack of 

confidence and would likely result in the dissolution of the government and 

new elections. Standing committees in Parliament examine the budget, 

question ministers and departments about their requests, and report back 

to Parliament. Parliament may offer modifications to the government’s 

budget through procedures called “Standing Orders.” However, these 

orders also give the government a financial veto if Parliament’s changes 

would result in a significant impact on the “fiscal aggregates,” or overall 

financial position. During the parliamentary deliberation process, the 

government continues to operate through supply bills.1

The Economy and the 

Budget

From the mid-1980s to the early 1990s, the New Zealand economy 

experienced a prolonged period of very slow growth. In 1991, real gross 

domestic product (GDP) was less than 3 percent higher than in 1984, 

compared to an average increase of more than 20 percent for other 

Organization of Economic Cooperation and Development countries during 

the same period. Unemployment soared from less than 5 percent in the 

1

Supply bills allow government agencies to continue operations until permanent 

appropriations have been made by Parliament. 
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early 1980s to almost 11 percent in 1991. The economy rebounded starting 

in late 1991, led by strong export growth. Economic expansion continued 

until 1996, when the economy started to slow. More recently, the Asian 

economic crisis has negatively affected New Zealand’s growth. 

Budget deficits had characterized New Zealand’s fiscal position for almost 

two decades. However, deficit reduction efforts and a strengthening 

economy have led to the achievement of surpluses from fiscal year 1993-94 

through fiscal year 1998-99. These surpluses are measured on an accrual 

basis—as required by new legislation—as opposed to the cash basis used 

to measure fiscal position before fiscal year 1993-94. The surpluses, along 

with proceeds from privatization, have allowed the government to 

undertake substantial debt reduction. By 1998, net debt had declined to less 

than 25 percent of GDP from a level of more than 50 percent in 1992. 

Current projections estimate that the budget will be roughly in balance in 

fiscal year 1999-2000 before achieving surpluses again starting in fiscal year 

2000-01.

Recent Reforms Between the mid-1980s and mid-1990s, New Zealand implemented 

systematic and sweeping reforms in the private and public sector that 

transformed the country from one of the world’s most controlled 

economies outside the communist world to one marked by openness. 

Reforms affected every sector and reflected several elected governments’ 

views that economic openness and competition were the engines of 

economic growth. Financial reporting and budget process reforms were 

the least controversial of all of New Zealand’s efforts during this period.

Prior to 1984, the New Zealand government played a substantial role in 

providing goods and services. In addition to providing extensive subsidies 

to various businesses, the government owned coal mines, banks, airlines, 

telecommunications, and other industries that together produced more 

than 12 percent of GDP. Government policies also focused on maintaining 

the standard of living of New Zealanders through generous provisions for 

social programs financed by borrowing heavily from abroad.

The 1984 election brought a new government to power, along with an 

agenda that focused on introducing competition to a heavily regulated 

economy and dismantling the state’s involvement in the economic sector. 

To effect this, the government devalued and then floated the currency, 

opened financial markets to international capital flows and investment, and 
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deregulated major sectors of the economy. It also removed wage and price 

controls and reduced or eliminated subsidies from many industries. 

After introducing competition in the private sector, the government turned 

to reforming the public sector. The government’s goals were to reduce its 

size and to adopt modern management practices. The first major step taken 

to improving performance of the public sector was the State-Owned 

Enterprises Act of 1986, which organized departments with commercial 

activities into separate commercial entities and required them to adopt 

business practices, implement new accounting systems, and compete with 

private sector entities where applicable. Subsequently, the State Sector Act 

of 1988 sought to improve accountability and performance in the core 

public service by reforming it and replacing the permanent tenure system 

for heads of government departments with a contract system. The act 

specified that executives would be evaluated on the basis of their 

performance, and transferred the power to hire, fire, and determine pay 

levels to each chief executive. Thus, each chief executive is now the 

employer for his/her department. 

The Public Finance Act of 1989 furthered the move towards a new financial 

management system and enhanced the link between budget and 

performance at the departmental level by shifting to output-based 

appropriations for the delivery of services over which departments had 

control. 2

 As a result, at the department level, the measurement basis for 

budgeting, reporting, and performance assessment was shifted from a cash 

to an accrual basis.

In 1994, the Fiscal Responsibility Act (FRA) expanded the accrual-based 

framework to cover all government accounts so that programs such as 

transfers and loans (which were still being budgeted on a cash basis 

although they had been reported in financial statements on an accrual basis 

since 1992) were to be budgeted on an accrual basis. By establishing a set 

of guiding principles for fiscal decision-making and requiring extensive 

reporting of fiscal performance, FRA added a new dimension to reforms 

that were until then primarily oriented towards increasing accountability of 

departmental executives so as to extract better departmental management. 

FRA extended this accountability framework to the rest of the government 

by requiring that the government first articulate its fiscal strategy before 

2

The New Zealand framework differentiates between items controlled by departments and 

items administered by departments on behalf of the government. (See figure 11.)
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budget submission, and then report subsequently on its performance. 

Whereas in the past, performance and accountability applied to the 

micromanagement level, they now became characteristics of the fiscal 

framework as well. 

Use of Accruals in 

Financial Management 

Unlike most other countries that have chosen to take an incremental 

approach to implementing accrual-based reporting, New Zealand viewed 

accrual accounting and budgeting as a part of a coherent framework. 

According to New Zealand officials, the adoption of accrual budgeting was 

the least controversial element of the reform program. There was already a 

body of knowledge about the shortcomings of the cash system, as well as 

proven benefits from accruals provided by the experience of state-owned 

enterprises. Once a new direction was chosen, the government moved 

quickly towards implementation.

Implementation Timeline The transition from cash to a full accrual-based system of reporting and 

budgeting began in 1989.3

 Departments transitioned all key elements, 

including both accrual budgeting and accrual reporting, at the same time. 

Before moving onto the new system, departments individually had to 

receive approval from the Treasury, with the approval hinging on whether 

departments fulfilled specific requirements. Specifically, each department 

had to (1) define its broad classes of outputs (the basis for accrual-based 

appropriations), (2) develop an accrual-based system capable of monthly 

and annual reporting, (3) develop a cost allocation system to allocate all 

input costs, including depreciation and overhead, to outputs, and

(4) develop a system of cash management. At the end of 2 years, and before 

the start of the fiscal year 1991-92 budget process, all departments had 

completed the transition process. In the 1991-92 budget, departments were 

required to present accrual budgets for their core services using almost

800 output classes instead of the 50-plus departmental appropriations that 

existed prior to the transition to accrual budgeting. By the end of 1991, all 

but six departments had received unqualified audit reports. Once individual 

departments had transitioned into the new financial management system, 

the government as a whole focused on the aggregated financial reporting of 

the government. In October 1992, the government presented to Parliament 

3

Starting with the fiscal year 1989-90 budget, New Zealand’s fiscal year runs from July 1 to 

June 30. 
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the first comprehensive set of accrual-based annual financial statements 

for the fiscal year ending June 30, 1992. In 1994, following an amendment to 

the Public Finance Act, the government prepared and presented the entire 

budget, including loans and transfers, on an accrual basis, thereby 

completing the transition to the accrual-based framework.

The Public Finance Act distinguishes between three types of 

appropriations, known as Modes A, B, and C (see figure 9). The three 

modes range along a continuum, from appropriating for input costs to 

appropriating for output prices. The three modes recognize that 

departments are in different stages of adopting reforms and that some 

departments provide goods and services that are more commercial and 

subject to competition than others. By 1991, all departments had 

transitioned out of Mode A into Mode B, which is still the usual mode of 

appropriation. Departments have not yet transitioned to Mode C, although 

a number of features that were originally envisaged for Mode C (such as a 

cost of capital), now apply to Mode B.

Figure 9: The Three Modes of Appropriations

The Public Finance Act requires that the financial statements for the New 

Zealand government and for each government department be prepared in 

accordance with generally accepted accounting practices. Generally 

accepted accounting practices are financial reporting standards approved 

by New Zealand’s Accounting Standards Review Board from submissions 

by the Institute of Chartered Accountants of New Zealand or any other 

person or body. Rather than developing its own separate standards, the 

Under Mode A, departments are appropriated cash for the purchase of inputs, with 

separate appropriations for capital expenditures. 

Under Mode B, appropriations are based on all accrual costs, including noncash costs 

such as depreciation expense and capital charge, incurred in production of outputs. In 

practice, departments do not submit new estimates of costs every year. Instead, the 

full costs of producing outputs, derived from a cost exercise conducted in 1991, form 

the basis for current appropriation. Cost reviews are performed periodically, often at 

the request of departments.

Mode C is intended for goods and services that could be subject to competition. Under 

this mode, departments would be appropriated cash for the fair market price of outputs. 

They would pay interest, taxes, and dividends in order to be truly competitive with 

others (including private sector entities) that provide similar goods and services. 
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government adopted generally accepted accounting practices used by 

entities in the private sector for reporting. If necessary, Treasury officials 

would develop specific accounting policies within the public accounting 

framework through the New Zealand standards-setting process. Using the 

generally accepted accounting practices framework, Treasury officials 

developed accounting policies that (1) define the reporting entity, (2) 

specify a system for consolidating information, and (3) develop a format 

for presenting and publishing the government accounts. The Comptroller 

and Auditor General’s Office, the Finance and Expenditure Select 

Committee, and experts in the public and private sectors reviewed these 

policies as they were developed. 

