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ACCA's response to the exposure draft Guideline for governmental financial reporting issued by the International Federation of Accountants is set out below:

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above exposure draft (ED).

Our comments on the document are divided between:

1. those of a general nature concerning its context and aims
2. major comments on its content and coverage
3. more detailed comments on the text.

General comments

We welcome this document as an informative and helpful summary of the various bases of governmental accounting, with useful examples of current practice.

Our overall view, however, is that this current document needs to be revised and reissued, for example for the items we have noted below. The project is not yet ready to move on to Part II which would produce a coherent set of accounting standards for governments based on International Accounting Standards (IASs).

We are also concerned about the status of this document as a "Guideline" and its relationship to further developments from this project. The ED is essentially a descriptive and not a prescriptive document, which allows all four bases to be used for example. Its title of Guideline is something of a misnomer as it provides little in the way of firm guidance for the preparation of financial reports. The status of the document might be better changed from guideline to review.

It is not clear how this guideline will then fit in with the proposed set of coherent standards. Will the guideline be withdrawn in whole or in part on publication of the standards? As standards are developed they will presumably tend to reduce the range of practice by governments. Some of the practices described in the ED would then be out of step with the standards at that time. Also will the standards continue to allow all four bases of accounting as acceptable under IFAC guidelines?

Our misgivings on how this project might develop, derive from a reluctance to endorse accrual accounting by governments as appropriate for all cases, and a sense that this current document is presenting an overstated case for the accruals basis.

The document appears to "oversell" accruals accounting and this detracts from a balanced and judicial impression and makes it seem more polemical. In our view it is necessary to have both a more detailed analysis of the benefits of accruals based accounting, and a more complete exploration of its drawbacks. At present there is a chapter headed "Benefits" which also refers to the costs of the system. However it would be very helpful for this discussion of costs to be more factual about the experience of the pioneer governments in this field. There is no chapter headed "Disadvantages", though in such a chapter one could include not only the costs, but also how generally understandable the accounts would be, the scope for manipulation, and the greater need for audit.

Also the ED stresses the usefulness of accruals based accounts in assessing whether government operations are being run efficiently and economically, without spelling out that they cannot do this on their own, but only in conjunction with output performance indicators. The extracts chosen to illustrate the New Zealand experience might be read as attributing the entire economic turnaround of that country to accruals based accounting by government.

We see accruals based accounting as perhaps an appropriate step for governments in the richer more developed countries to take. We are concerned, however, in less developed countries and emerging economies, that there might be greater priorities for the smaller pool of accounting expertise to address. Guidelines issued by international bodies have a habit of becoming a requirement for less developed countries by being incorporated into loan and grant conditions. Accruals based accounting for governments might become another hurdle that has to be overcome before much needed financial resources can be obtained.

The Guideline could also be open to the accusation that it contains political messages inappropriate in an IFAC document. In particular at times it appears to promote the minimisation of government and the reduction in government borrowing. For example its model could be accused of doing so by highlighting the surplus/deficit for the year as the "bottom line" of government's financial reporting. Also paragraph .279 states that citizens " believe that their government has a duty to acquire, hold and invest resources from the public only in such amounts as are needed for the purposes of government". This is either a statement so devoid of meaning as not to be worth saying, or it is a political statement in support of smaller government made by IFAC on behalf of citizens.

The ED does not try to identify likely users of these general purpose government accounts. We suspect that the management of the reporting entity themselves and other parts of government would be a major component, and that truly external users might turn out to be limited in number. The ED produces two rather different lists of uses of accounts - the four bullet points in the introduction (unnumbered pages) and the list in paragraph .121. We query whether there is support in a government context for paragraph .009's assertion that "There is general agreement about both the type and extent of information which is considered useful for users of external reports". In fact it is arguable that the structure of reporting suggested, following as it does the accepted commercial entity model, may be inappropriate to government as it

• does not recognise the key role played by the budget
• may not fully recognise the different objectives of government and commercial enterprises.

Our other general comment on the ED is that the text is predominantly based on the Anglo-American (including the Commonwealth) tradition. In some other countries the budgetary basis of reporting is even more important, and therefore the Guideline's lack of any reference to the budget even more notable. Another aspect of the Anglo-American tradition is the use of IASs as the basis, which the Guideline takes on with little further discussion. Governments might wish to base their accounts on the accounting standards applying in their own country, and these will not always be consistent with IASs.

