Broad principles

Since the late 1980s, New Zealand’s public sector management system has focussed on promoting public sector performance. Details of New Zealand’s reforms are well documented elsewhere[1]. This performance management approach emphasises, among other things, clear objectives and clear lines of responsibility, greater freedom to manage, and a corresponding expectation of greater accountability for results. Such a system requires good measures of performance that interested external parties can trust. In the areas of financial reporting, budgeting and budget controls, the Public Finance Act attempts to meet these objectives by requiring the Government and all public sector entities to prepare financial information that:

• uses accrual accounting concepts and statements
• is in accordance with financial reporting standards approved by an independent standard setter, and
• in the case of annual financial statements, is audited by an independent auditor.

These key principles, which are applied throughout the Public Finance Act, are explained in more detail below.

Accrual accounting concepts and statements

Each individual reporting entity (for example, a department) and the Government as a whole prepare financial forecasts and statements using the accrual basis of accounting.

The following table summarises the features of these reports.

The accrual basis of accounting was adopted by the New Zealand Government because it provides a more comprehensive set of information than cash accounting. It supports the Government’s commitment to provide comprehensive and transparent financial reports.

For example, accrual financial statements provide information on:

• assets and changes in the value of assets due to use or changes in market conditions
• liabilities including amounts owed to suppliers, and long term obligations such as accumulated employee leave entitlement and unfunded pension liabilities
• the overall financial position of the individual entity or the Government
• the impact of exchange-rate and interest rate movements on the value of financial assets and liabilities
• the full cost of goods and services used or consumed within a given period, regardless of when ordered, received or paid for, and
• cash flows during the period are reported in a separate statement.

Accrual information is less subject to manipulation than cash information. Because the accrual basis recognises expenses when they are incurred rather than when they are paid there are limited incentives to shift payments between periods inappropriately.

An accrual budgeting system focuses on costs to be incurred rather than funds to be obligated or spent. Accrual budgets provide a more comprehensive financial picture of proposed activities and the impact of those proposals on the operating costs of individual entities.

Parliamentary authority for budget (appropriations) is also expressed in accrual terms. Accrual appropriations mean that Parliament’s control is effectively exerted when the use of public money or resources is committed as expenses are recognised at the point at which an obligation is incurred, which is usually prior to when the flow of cash occurs. Authorisation of total expenses ensures that the total level of Government activity is transparent to Parliament. Any incentive to favour activities with non-cash costs is avoided.

Some key dates associated with the adoption of accrual accounting are shown below.