Factors Driving Adoption of 

Accrual Budgeting

New Zealand’s approach to accrual budgeting is one of the most 

comprehensive of the countries that have implemented it to date. In part, it 

reflected the rejection of a cash system that was not providing proper 

information for the management of assets and liabilities. The fiscal system 

in New Zealand’s central government had traditionally focused on the 

annual cash cost of inputs such as personnel, travel, maintenance, and 

materials. As in most other countries, the government and Parliament 

exerted control over inputs by mandating the use of specific suppliers and 

regulated compliance through extensive instructions. Budgeting took the 

form of a set of appropriations of cash payments to recipients, to a 

government activity, or to a type of payment such as a grant or a capital 

payment. Managers focused on budget and legal compliance rather than on 

managing resources efficiently and effectively. The accounting system for 

the whole of government, including state-owned enterprises, was entirely 

cash-based. 

The previous cash-based system had several deficiencies, some of which 

were highlighted by the country’s reform agenda. According to officials and 

experts, the cash-based system was not providing crucial financial data on 

assets and liabilities to support the government’s “ownership” role and 

created incentives for poor resource management. Further, the government 

did not know the full cost of producing a good or service, which was 

fundamental to the government role as “purchaser” under a more 

decentralized management regime. 

According to New Zealand officials, under its previous cash-based system 

the government did not know what assets it owned, the value of these 

assets, and whether these assets were being put to the best use. For 

example, when officials in the 1970s wanted to sell spare land holdings, 
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they could not identify what land the government owned. The New Zealand 

cash system did not account for future liabilities arising from present 

commitments. The New Zealand government in the late 1970s provided 

guarantees to industries engaged in activities such as oil production aimed 

at reducing the country’s reliance on foreign sources. The guarantees cost 

the government of the day nothing; however, as oil prices fell, industries 

withdrew from those sectors and redeemed the guarantees. Subsequent 

governments had to pay the high costs of those commitments made by 

earlier governments. Similarly, the cash accounting system was arbitrary in 

its application of specific principles. For example, under the cash system, 

the calculation of the deficit included the effect of interest rate changes on 

the cost of servicing government debt, but did not incorporate the effects 

of exchange rate changes on the value of the debt. Accordingly, when the 

currency declined in value, the value of the debt in New Zealand dollars 

increased, making the debt more expensive. Because the cash basis failed 

to account for this effect, the government continued borrowing in lowinterest rate, strong-currency markets, without appropriate consideration 

and accounting for the risk involved in currency changes. 

Another rationale for moving the entire public sector to accrual accounting 

and budgeting came from the improvement in the performance of stateowned enterprises (SOE) when they adopted accruals. These entities had 

in the past produced no return to the government. After corporatization 

and the implementation of accrual accounting and budgeting, these entities 

started producing profits.4

 By 1992, SOEs were paying more than 

NZ$500 million in dividends, which were used to improve the fiscal 

position of the government. According to government officials, 

improvements in this sector were seen as an indication that management 

efficiencies could be achieved by moving departments to accrual 

accounting and budgeting as well. 

The final impetus, however, lay in the desire to tie budgeting to 

performance and accountability in a coherent framework. In this regard, a 

New Zealand government official stated that “there is much more to 

recommend the development of accrual accounting in government when it 

is implemented in the context of a regime which encourages management 

4

As extensive reforms occurred to SOEs at about the same time, it is difficult to draw a clear 

distinction between the benefits of corporatizing—putting SOEs on a commercial basis and 

forcing them to compete with private sector entities—and switching to accrual budgeting 

and accounting.
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performance.” In the new environment, the government defines strategies, 

which ministers translate into performance requirements (outputs) of the 

chief executives of departments. Under the reformed system, the 

government purchases these departmental outputs at an agreed upon price. 

Thus, output pricing is crucial. To properly determine the output price, the 

government needed to account for all output costs, not simply the cash 

flows in any given year. According to an architect of the New Zealand 

system, the accrual framework was chosen not “because it was better 

accounting, but because it was an integral part of the management 

framework” that the government was trying to install. 

According to officials we interviewed, once the decision was made that 

accrual information would form the basis of reporting, they viewed it as 

crucial that it also become a key budgetary tool. A former official who was 

a key champion of the adoption of accrual budgeting stated that “accrual 

accounting for the whole of government will not amount to much more 

than an interesting accounting exercise unless the information is used for 

the purposes of economic management.” Officials in New Zealand did not 

believe that accrual-based financial reporting alone would create 

incentives to manage programs more effectively. Further, they noted that 

even departments that were able to prepare financial statements had no 

incentive to do so unless they formed the basis of accountability, by tying 

actual performance to what was expected as represented by the budget. 

Officials we spoke with also stressed the importance of following existing, 

widely accepted private sector standards. They pointed to relatively few 

exceptions where private sector standards failed to meet public sector 

needs. Such standards are preferable because they increase accountability 

by ensuring that more people would be informed and able to scrutinize the 

financial position and performance of the government.

The Audit Office provides its opinion on the financial statements through 

audit reports.5

 In addition, the Audit Office is heavily involved with the 

Treasury in the development of the accounting policies of the Crown. 

Financial statements of SOEs and Crown entities are audited separately, 

5

The Public Finance Act of 1977 established the Audit Office to provide independent 

information, assurance, and advice to Parliament. The office’s current functions include 

performing and reporting on results of audits of financial statements and service 

performance information, and reporting on matters arising from audits generally. In 

addition, the Audit Office undertakes special audits regarding matters of concern identified 

by select committees, the public, or the Audit Office itself. 
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and their results of operations are reported in the Financial Statements of 

the Government of New Zealand. 

Summary of Accrual 

Budgeting System

The New Zealand system makes a distinction between two roles of 

government: as purchaser of goods and services and as owner of assets 

used to provide those goods and services. Given its dual role as owner and 

purchaser, the government is not only interested in the services that are 

being rendered, but also the maintenance of an asset base to ensure the 

sustainability of these services. New Zealand’s accrual-based framework 

encompassing output-based budgeting and accrual-based measurement in 

both financial reporting and budgeting is viewed as crucial in providing the 

information and incentives needed to make this dual role work.

Structure of Appropriations Appropriations are generally limited to 1 year, consistent with the annual 

budget cycle, and cover proposed expenses.6 Multiyear appropriations are 

rare and arise when Parliament wishes to signal a commitment that 

requires appropriations for more than 1 year. As shown in figure 10, the 

government’s budget is presented by three primary statements similar to 

those found in private sector reporting: the Forecast Statement of Financial 

Performance, the Forecast Statement of Financial Position, and the 

Forecast Statement of Cash Flows.

6

However, since appropriations cover noncash expenses such as depreciation, departments 

may carry cash balances.
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Figure 10: The Three Primary Statements Used to Present the Budget

In addition, the government also submits the Forecast Statement of 

Borrowings, the Statement of Commitments, and the Statement of Actual 

Specific Fiscal Risks. The Statement of Borrowings reports on the net debt 

of the government. The Statement of Commitments reports on the 

commitments of the government for future years, broken down into capital 

commitments, such as military equipment, and operating commitments, 

such as noncancelable leases.7

 These statements provide aggregate data at 

a high level, while the Estimates of Appropriations that accompany the 

above statements break down the budget request to detailed objectives and 

outcomes of the government and provide details on departments’ and 

agencies’ outputs. As shown in figure 11, there are seven types of 

appropriations. The funding request for each appropriation reflects the 

results of the purchase agreement between department executives and 

ministers, whereby the latter define the output to be provided and specify 

the quantity and quality. While department managers and ministers have 

authority to shift resources within each type of appropriation as long as 

they deliver the agreed upon outputs, ministers do not have the authority to 

transfer resources between types of appropriations without the consent of 

Parliament. 

7

This statement does not provide estimates of commitments for social insurance, which 

operates on a pay-as-you-go basis out of general revenue.

Forecast Statement of Financial Performance reports estimated revenues and 

expenses by major revenue classes and by functional classification, respectively. The 

operating balance is defined as revenues less expenses of departments, plus the 

results of operations (less any dividends) from SOEs and Crown entities. The 

statement also reports on actual financial performance for the previous fiscal year, as 

well as forecast performance for the 3 upcoming fiscal years.

Forecast Statement of Financial Position shows estimated assets and liabilities as of 

the end of the fiscal year. The statement also reports on actual financial position for the 

previous year, as well as forecast position for the 3 upcoming years. 

Forecast Statement of Cash Flows shows the cash inflows and outflows for the 

budget year, the previous year, and the 3 upcoming fiscal years. The statement also 

provides a reconciliation between the forecast operating balance and the forecast net 

cash flows from operations.
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Figure 11: The Seven Types of Appropriations

Appropriations are provided for the total cost of outputs, including salaries 

and wages, as well as other costs not requiring cash outlays, such as 

depreciation. The cost of output also includes a cost of capital charge—

akin to an interest charge for using capital—levied on departmental net 

assets to reflect the full cost of government services and to create an 

incentive to (1) more efficiently use assets and (2) dispose of surplus assets 

by making it more expensive to own assets of low utility. 

Treatment of Specific 

Budget Items

As mentioned above, the treatment of budget items follows generally 

accepted accounting practices. This means that assets are capitalized and 

depreciation expense recorded over the life of the asset. Liabilities are 

recorded when they become probable and measurable. Our review, 

including interviews with New Zealand officials, showed that specific 

budget items are treated as follows.

• Public sector employee pension: Under accrual budgeting, each 

department transfers an actuarially derived amount equal to future 

pension benefits earned during the year to the Government 

Superannuation Fund, i.e., the Public Employee Pension Fund. This 

Outputs: for classes of outputs to be supplied by departments and purchased by the 

Crown from other organizations or persons.