Comments on the content of the Guideline

As noted above the ED includes very little in relation to budgets, and yet governments of all kind have traditionally used the budget as the main instrument of financial reporting. It is still the main focus of government financial management. While we appreciate that the Guideline cannot cover fully the budgeting process, we think it could usefully have a chapter dealing with the connections between the budgeting and the financial reporting processes, including the comparison of outturn against forecast.

Paragraph 8 above noted that accruals based accounting can produce useful information on the efficiency and effectiveness of government activity, in conjunction with some performance indicators. A chapter on the link with performance, and information on outputs as well as inputs would be a helpful addition.

The ED does not cover the question of how to consolidate the various parts of government together, nor of the sorts of approaches that have been adopted in different countries. Consolidation might in our view give rise to two sets of problems. Firstly how to define and set the boundaries of what constitutes government or any particular part of it. So for example there is no indication as to how state-owned industries are dealt with, joint ventures or associates. Secondly on the mechanics of consolidation, the ED does not cover issues associated with, or approaches to, the cancellation of intra-governmental transactions and balances.

The draft guideline appears to be undecided about a number of key accounting questions including

• whether in general all assets and liabilities recognised using the IASC framework should be in government's accounts. (E.g. paragraph .351 compared to paragraph .400)
• of current/fair values as opposed to historical cost, the ED giving little guidance on when one might be more appropriate than the other
• of discounting, particularly of liabilities.

The concept of realised/unrealised gains and losses is referred to on pages 147 to 149. For European Union company accounts this concept is critical for the question of distributable profits, and distribution is a concept irrelevant to government. The guideline also appears to make no other reference to any division of net worth into separate (e.g. realised and unrealised) elements. It seems to us questionable whether realisation is a relevant concept for government financial reporting at all.

The ED should make some reference to the accounting for the type of arrangements where the government have entered a contract with the private sector for the provision of both a capital asset and for services associated with it (for example a hospital and the building maintenance or cleaning services for it). In the UK such contracts are referred to as the Private Finance Initiative (PFI). The question of when there is an asset and liability to capitalise is being looked at by the Accounting Standards Board at present.

When governments make grants for fixed assets, recipients under IAS should either reduce the cost of the asset or set up a separate balance to be released over the life of the asset. In our view this ED should deal with the government's accounting for such grants, and indicate whether they have an interest in the asset or some other kind of asset. Paragraphs .614 and .636 do not appear to cover this.

The ED identifies a number of difficult areas where its guidance is not very definitive. For example

• heritage assets
• military equipment
• natural resources
• tax revenues
• restricted income.

These are therefore areas where further guidance will be needed to be developed during Part II of the project. We noted that with heritage assets for instance, no example of how these have been included in a balance sheet. If this absence means that there is no such example of where it has been done, then it might be more helpful for the Guideline to say so.

Detailed points

We noted a number of points on going through the document:

• The main classification suggested for revenues appears to be that between reciprocal and non-reciprocal. This can be of importance, but we think that the ED should place more emphasis that this needs to be accompanied by an analysis of costs to allow a matching of the reciprocal income with its costs.
• Land and inventories held for sale are listed among financial assets in paragraph .211. They would not, however, meet the definition set out in paragraph .210, nor would they be financial instruments as defined by IAS32.
• The definition of contingencies should perhaps be made consistent with the new IAS on provisions and contingencies when that is published.
• We did not find it clear whether paragraph .284 is recommending that more information about maintenance and deferred maintenance be disclosed.
• Paragraph .357 should make clear that derivatives should be included among the assets and liabilities.
• At present investments are treated in the ED as either physical assets or financial assets (paragraphs .357 and .381). This highlights a degree of confusion in the draft Guideline between the terms physical asset/long term asset on the one hand, and financial assets/short term assets on the other.
• Chapter 19 should make some reference to provisions.
• Paragraph .362 needs updating for the exposure draft E62 published recently by IASC.
• There is a typing error at the start of Chapter 9.

Almost inevitably this has been mainly taken up with criticism of the document. We do however very much support the initiative in publishing what is a worthwhile and helpful document.

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