Benefits: for programs such as unemployment that departments have no direct control 

over, but administer on behalf of the government.

Borrowing expenses: for payments of interest, premiums, borrowings, and other 

finance costs.

Other expenses: for costs that could not reasonably be passed on to a third-party, such 

as restructuring costs, litigation costs, and loss on sale of fixed assets.

Capital contributions: for any increase in departments' net asset holdings or an 

investment of capital into an SOE, a crown entity, or an individual (e.g., a student loan).

Purchase or development of capital assets: to fund activities related to assets 

undertaken by the Crown, such as construction of state highways, national parks, or 

Parliament buildings. 

Repayment of debt: to repay debt of the Crown.
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amount is recorded as an expense on each department’s financial 

statements and budget. The accumulated total of each department’s 

expense is recognized as an expense (a debit) on the government’s 

Statement of Financial Performance. A corresponding liability (a credit) 

is added to the existing pension liability from past services already 

recorded on the Statement of Financial Position, while cash outlays to 

current pensioners are recognized as reduction to pension liability. The 

movement in pension liability thus reflects the combined effects of cash 

outlays and current expense.

• Capital: New Zealand’s appropriation for capital is divided into two 

categories: (1) appropriation for any increase in departments’ net asset 

holdings, and (2) appropriation to fund activities related to assets 

undertaken by the Crown, such as construction of state highways, 

national parks, or Parliament buildings. New Zealand’s cash 

appropriation to departments includes funding for noncash items such 

as depreciation expense. Managers have the freedom to optimize their 

asset base, which includes purchasing replacement assets by using 

funds accumulated from this depreciation expense. Managers with 

adequate reserves have the discretion to purchase assets up to a 

NZ$7 million limit, while those seeking to purchase assets between 

NZ$7 million to NZ$10 million must seek ministerial approval, even if 

they have enough reserves. Departments with inadequate funds to 

replace assets must request a capital injection—an appropriation for the 

difference between funds required and available reserves. Asset 

purchases over NZ$10 million must receive Cabinet approval, whether 

or not departments need a cash injection. To further encourage better 

management of assets, the government implemented a cost of capital 

charge on the net assets of the department. The capital charge is used to 

derive the cost of the output, thus the cash appropriated to departments 

includes the capital cost. Assets undertaken by the Crown are managed 

by departments on behalf of the Crown. In these instances, departments 

receive cash appropriation for the administrative costs of managing 

these assets, and not the depreciation expense, as decisions to replace 

these assets are made by the Crown and not by individual departments.

• Inventories: Inventories are recorded as assets in accordance with 

generally accepted accounting practices at the lower of cost or net 

current value, with appropriate allowances for obsolescence.
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• Insurance, loans, and guarantees:

8

 The Accident Compensation 

Corporation, New Zealand’s major insurance program, covers all types 

of insurance including motor vehicle, on-the-job injury, and others. 

Starting with the fiscal year 1999-2000 budget, accident insurance is 

recorded on an accrual basis in the budget. An expense is recorded at 

the net present value of the estimated cash outflows of claims filed 

during the year, plus a small estimate based on historical data on the 

value of accidents that had occurred but had not been filed in the year. 

For fiscal year 1999-2000, the government also booked, in its Statement 

of Financial Position, a change in the Crown balance due to the 

recognition by the Accident Compensation Corporation of the estimated 

liability from past accidents. Loan programs are appropriated to 

departments as a capital contribution. Loans are recorded on the 

Statement of Financial Position at the recoverable value that includes an 

estimate for uncollectibles. Bad debt expense is recorded the year the 

loan is issued.

• Social insurance: The old-age pension program operates on a pay-asyou-go basis out of general revenue. New Zealand does not report a 

liability for commitments for this program. 

• Revenues: Revenues are measured on an accrual basis and recognized 

at the point the debt to the Crown arises, for example, when an 

individual or company earns income that would be subject to tax. This 

means that taxes on income or goods and services that are deducted 

directly at the source are recognized when the transaction is forecast to 

occur. Other taxes are not recognized until an assessment is made by the 

revenue department or filed by the individual or company. The power to 

tax is not recognized as an asset because the criteria for recognizing an 

asset is not properly satisfied since the transaction that gives rise to the 

revenue has not occurred, nor could its value be measured reliably. 

8

Better disclosure of contingent liabilities helped point out the risk involved with the 

provision of government guarantees. Currently, guarantees are not a material item on the 

government’s balance sheet.
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Aggregate Budget Measure Multiple measures are used to evaluate New Zealand’s fiscal position. The 

primary measures are the operating balance,9

 the debt to GDP ratio, and 

net worth. The operating balance became one principal measure of the 

fiscal position when FRA made mandatory the use of accrual accounting 

standards for fiscal forecasting purposes. Under FRA, the government is 

required to present, in every budget, 3-year projections of government 

finances using the three principal financial statements described earlier. By 

requiring accrual-based budgets for the current year as well as the forecast 

budgets, FRA’s intent was to increase both the transparency and credibility 

of the public accounts. The main differences between the accrual operating 

balance and the traditional cash balance are depreciation, changes in the 

pension liabilities of public employees, changes in working capital such as 

receivables and payables, and changes in the valuation of forests owned by 

the Crown. In addition, except for gains or losses, the accrual operating 

balance excludes the cash effects from the purchases or sales of assets. 

In addition to the operating balance, New Zealand also emphasizes the debt 

to GDP ratio—a cash measure—as a key indicator to track the 

government’s impact on the economy. According to government officials, 

the reason for focusing on debt was because a small and open economy 

like New Zealand needs to attempt to maintain a low debt to GDP ratio to 

be able to respond to future economic shocks. Officials and experts we 

interviewed explained that setting a debt to GDP ratio guided the 

subsequent determination of the operating balance. It also helped keep the 

government focused on maintaining surpluses and in articulating the need 

for running sustained operating surpluses. 

9

The operating balance is an accrual measure of the results of the operations of the New 

Zealand government for a fiscal year. It is the difference between revenue, calculated on an 

accrual basis, and expenses, also calculated on an accrual basis. The accrual operating 

balance is derived through inclusion of transactions such as depreciation and revenue 

receivable. Although these transactions did not result in cash outlays or receipts, they were 

the results of current year’s operations. 
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Net worth, i.e., the difference between assets and liabilities, was also used 

at times to gauge fiscal performance. According to government officials, 

the changes in net worth allow government officials and other experts to 

analyze the government’s fiscal performance over time. An increasing net 

worth can indicate improved financial position, while a decreasing net 

worth may signal the need for government to take actions to address 

shortfalls in assets or increases in liabilities. Furthermore, changes in net 

worth may be used to assess the fiscal sustainability of government 

programs because liabilities used to calculate net worth reflect the 

estimated commitment that the government had made in the past.10

Key Differences Between 

Accrual and Cash

Figure 12 shows the reconciliation between the operating balance and the 

adjusted financial (cash) balance. Key differences between accrual and 

cash relate to the timing of the recognition of revenues and expenses. The 

greatest timing difference between accrual and cash occurs in the 

recognition of pension expense, depreciation expense, and the purchase of 

assets. Timing differences mean that the bottom line—the surplus or 

deficit—is affected in either direction by accrual or cash depending on the 

activities undertaken by the government in a particular year. For example, 

cash outlays for the purchase of assets decrease the surplus (or increase 

the deficit) in the year the cash is paid under a cash system, but have no 

effect under an accrual system. In succeeding years, as the asset is put into 

service, depreciation expense decreases the accrual-based surplus (or 

increases the accrual-based deficit), but has no effect on the cash balance. 

In most instances, because the cash basis tends to recognize large capital 

items all at once while the accrual basis spreads the cost of purchases over 

the useful lives of the assets, accrual measurements generally smooth out 

expenses if capital purchases are not made at a constant level year after 

year. 

10As noted previously, this does not include social insurance commitments.
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Figure 12: Reconciliation Between Operating Balance and Adjusted Financial 

Balance (Cash)

During the period from fiscal year 1994-95 through fiscal year 1997-98, the 

accrual operating balance differed from the cash balance, but the 

differences varied in magnitude and direction. In fiscal year 1995-96, the 

accrual operating surplus exceeded the cash surplus by about 3 percent of 

GDP, with the difference attributable in part to the purchase and sale of 

investments. In fiscal year 1996-97, the government achieved a cash surplus 

that exceeded the accrual operating surplus by almost 2.7 percent of GDP, 

due primarily to the sale of physical assets. In fiscal year 1997-98, the 

government actually achieved an accrual operating surplus but was in cash 

deficit, primarily because of purchases of investments and physical assets 

(see figure 13). 

Operating Balance (Accrual)

+/- Changes in noncash expenses (statement of financial performance):

+ Depreciation

+/- Unrealized losses/(gains)

+/- Net deficit/(surpluses) attributable to SOEs and Crown entities

+/- Net losses/(gains) on foreign exchange

+/- Increase/(decrease) in pension liabilities

+/- Other noncash items (e.g., cost of capital)

+/- Movements in working capital (statement of financial position):

+/- Decrease/(increase) in taxes receivable

+/- Increase/(decrease) in payables

+/- Decrease/(increase) in other receivables

+/- Decrease/(increase) in inventories

+/- Other items

 +/- Sale/(purchase) of assets

 +/- Other investing items

= Adjusted Financial Balance (Cash)
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Figure 13: Accrual Operating and Adjusted Cash Balances, Fiscal Years 1994-95 

Through 1997-98

Note: In 1994, the New Zealand government changed its definition of surpluses/deficits from a cash 

basis to an accrual operating balance basis. The adjusted cash balances from fiscal years 1994-95 

through 1997-98 are our calculations and reflect the cash flows from operating and investing activities, 

which approximate the adjusted financial balance used to measure surpluses/deficits prior to 1994. 

However, some additional adjustments are necessary to arrive at an exact measure of the adjusted 

financial balance.

Source: New Zealand Treasury.

Views on Implications 

for Decision-making

It is difficult to isolate the effects of the adoption of accrual budgeting from 

those of the extensive public sector reform that occurred in New Zealand. 

It is also difficult to determine whether benefits attributed to accrual 

budgeting would have occurred with accrual accounting alone (i.e., 

without accrual budgeting). Since the New Zealand government never 

considered budgeting and accounting on different bases, when officials 

spoke of the benefits of accruals, they usually were referring to the benefits 

from both accrual accounting and budgeting. Some of the benefits for fiscal 

and managerial decision-making attributed to the accrual framework 

included

-1

0

1

2

3

4

5

1994-95 1995-96 1996-97 1997-98

Fiscal year

Percentage of GDP

Adjusted cash balance Operating balance
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• encouraging more fiscally responsible decisions through better 

recognition of assets and liabilities; 

• providing better information and incentives for asset management by 

recognizing the cost of capital asset use through the depreciation and 

capital charging regime;

• enabling departments to make efficient decisions when faced with a 

budget squeeze by improving cost recognition, thus helping to pinpoint 

inefficiencies; and

• encouraging better financial reporting discipline and the development of 

modern financial practices and systems.

As discussed later in this section, some critics have voiced concerns that 

managers have too much flexibility to make decisions that properly belong 

in the legislative arena. Others felt that the change in the basis of reporting 

and the emphasis on accrual rather than cash made it more difficult to 

assess the government’s impact on the economy. Further, some disagreed 

that accrual budgeting improved transparency, noting that the use of 

accruals requires a more sophisticated understanding of financial issues 

because accrual measurement is based on technical standards and 

underlying professional judgments and assumptions.
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According to a former minister, the greatest impact on fiscal policy from 

the introduction of the accrual framework has been to emphasize issues of 

sustainability by bringing greater attention to liabilities. In his view, 

recognizing and recording a long-term liability on the balance sheet causes 

greater fiscal caution and budget discipline. Under the cash budgeting 

system, parliamentarians were generally aware of the consequences of 

actions that have a future impact on the budget, but without the reporting 

requirement for liabilities embodied in accrual accounting standards, 

politicians were able to discount the magnitude of future liabilities in favor 

of funding current popular programs. For example, under the previous 

system the magnitude of government commitments to public sector 

pensions was recalculated and reported to Parliament every 5 years. 

However, since the liability was not a current estimate, it did not play a 

significant role in the budget debate. Consequently, politicians did not use 

it to argue convincingly for fiscal prudence when pushed by employee 

representatives to expand program benefits. Reporting the liability on the 

balance sheet annually as required by accounting standards made the longterm commitment more visible, and gave the government support, 

grounded in analytical data, for making difficult decisions. This former 

high-ranking official also told us that recognizing more than NZ$7 billion of 

public sector pension liability raised concerns in the government about the 

sustainability of the program. Subsequently, the government first refused to 

increase benefits and later closed the centrally operated, defined-benefit 

plan to new employees.11 Similarly, the government ceased offering 

earthquake insurance to businesses once the liabilities of the program were 

reported on the balance sheet. 

On the managerial side, current officials credited accrual-based budgeting 

with generating better information and creating the proper incentive for 

better asset management. To create the beginning balance sheet, an 

extensive exercise was conducted to find and value government assets. 

The exercise confirmed that where records of assets existed, they were 

woefully inadequate. Some organizations, such as the Department of 

Education, found assets that they were unaware of owning. While the most 

valuable assets were land and buildings, departments also found they had 

significant other assets. For example, the asset identification exercise 

found that unpaid fines due to the Department for Courts were a significant 

asset to that department’s balance sheet. Subsequent attention prompted 

11The government allowed departments flexibility to offer pension plans in wage 

negotiations, as long as they were defined-contribution plans.
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the department to actively manage this asset by replacing the traditional 

collection methods with direct payment systems at courthouses and 

computerized call centers for tracking slow payers. 

In addition, officials viewed the introduction of the capital charge as a 

significant incentive for better asset management. As mentioned 

previously, while the department is appropriated the capital charge as part 

of the price of its output, it must pay the cost of capital back to the 

government. If a department has a smaller asset base at the end of the year 

than the asset base for which the appropriation was made, the department 

is permitted to keep part of the capital charge. The consensus among 

officials we interviewed was that the capital charge had substantially 

reduced the amount of idle assets held by departments. However, other 

analysts argued that the capital charge might have driven department 

executives into making rational short-term decisions that could be 

damaging to the long-term sustainability of departmental operations. For 

example, an audit official informed us that partly to avoid a higher capital 

charge, one department has not replaced its assets, but instead has 

continued to operate with obsolete and fully depreciated assets, a move 

that enabled it to service more clients in the short run, but compromised its 

ability to deliver the best service in the long run. 

Recognizing depreciation as an expense in the budget also was cited by 

some supporters of accrual budgeting as changing decision-making to 

result in more efficient asset use. Because departments are paid to produce 

outputs, the government has taken a hands-off approach on how 

departments manage inputs to produce those outputs. Since output prices 

are revised only periodically, departments may receive appropriations 

covering depreciation on assets that have been totally depreciated or assets 

that have been disposed. If a department is able to reduce an input cost 

such as depreciation expense while its price level stays the same, it can 

save that money to fund future replacement of an assets, or alternatively, it 

may use that money to fund other expenses such as additional personnel or 

salaries.
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Others, however, expressed skepticism about the desirability of a 

depreciation regime. Some felt that giving managers the discretion to apply 

reserves built from depreciation expenses toward asset replacement 

amounted to giving executives too much freedom to make allocation 

decisions.12 Others felt that the depreciation regime might impede efficient 

replacement of assets.13 For example, officials in the New Zealand Defence 

Force informed us that in a technology-intensive environment, asset prices 

tend to increase commensurate with improving technology. In this 

environment, accumulated depreciation would never be adequate to fund 

asset replacement, thus requiring capital injections in almost all 

circumstances.

Some officials noted that adopting accrual-based budgeting was also 

valuable in ensuring fiscal discipline and improving the ability to maintain 

surpluses. Since 1991, New Zealand has maintained the core budget of each 

department at a constant nominal level, allowing almost no room for 

increases. Departments desiring additional funding had to deliver 

additional output or present convincing arguments as to why they could 

not extract additional efficiency from their organizations. According to a 

former Finance Minister, under a cash system the government could 

arbitrarily impose a budget squeeze on departments, but that could also 

cause arbitrary cuts to otherwise crucial programs. In contrast, because of 

the availability of cost information in the accrual budgeting framework, 

officials were able to identify and either cut or improve the efficiency of 

less efficient areas instead of sacrificing an area that was fundamental to its 

ability to deliver agreed upon outputs. While this is the generally accepted 

theory, some New Zealand experts have raised concerns that departments 

may have reached the limits of their abilities to “squeeze out” efficiencies 

and have begun to run down their capacity—by failing to replace or 

maintain both physical and human capital—in their drive towards 

efficiency.

12In New Zealand, decisions about individual asset purchases are made by the executive 

government and approved at an aggregate level by the legislature.

13According to Treasury officials, departments that did not efficiently and effectively replace 

assets could face operational difficulties, which could result in sanctions for their chief 

executives for poor performance. 
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In general, economists we interviewed felt that the new framework 

provided useful information to analyze the government’s effectiveness in 

managing the country’s finances. However, some said that the accrual 

accounting and budgeting framework, particularly the focus on the net 

operating balance and output appropriations, fails to provide adequate 

information with which to make informed analysis about the effect of 

government policies on specific sectors of the economy. Although the cash 

flows statement provides data on cash inflows and outflows, these data are 

available only on an aggregate level. Consequently, analysts informed us 

that they were unable to determine how much cash was spent, for example, 

on the transportation sector, and thus they were unable to determine the 

effect that such spending had on economic growth. These analysts believed 

that sector-specific details on cash inflows and outflows, as were provided 

under the cash basis, would greatly assist them in analyzing the effects of 

government spending.14 Others told us that using net worth to measure 

sustainability was flawed because (1) the objective of the government is 

not to operate at a profit, (2) some government assets are difficult to value, 

therefore net worth may be misstated, and (3) a focus on net worth tends to 

direct the government towards implementing financial rather than fiscal 

policies. A former Secretary of the Treasury responded that the debate on 

whether cash or the accrual-based operating balance should be used to 

measure fiscal position is based on the “misplaced desire to look at accrual 

accounting information as if it were the be-all and end-all to fiscal 

management, instead of looking at accrual as another set of data that 

facilitates exercises on comparability.” Officials acknowledged that an 

accrual-based net worth number is necessarily based on some underlying 

assumptions and professional judgments. However, they emphasized that 

what is most important is not the absolute level of net worth, but the ability 

to track trends in net worth as an indicator of the government’s fiscal 

condition using consistent standards. Further, officials stressed that the 

government continues to monitor its cash needs through the cash flow 

statement. 

Parliamentarians we interviewed were generally supportive of the new 

accrual framework and welcomed the additional information it provided. 

While most admitted to not fully understanding the intricacies of accrual, 

they generally felt comfortable with accrual principles and the quality of 

information provided. However, some expressed concerns about 

14New Zealand officials countered that information on the cash flows of each entity is 

published annually and can be extracted and collated by private sector analysts. 
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accountability under an output-based appropriation framework because 

defining output is complex, and departments have incentives to revise 

those definitions, so that tracking accountability can be difficult.

Treasury officials believed that reporting under the accrual budgeting 

framework enhanced accountability. According to these officials, financial 

systems were no longer designed in house; instead, departments acquired 

modern, off-the-shelf financial systems to enable them to provide 

sophisticated financial information to the Treasury in a timely manner. 

Such information, which is now available each month, allows analysts to 

conduct financial analysis and provide early notice of departments at risk 

of not meeting their output agreements. In contrast, under the previous 

system, financial data were not available until the end of the fiscal year and 

indications that a department may be at risk of breaching its cash 

appropriation were not available on a timely basis. 

Implementation Issues Implementation issues in New Zealand can be organized into three groups: 

(1) transitional issues, which relate to timing, skills, and resources 

necessary to implement accrual, as well as issues related to asset 

identification and valuation, (2) issues that relate to accountability and 

parliamentary control, and (3) ongoing challenges, including output 

pricing, asset management, and the capital base. 

Transitional Issues Officials told us that although timing, skills, and resources to implement 

accrual budgeting were initially considered problematic, they were 

generally resolved without too much difficulty. According to a former 

Treasury official, though the targeted transition period was considered 

optimistic, all departments made the transition to accrual within the time 

frame specified. In addition, though departments were not given additional 

resources to fund the development of new accounting systems but instead 

were expected to recoup the cost from efficiency gains, freeing 

departments from the cumbersome regulations of the old cash process was 

one such source of efficiency gain. In addition, the new integrated 

accounting system substantially reduced processing and reconciliation 

problems, thereby freeing resources for other purposes.

A major challenge throughout implementation was to ensure that the 

opening balance sheet was as accurate as possible. The accuracy of the 

balance sheet was particularly important given that it provided the 

foundation for amounts, such as depreciation and capital charges, that 
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under the new regime were to be included in the budget. Since government 

entities were previously less concerned with managing assets, the existing 

information on both the ownership and valuation aspects of assets was 

inadequate. Departments and auditors found it particularly difficult to 

ensure that all properties were reported. Officials explained that there was 

a lot of fine-tuning of the reported asset values in the early years of 

implementation, but that the problem was substantially resolved after 

several years of experience.

A key factor in the successful move to accrual budgeting was the strong 

support both from the political leadership and within the bureaucracy. 

Politicians’ needs for better financial and managerial information provided 

the impetus behind the passage of the Public Finance Act of 1989, with 

decisionmakers committed to ensuring that the implementation was 

successful. Once departments realized that performance management, and 

the accompanying accrual framework, was not going away, momentum for 

its implementation was established. Peer pressure was brought to bear, as 

chief executives operating under 5-year contracts had an incentive to 

ensure that they quickly and effectively transitioned to the new 

environment. 

Officials also attributed implementation success to the adoption of private 

sector accounting standards. Whereas in the past, budget officials received 

special training in cash budgeting, now a larger pool of potential employees 

exist who have already been educated in the common accounting 

standards used in both the public and the private sectors. In addition, 

managers were given more freedom to hire from this larger available 

human resources pool. 

Parliamentary 

Accountability and Control 

Ten years after implementing accrual budgeting, tension continues to exist 

between accountability and control. At its core, the accrual-based 

framework was designed to give more flexibility to managers in exchange 

for more information to Parliament and the public. However, discussions 

continued as to how much decision-making freedom to give managers. One 

issue that illustrates the tension between managerial autonomy and 

parliamentary control is the proposal that departments be able to retain 

surpluses achieved through efficiencies and cost reductions. From a 

managerial standpoint, being able to retain surpluses increases the 

incentive to be more efficient, more innovative, and more results-oriented. 

From the point of view of Parliament, retention of surpluses undercuts one 

of the fundamental principles of public expenditure, i.e., that money is 
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appropriated for specific purposes. While using its efficiency gains to 

provide more of its own output may be desirable from a department’s point 

of view, it may not be in the collective interest for the government to devote 

the department’s efficiency gains to that output because priorities may lie 

elsewhere. For example, there is no governmentwide policy to reinvest 

savings in the same area where the savings were made. Government 

reserves the right to invest departmental savings in other high priority 

areas. Experts we interviewed admitted that this continues to be a difficult 

area to resolve. 

Another area that illustrates the tension between parliamentary and 

managerial control is capital, specifically the question of who should 

decide the proper mix of capital. From a managerial standpoint, 

depreciation measures the cost of resource consumption. However, 

providing depreciation expense to departments in the form of cash is 

tantamount to giving free rein to managers, who may elect to use the 

funding to finance other activities in the short term. Under the cash system, 

parliamentarians through their legislative authority to appropriate funds 

could determine whether and when asset purchases could be made. Under 

the new environment, they no longer play this role. 

Output pricing is another area that not only presents practical 

implementation difficulties, but also has implications for parliamentary 

control. Some officials in the legislative branch felt that the focus on output 

instead of input controls might provide opportunities for departments to 

mask data. This is because the new reporting framework does not routinely 

provide information on the mix of input used to produce each specific 

output. For example, social work services to children and young persons is 

one output requiring an appropriation of almost NZ$190 million. Although 

the output is defined by various performance standards, such as the 

number of notifications investigated or the number of orders in force, the 

appropriation documents provide no detail as to the mix of personnel, 

overhead, or technology used to provide the output. Consequently, it can be 

difficult to determine whether an output was achieved by extracting 

efficiencies, or by running down and not replacing needed assets. 

Furthermore, as departments redefine outputs over time, the lack of input 

information makes it even more difficult to compare performance on a 

consistent basis. In addition, output classes are inconsistent—some are 

broad, whereas others are detailed—making meaningful comparisons 

within and across departments challenging. While Parliament has tried to 

better monitor performance and sometimes relied on auditors’ reports, 
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officials cited difficulties in achieving optimal oversight over departments 

that have been given a great degree of managerial discretion. 

Ongoing Implementation 

Challenges

Issues related to output pricing, asset management, and the capital base 

represent ongoing challenges to government officials. New Zealand’s 

accrual-based budgeting framework is premised on the ability of 

government in its purchaser role to adequately assess the price and quality 

of outputs. However, while pricing outputs for state-owned enterprises is 

possible because private sector comparisons can be made, pricing outputs 

for unique government services that have no comparable alternative in the 

private sector continues to present a tremendous challenge. In instances 

where prices could be derived, judging the quality of the output produced 

presented additional challenges. For example, although it is possible to 

accumulate the cost of policy advice across government for comparison 

purposes, the quality and relevance of such advice is harder to evaluate. It 

is thus difficult to judge when a price is right, when the price is too high, or 

when the price is too low. 

Asset management was also cited as a difficult area. According to several 

Treasury officials, the difficulty arose from the decision not to optimize the 

asset base at the time of the switch to accrual budgeting. Because the new 

framework assumed that departments started out with the capital 

necessary to ensure sustainability of their activities, departments found it 

difficult to argue for capital injections to purchase additional assets, thus 

discouraging departments with legitimate capital needs from seeking 

additional appropriations. Over the last several years, we were told, major 

equity problems have arisen. Departments that were asset-rich when the 

new system was implemented were able to maintain and even expand their 

asset bases, thus delivering quality service. Asset-poor departments have 

continued to run down their asset bases. Officials found that some assetrich departments have been able to install up-to-date computer systems 

because they accumulated depreciation funding. In contrast, an asset-poor 

department that could not accumulate much depreciation funding did not 

have an adequate computer system and therefore no longer maintained 

information on its caseload on-line. Officials also warned that several 

departments were not able to accumulate adequate depreciation expense 

to fund new assets, and therefore had continually run down their assets 

and would require capital injections in the near future.
Page 201 GAO/AIMD-00-57 Accrual Budgeting

Appendix VI

United Kingdom ApendxiVI

The United Kingdom’s shift to accrual reporting and budgeting has 

progressed over several years, coinciding with a series of broader reform 

efforts aimed at improving the nation’s economic health and public 

management regime. The United Kingdom’s accrual framework, known as 

Resource Accounting and Budgeting, applies commercial style accounting 

practices to central government financial reporting and to budgeting. 

Subject to Parliament’s approval, resource budgeting is to be in effect from 

financial year 2001-02. As currently proposed, resource accounts consisting 

of five financial schedules prepared on an accrual basis are to replace the 

traditional cash-based appropriation accounts and become the main form 

of accountability to Parliament. Parliamentary approval for departmental 

funding is expected to operate on a dual cash and accrual basis.

Background The United Kingdom is a unitary state composed of England, Scotland, 

Wales, and Northern Ireland.1 There are two main levels of government—

the central government and local authorities. The central government has 

direct or indirect control over most government revenues and spending, 

while local authorities are primarily responsible for service delivery in 

education, housing, and social services. 

Governmental Structure The government is a parliamentary system, with a Parliament composed of 

two chambers—the House of Lords and the House of Commons. The focus 

of parliamentary control lies with the House of Commons, which is 

comprised of approximately 659 elected members. It is responsible for the 

passage of legislation and scrutiny of public administration, with sole 

legislative responsibility for budget matters. The House of Lords has 

relatively limited powers in the legislative process and virtually no power 

with respect to budget matters. The government is headed by a Prime 

Minister, who is the leader of the majority party in the House of Commons, 

and an appointed cabinet of about 20 members, who are also members of 

Parliament. A general election is held at least once every 5 years. 

Two political parties—the Labour Party and the Conservative Party—have 

dominated British politics. The current Labour government, headed by 

Prime Minister Tony Blair, was elected in 1997. Prior to Labour’s taking 

power in 1997, the Conservative Party had held power since 1979. 

1

The government has devolved powers to Scotland, Wales, and Northern Ireland. 
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The Budget Process The governing political party effectively controls the entire budget process. 

The Treasury serves as the primary control point for spending and tax 

decisions with the Parliament playing only a limited role in the budget 

process. The Parliament cannot increase the government’s spending 

proposals and, in practice, has limited ability to do anything other than 

accept them.

The current Labour government recently modified the budget planning 

process. Total spending is split into two categories that have separate 

control mechanisms. The first category is subject to Departmental 

Expenditure Limits, which are set for 3 years and, unlike the old process, 

will generally not be reviewed annually. The second category, AnnuallyManaged Expenditures (AME), consists of spending that is more difficult to 

control. Its largest components include social security benefits, interest, 

and local government expenditure. Spending covered by AME will be 

subject to annual reviews and considered part of total spending for 

purposes of achieving the government’s fiscal goals. The budget also 

includes an annual reserve that is intended more for emergency spending 

than as a source of supplemental funds for departments. The new budget 

framework also places a greater emphasis on distinguishing between 

current and capital spending. 

The Economy and the 

Budget 

Over the past two decades, the United Kingdom has experienced periods of 

deep recession and robust growth. After recovering from a deep recession 

lasting from 1979 to 1981, the economy experienced sustained growth with 

an annual average growth rate of more than 3 percent in real terms for 

nearly a decade before dipping into a recession again between 1990 and 

1992. The economy began to recover during the second half of 1992 and has 

continued to expand since then. 

During the past two decades, changes in the United Kingdom’s fiscal 

position have closely followed the economic cycle.2

 From the mid-1970s to 

the mid-1980s, the United Kingdom had large budget deficits. Deficits gave 

way to surpluses during the 1980s expansion. Then, with the onset of the 

recession in the early 1990s, deficits reemerged before steadily declining in 

tandem with the sustained economic growth of the mid- to late 1990s. 

2

Budget Surplus: Experiences of Other Nations and Implications for the United States

(GAO/AIMD-00-23, November 2, 1999) and Deficit Reduction: Experiences of Other Nations

(GAO/AIMD-95-30, December 13, 1994).
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The United Kingdom’s net public debt, as a percentage of GDP, has 

fluctuated during the past two decades. The net debt to GDP ratio declined 

from approximately 70 percent in 1970 to about 45 percent in 1979 before 

increasing again in 1980. The net debt to GDP ratio declined again during 

the 1980s before increasing again until the late 1990s. The trend of 

increasing debt to GDP reversed itself, with net debt as a percentage of 

GDP falling to about 42 percent in 1998 and projected to decrease further to 

about 36 percent by 2003-04. 

Recent Reform Efforts Improving the efficiency and effectiveness of public sector performance 

has been a high priority in the United Kingdom for over a decade. The 

United Kingdom’s early efforts to improve public sector financial 

management were launched in 1982 with the Financial Management 

Initiative that emphasized the devolution of responsibility for budget and 

financial controls. The country continued to embark on a series of reforms 

throughout the 1980s emphasizing improved performance management 

within the public sector. 

Most recently, the Labour government has undertaken a series of reforms 

aimed at improving the health of the economy and the effectiveness, 

efficiency, and transparency of government activities. In June 1997, the 

government launched a comprehensive assessment of all government 

spending programs—both current and capital—with the aim of better 

aligning programs with government priorities and generating ways of 

improving efficiency and service quality. Additionally, as discussed below, 

the government plans to adopt a form of accrual accounting and budgeting, 

known as Resource Accounting and Budgeting (RAB), which was originally 

proposed by the previous government. 

The Labour government also established a statutory basis for developing 

fiscal policy with a new law requiring the government to issue a “Code for 

Fiscal Stability.” The purpose of the law is to increase the transparency of 

fiscal policy decision-making and to enhance accountability by requiring 

the government to present a fiscal strategy and meet certain reporting 

requirements. Although the Code for Fiscal Stability provides a general 

framework requiring that fiscal and debt management policy be guided by 

five key principles—transparency, stability, responsibility, fairness, and 

efficiency—it nevertheless allows the incumbent government wide 

discretion in developing its specific strategy. 
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The current Labour government’s fiscal code establishes two rules: (1) the 

“golden rule” which prohibits borrowing to finance current spending and 

(2) the “sustainable investment rule” which requires that net public debt as 

share of GDP be kept at a “stable and prudent” level. Both rules are to be 

applied over the economic cycle, allowing for fiscal fluctuations based on 

economic conditions. These fiscal rules are meant to work together. The 

“golden rule” is intended to recognize explicitly the different economic 

nature of current and capital spending and is designed to ensure control of 

public finances while allowing deficit financing of capital investment, net 

of depreciation and asset sales.3

 At the same time, the “sustainable 

investment rule” recognizes that borrowing for public investment must be 

constrained by the need to ensure a “prudent level” of debt. 

Use of Accruals in 

Financial Management

Timeline: Progression of 

Use of Accruals

The United Kingdom has progressively extended the use of accrual 

accounting (known as resource accounting) across government and is 

currently aiming to have accrual budgeting fully implemented for fiscal 

year 2001-02. Resource accounting applies commercial-style accrual 

accounting to central government departments. Additionally, it includes a 

framework for analyzing expenditures by departmental aims and 

objectives, relating them to outputs where possible. Resource budgeting 

refers to the planning, managing, and controlling of public expenditures, at 

both the departmental and aggregate levels, based on resource accounting 

techniques and information.

The then-Chancellor of the Exchequer launched the United Kingdom’s 

move toward resource accounting and budgeting in 1993 as part of his 

budget proposals. In 1994, the Green Paper, Better Accounting for the 

Taxpayer’s Money, set out the potential benefits of implementing resource 

accounting in departments and considered the case for adopting accruals 

for budgeting. A 1995 White paper confirmed the government’s 

commitment to use resource accounting as the basis of public expenditure 

3

The government defines investment as “physical investment and grants in support of 

capital spending by private sector.” See Fiscal Policy: current and capital spending, HM 

Treasury (United Kingdom), 1998, p. 7 fn. 2.
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planning and control (budgeting). However, changing the basis of 

Parliament’s voting of funds will require new legislation. A draft bill has 

been introduced for consultation with the hope of having final legislation 

by summer 2000. 

Initial implementation efforts focused on developing the standards and 

information systems necessary for financial statement reporting. One of 

the first steps was determining appropriate reporting standards and 

requirements. After consultation with other government departments and 

other interested bodies, the Treasury produced a Resource Accounting 

Manual (RAM) that sets out the standards and policies to be used to guide 

the preparation of departmental resource accounts. The Financial 

Reporting Advisory Board (FRAB)4

 conducted a comprehensive review of 

and eventually endorsed the RAM. The Board is expected to continue to 

review the RAM and consider proposals for change based on experience, 

the evolution of generally accepted accounting practices, and development 

of policy aims with respect to RAB.

Over the past several years, departments have made progress in 

implementing resource accounting. For purposes of testing the new 

systems, the first resource accounts were to be produced for fiscal year 

1998-99. Although not to be published, the National Audit Office (NAO)5

was to audit these “dry run” accounts. Subject to departmental progress in 

preparing their accounts, audits were to be concluded in October 1999. 

NAO will advise the departments and through them the Treasury of their 

findings. The first full set of published resource accounts is scheduled for 

financial year 1999-2000. With a foundation in resource accounting, 

Treasury turned its efforts toward implementing resource (accrual) 

budgeting.

4

Although the legislative authority to set public sector accounting standards lies with the 

Treasury, FRAB was established, on the advice of Parliament, to provide the Treasury with 

independent advice on developing and applying financial reporting principles and standards 

to the central government.

5

NAO was established in 1983 to provide independent information, assurance, and advice to 

Parliament. NAO, which employs about 750 staff, is headed by the Comptroller and Auditor 

General. NAO carries out two main types of work: (1) financial audits that certify the 

accounts and include examining the regularity and propriety of government expenditure 

and addressing the risks to financial control and accountability and (2) value for money 

audits that review the economy, efficiency, and effectiveness of publicly funded programs, 

projects, and activities. 
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Factors Surrounding the 

Adoption of Accrual 

Budgeting

Reform efforts—within the United Kingdom and across the international 

community—set the stage for the United Kingdom’s move to accrual 

budgeting. From the start of the United Kingdom’s performance reforms, it 

became clear that it would be difficult to adequately assess “value for 

money”6

 under a cash-based system and attention turned to developing an 

integrated financial system that would more effectively support reform 

efforts by improving the quality and consistency of the information 

provided to decisionmakers. The recognition that the cash-based budget 

system was not fully reflecting the needs of performance management was 

bolstered by the increasing use of accruals elsewhere in the United 

Kingdom public sector and a general skepticism about the cash system, 

which was viewed as allowing manipulation of spending across years and 

creating disincentives for capital spending. Further, the movement of other 

countries to accrual budgeting was described as helping to provide United 

Kingdom officials “the courage” to undertake RAB. 

As an outgrowth of the United Kingdom’s long-standing public sector 

reform efforts aimed at achieving more efficient performance and better 

value for money, RAB’s design reflects the central government’s concern 

about improving performance measurement and the links between inputs 

and outputs. As described by one Treasury official, RAB is about more than 

changing the basis of calculating cost. It is as much about identifying the 

costs of aims and objectives and a more systematic use of output and 

performance measures which carries forward the Financial Management 

Initiative of 1982.7

 The government’s new fiscal framework, especially its 

emphasis on distinguishing current and capital spending, was also viewed 

as further paving the way for RAB and providing a conduit to advance it not 

only as a “micromanagement” tool but as useful for fiscal policy. 

The United Kingdom’s 

Proposed Accrual 

Budgeting System 

The RAB framework involves both a shift to accrual-based measurement 

and the linking of inputs to outputs (performance measurement). Both 

components—the change to an accrual measurement basis and the move to 

output-based reporting—are viewed as important to the design of RAB.

6

“Value for Money” refers to the economy, efficiency, and effectiveness of publicly funded 

programs, projects, and activities. 

7

The Financial Management Initiative of 1982 emphasized the need for managers at all levels 

to have clearly defined objectives, responsibility for the best use of resources, and 

information particularly about costs and the achievement of objectives.
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Structure of Appropriations Under resource budgeting, resource accounts will replace appropriation 

accounts8

 and become the main form of accountability to Parliament. As 

proposed, parliamentary approval for departmental funding is to operate 

on a dual cash and “resource” basis. Each budget estimate will include

• several “requests for resources” which represent expenses on an accrual 

basis, including noncash amounts such as depreciation and a 6 percent 

charge on net assets employed, and 

• a single cash requirement, built up from the resource requests and 

representing an absolute limit on the withdrawals from the 

Consolidated Fund.9

Thus, instead of cash alone being the budgetary measure, departments will 

have a resource budget in accrual terms and an associated cash 

requirement, known as the financing requirement. In comparison to the 

New Zealand and Australia models, which provide cash to cover noncash 

amounts such as depreciation, the United Kingdom’s resource budget 

would treat noncash items as “notional” entries, i.e., departments will not 

receive cash to cover these amounts. Figure 14 shows, in general terms, the 

reconciliation between the resource budget and the financing (cash) 

requirement.10 Similarly, overall planning totals will be the government’s 

Resource Control Total and an associated Total Financing Requirement. 

While stressing that a number of issues, such as the precise treatment of 

capital, were still unresolved at the time of our visit, officials noted that a 

key objective in designing the resource budgeting system was to 

concentrate attention on resources while continuing to control cash.

8

In the United Kingdom system, an appropriation account is an end of the year account that 

compares amounts authorized by Parliament with actual cash payments made and receipts 

collected and explains any substantial differences. One account is prepared for each vote. A 

vote is taken to provide funds for each individual “supply estimate”—a statement presented 

to the House of Commons of the estimated expenditure of a department. 

9

The Consolidated Fund is the account to which tax revenues and other current receipts not 

specifically directed elsewhere are held and from which payments for the largest part of 

central government expenditure are made. 

10The financing requirement refers to the net cash implications of a department’s resource 

budget. It is the cash limit that will apply to departmental spending. 
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Figure 14: Reconciliation of Resources to Financing Requirement

The resource accounts for departments will consist of five schedules, 

including three that are similar to private sector statements, namely a 

Balance Sheet, an Operating Cost Statement, and a Statement of Cash 

Flows. The other two statements, which do not have direct private sector 

equivalents, include (1) a Summary of Resource Outturn11 and (2) a 

Statement of Resources by Departmental Aims and Objectives. The 

Summary of Resource Outturn will serve as the statement for 

parliamentary control, highlighting the request for resources and the net 

cash requirement that are voted on by Parliament. It will provide 

reconciliation between requests for resources and the consequential cash 

requirement. The Statement of Resources by Departmental Aims and 

Objectives links resource inputs to department aims and objectives. In 

addition, but outside the accounts, a sixth statement—an Output and 

Performance Analysis—will show achievement against departmental 

objectives, major outputs, and overall efficiency of operations.

The use of resource accounts for budgeting is to be phased in over the next 

several years. The first resource accounts will be published for the fiscal 

year 1999-2000, and will be produced in parallel with the present cashbased Supply Estimates and Appropriation Accounts. The Treasury, subject 

to the approval of Parliament, then plans to implement resource-based 

budgeting for 2001-02, replacing cash-based appropriation accounts. 

11The term “outturn” refers to actual expenditure and income. 
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Treatment of Specific 

Budget Items

At the time of our visit the Treasury was in the process of developing a 

resource budgeting manual to serve as an operational guide for 

departments in preparing their resource budgets. Because this manual was 

in the development stage, officials and staff we spoke with stressed that 

some of the implementation and control issues surrounding the treatment 

of certain items were not fully resolved. However, officials stressed that 

compatibility of accounting standards for use in the budget was and 

continues to be given considerable attention. According to Treasury 

officials, during the development phase, attempts were made to anticipate 

the accounting standards’ capacity to support resource budgeting. In cases 

where the requirements of generally accepted accounting practices and the 

parliamentary control process are in conflict, the manual states that 

generally accepted accounting practices should be adapted accordingly. 

For example, officials noted that in order to coincide with the budget 

process the timing of asset valuations was adjusted. 

The following summarizes the proposed treatment of key budget items.

• Public sector employee pensions: Under resource budgeting, each 

department will pay an actuarially derived contribution for annual 

employee pension costs to relevant pension schemes, resulting in an 

intragovernmental transfer. These pension contributions will be 

included in a department’s request for resources and cash requirement. 

The centralized pension schemes receive these contributions from the 

departments and use them to make payments to current retirees. Thus, 

at the governmentwide level, the total financing requirement represents 

the total cash required for payments to current retirees in that year. If 

cash payments to current retirees exceed the departmental 

contributions, drawings are made from the Consolidation Fund to 

makeup the difference. 

For each pension scheme there will be a separate actuarial statement 

that shows total pension liability and the level of annual contributions 

(expressed as a percentage of pay) that departments need to make to 

meet the liability. However, this actuarial amount is not recorded in the 

pension funds’ resource request or financing requirement. 

• Capital: The purchase of new capital assets would require a cash 

appropriation for payments made in the fiscal year; this amount would 

be included in a department’s financing requirement but would not be 

included in the resource budget. The annual cost of using capital, 

namely depreciation and a cost of capital charge,12 would be included in 
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the request for resources as “notional” entries and would require a 

parliamentary vote but would not result in departments receiving cash. 

Thus, in comparison with the New Zealand model that provides cash to 

cover noncash amounts, such as depreciation and capital charges, with 

the expectation that departments will manage and use these funds to 

maintain their asset base, RAB was designed to help focus attention on 

the cost of capital use without significantly decentralizing cash and 

asset management. As shown in figure 14, under resource budgeting, the 

noncash amounts, such as depreciation, are backed out in order to get 

to the cash requirement. 

• Inventories: Under resource budgeting, the cash requirement would 

include the payments estimated to be made during the fiscal year. The 

request for resources would include the amount of inventories 

estimated to be consumed during the fiscal year. 

• Insurance, loans, and guarantees: These types of programs are 

limited in the United Kingdom and generally are outside the coverage of 

RAB. Loans made by departments to bodies not consolidated in their 

accounts will nonetheless be recognized as assets in resource accounts. 

The making or recovery of loans will be included in the cash 

requirement. Significant contingent liabilities are noted in the budget 

estimates and presented to Parliament and reported in notes to the 

accounts. 

• Social Insurance: The National Insurance Fund, which covers 

unemployment, state retirement pensions, and part of the National 

Health Service, will not be covered by RAB. This fund is operated on a 

“pay-as-you-go” basis with the budget reflecting cash flows for the fiscal 

year. Any shortfall between collections and payments is paid out of 

Consolidated Fund revenues. 

• Revenues: Under RAB, tax revenues will continue to be measured for 

the time being on a cash basis, primarily due to measurement difficulties 

and prohibitive implementation costs.

Aggregate Budget Measure At the time of our visit, there was still uncertainty about the link between 

the RAB initiative and the measures focused on for fiscal policy. 

Corresponding to the introduction of its new fiscal policy framework, the 

Labour government introduced a new format for presenting fiscal policy 

measures. The new format is intended to more readily allow the monitoring 

12The cost of capital charge is a charge on an entity’s total net assets.
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and assessment of progress against the two fiscal rules described above—

the “golden rule” and the “sustainable investment rule.” 

The main changes under the new format are to better distinguish current 

and capital spending and to focus on a measure of budget balance that 

excludes financial transactions. Under the new format the three principle 

measures of public finances are as follows.

• Surplus/deficit on current budget: Under the new format, current 

receipts less current spending will be used to judge whether the “golden 

rule” will be met over the economic cycle.

• Public Sector Net Borrowing (PSNB): Under the new format, the 

Treasury has switched to PSNB as the main overall budget measure. 

Prior to 1998, the main surplus/deficit measure was the public sector net 

cash requirement (PSNCR), referred to at the time as the public sector 

borrowing requirement.13 PSNB differs from PSNCR by excluding 

privatization proceeds and other financial transactions.14

• Public Sector Net Debt Ratio: Under the new format, total debt of the 

public sector (net of certain liquid assets) as a proportion of GDP is 

used to judge whether the government’s “sustainable investment rule” is 

met. 

Although the interaction between the information provided under RAB and 

these measures has not been fully resolved, some Treasury officials 

speculated that the current budget surplus/deficit may be measured on an 

accrual basis once resource budgeting is implemented. However, they 

noted that a number of issues, such as the interaction of the RAB measure 

with national income account reporting, were still under discussion.

Key Differences Between 

Cash Versus Resource 

Budgeting

As noted above, the first resource budget is expected to replace 

appropriation accounts in fiscal year 2000-01. However, based on 

experience to date with resource accounting, the implications of resource 

budgeting are expected to be greatest for capital intensive departments, 

such as the Ministry of Defense, while other less capital-intensive 

departments, such as the Home Office, were not anticipating significant 

13PSNCR includes receipts and expenditures at all levels of government, including 

privatization proceeds, and is similar to the United States’ unified budget. 

14Other financial transactions include loans made by the public sector and some other 

adjustments which reflect the precise timing of payments.
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changes resulting from the budgetary change to accrual-based 

measurement.

Views on Implications 

for Decision-making

In introducing RAB, the Treasury asserted significant benefits for fiscal 

policy and managerial decision-making including

• making decisionmakers focus more on resources consumed and not just 

the cash spent,

• treating capital and current expenditure in a way that better reflects 

their different economic significance, and 

• encouraging a greater emphasis on outputs and the achievement of aims 

and objectives.

According to the Treasury, RAB is expected to improve decision-making at 

both the governmentwide and the departmental level by ensuring that the 

“full economic costs of government activities are measured properly” 

through the inclusion of costs such as capital consumption and by 

matching costs to the right time period. 15 Another significant benefit 

credited to RAB is the improved integration of the full cycle of planning, 

budgeting, monitoring, and reporting.16 Along these lines, a key official we 

spoke with stressed RAB’s alignment of the basis of budgetary 

measurement with financial reporting standards that mirror private sector 

generally accepted accounting practices as critical to improving the 

transparency, consistency, and credibility of information and incentives for 

decision-making. Officials we spoke with stressed that they viewed having 

the ex-post financial reporting system and the ex-ante budgeting system on 

the same measurement basis as valuable for facilitating decision-making.

From a departmental management perspective, resource budgeting is 

anticipated to provide managers with better management information as 

well as improve the incentives to manage resources more effectively. 

Resource budgeting was viewed as particularly beneficial in two areas: 

improved asset management and better linkages between resources and 

15Resource Accounting and Budgeting: A Short Guide to the Financial Reforms, Her 

Majesty’s Treasury, January 1998.

16The Green Paper notes that “the consistency of departments’ internal budgeting systems 

with the overall system of budgetary allocation and control within the government is a key 

objective.” 
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outputs. Overall, the information and incentives under resource budgeting 

were described as having the potential to enable both department 

managers and policymakers to make better decisions about how best to 

use resources. For example, officials from the Ministry of Defence credited 

RAB with improving understanding of asset base and inventory levels, 

noting that these issues are being taken more seriously now that they will 

be directly linked to the budget. However, some we spoke with pointed out 

that resource budgeting would have the greatest implications for capitalintensive departments and would likely have significantly less impact on 

other departments. In addition, some of the benefits of RAB may result 

from improved financial accounting and linkages of resources to outputs 

rather than the change of budgetary measurement basis from cash to 

accrual. 

Proponents also argue that resource budgeting will help ensure that the 

planning framework delivers the government’s fiscal policy objectives. 

First, using departmental resource accounts to underpin resource 

allocation decisions at the aggregate levels is viewed as helping to ensure 

that allocations among the government’s competing priorities are made in 

consideration of full cost information. Further, some officials suggested 

that resource budgeting will encourage a wider breadth of questions with 

respect to sustainability and efficiency than previously considered under 

the cash system. The Treasury noted that the government collectively will 

benefit because, what is good for departmental management is also good 

for the government as a whole. Finally, resource budgeting is viewed by 

some as supporting the government’s investment objectives by spreading 

the cost of capital over its useful life and by clarifying the opportunity costs 

associated with holding capital through capital charging. 

The direct implications of resource budgeting on parliamentary decisionmaking, however, are hard to discern. Parliamentary Committee Reports, 

while expressing some caution, articulated support for RAB noting the 

anticipated benefit of increased information for parliamentary decisionmaking. As expressed by the Clerk of the House, “the House, in general, 

and departmental select committees in particular, will welcome the greater 

range of information which will be provided in resource-based documents.” 

However, despite these perceived benefits of improved information, both 

parliamentary staff and academics cautioned that the extent to which 

resource budgeting will influence parliamentary decision-making must be 

considered in the context of the Parliament’s limited role in the budget 

process. As previously noted, Parliament has historically had a limited role 

in the budget decision-making process. Nevertheless, parliamentary staff 
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generally agreed with others that Parliament may benefit from RAB 

indirectly through improved management of departments and increased 

information for oversight. 

Implementation Issues At the time of our visit, Treasury and Parliament were beginning to address 

numerous implementation and control issues raised by the introduction of 

resource budgeting. Officials we spoke with acknowledged that because 

the RAB initiative was still in the early stages, some implementation and 

control issues remained unresolved. Some of the key issues surrounding 

the introduction of resource budgeting included the following.

Parliamentary 

Accountability and Control

The introduction of resource budgeting has raised concerns about the 

implications for parliamentary accountability and control. In particular, 

parliamentary committees have expressed concerns that the replacement 

of appropriation accounts may result in reduced understanding and 

weaken parliamentary oversight. In July 1998, the Committee of Public 

Accounts noted that a “main concern is that the current bases for voting 

Supply17 and holding departments accountable should not be discontinued 

until it is clear that there are equally effective or better arrangements to 

replace them.”

Parliamentary control concerns about resource budgeting have been 

intensified, at least in part, by the heavy reliance on professional judgment 

involved with the use of accrual-based measurement and other unresolved 

issues dealing with implementation specifics. A general concern was 

expressed that the movement towards accrual-based measurement will 

introduce a greater degree of professional judgment, and thus uncertainty, 

into the budgetary process than is presently the case with the cash-based 

system. Both parliamentary staff and NAO officials expressed concerns 

about the added level of complexity associated with accrual-based 

reporting. Some suggested that this added complexity could lead to the 

potential for manipulation. For example, whether a transaction is recorded 

in the budget will not simply be based on the timing of cash payment, but 

rather will depend on professional judgments about the timing of the 

consumption of resources and other underlying assumptions. Further, 

some issues surrounding how new assumptions will be integrated into the 

17Voting supply refers to voting the budget.
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budget process have not been fully resolved. For example, since budget 

amounts for departments are to be fixed for a 3-year period under the new 

fiscal framework, how will changes in assumptions surrounding 

depreciation and capital charges be handled in order to prevent 

departmental windfalls (excess funding)? Also parliamentary staff and 

NAO officials expressed concern about the ability to adequately track the 

linkages between the request for resources and the underlying cash 

requirement. 

Transitional Issues The government is taking a number of steps to smooth the transition to 

resource budgeting and to help mitigate concerns. Officials and program 

managers stressed that ensuring cultural change and training is critical to 

the success of resource budgeting. Treasury officials told us that numerous 

training efforts are being undertaken to support the implementation of 

RAB. Much of this training has been decentralized, with Treasury taking on 

a facilitating role while departments have responsibility for designing and 

implementing their own training programs. Additional implementation 

issues have focused on how to structure account presentations and voting 

procedures to provide sufficient assurance about cash control while 

focusing decision-making on resources. At the time of our visit, there were 

continuing efforts to clarify the treatment of more technical accounting 

issues in the budget context. Some Treasury officials, however, noted that a 

number of issues might not come to light until resource budgeting is 

underway.
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In part because of these implementation challenges, the appropriate 

implementation timetable continues to be a source of debate. One Treasury 

official stressed that the goal has been to make the timetable long enough 

to allow for sufficient groundwork but short enough so that the initiative is 

taken seriously and the momentum is maintained. Some suggested that 

extending the dual running of the old cash system and the new resourcebased system would allow time for increased understanding of the 

implications for parliamentary control and oversight. The Treasury, 

however, opposed additional dual running of the two systems, testifying 

that doing so would be extremely costly and would undermine incentives 

to move to the new system. To help allay fears the Treasury has developed a 

series of “trigger points” to assess department progress.18 Departmental 

implementation concerns to date have focused on system and staff 

capacity.

NAO has been, and will continue to be, involved with monitoring 

department progress. In 1997 and 1998, NAO conducted surveys of 

departments’ preparedness that reviewed, among other things, 

departments’ accounting systems and policies and the extent of progress 

made on preparing opening balance sheets. NAO then found that while the 

majority of departments had made considerable progress some still had 

significant work to do. 

During the first half of 1999, as part of trigger point 2, NAO conducted an 

audit of departments’ opening balance sheets as of April 1, 1998, and a 

further assessment of departments’ systems. They found that, in the main, 

balance sheets were reasonably complete, although they also found errors 

and omissions of varying size and significance. On systems, further 

progress had been made but some departments still have to develop fully 

certain elements necessary to meet all requirements. In NAO’s view, the 

first full indication of departments’ preparedness will be the audit findings 

on the 1998-1999 dry run accounts.

18The three “trigger points” identified by the government are as follows: (1) stage one 

approval—survey of departments’ progress towards developing and implementing systems 

and policies to support resource accounting, (2) assessment of departments’ opening 

balance sheets for 1999-2000, and (3) NAO’s audit of departments’ dry-run 1998-99 resource 

accounts. 
Page 217 GAO/AIMD-00-57 Accrual Budgeting

Appendix VII

GAO Contacts and Staff Acknowledgements ApendxiVI

GAO Contacts Christine E. Bonham, Assistant Director (202) 512-9576

Elizabeth A. McClarin, Evaluator-in-Charge (202) 512-5059

Acknowledgements In addition to those named above, Tuyet Quan Thai and Bill J. Keller made 

significant contributions to this report.

(935280) Letr
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