THE government’s plan to switch from a cash accounting system to an accrual accounting system has been delayed and will only be implemented after certain laws are passed. Initially, the proposed plan was for the public sector to make the switch on Jan 1.

The Ministry of Finance (MoF) told The Edge in an email reply that the implementation of accrual accounting has yet to take place and is scheduled to happen on a date to be determined after the “relevant acts are tabled before Parliament”.

However, it did not give any reasons for the delay. At the time of writing, the ministry had also not explained the “relevant acts” it referred to in its email.

“However, preparations are ongoing for the implementation of accrual accounting both at the federal and state levels of government. Among others, the formulation and setting of accrual accounting standards and policies, system development, data collection for opening balance of assets and liabilities, change management and training are in progress,” says the ministry.

Many have been eagerly anticipating the switch because the accrual method will provide a more accurate picture of the government balance sheet.

“The implementation of the accrual accounting method in the public sector is actually one of the items on my wish list. It would give us a fuller picture of the overall balance sheet compared with the current situation where we have undisclosed off-balance-sheet assets and liabilities,” says an economist.

At present, the government uses a modified cash-basis accounting system. Assurance partner of EY Malaysia Syarizal Rahim says this means that only certain expenses are accrued in the financial statements.

“The only assets included in the government’s balance sheet currently are cash and liquid investments such as deposits and marketable securities. These assets are funded by the reserves as well as government borrowings and the trust account,” he says.

He adds that currently, the memorandum account, which is separate from the balance sheet, provides information on the government’s other assets and liabilities.

Among information included under the assets category in the memorandum account are loans provided by the government and equity investments in government-linked entities, statutory bodies and international agencies. Liabilities would include government treasury bills and investment securities as well as bonds issued.

This is expected to change when the accrual accounting system is adopted. All assets and liabilities would be accounted for in the balance sheet under this method instead of it being recorded separately in the memorandum account.

Items such as government properties, inventories and others would be included as assets in the balance sheet while liabilities currently included in the memorandum account as well as government pension liabilities would be accounted for as liabilities. In addition, government guarantees and other commitments would have to be disclosed in the notes to the accounts.

This would mean that there would be more transparency on government finances, says Syarizal. It would also enable users to understand better the state of wealth of the government.

MoF concurs, saying that the fact that accrual accounting is more comprehensive than cash accounting, it would mean greater transparency.

“Accrual accounting will allow ministries and agencies to be financially accountable for their respective revenues and expenditures. This will add depth to the accountability and transparency of the management of public-sector resources. The complete view of the assets and liabilities will provide useful information for decision-making for sound financial planning,” says the ministry.

Many are expecting the implementation of the accrual accounting system to force the government to reveal the true extent of its borrowings, putting it under public scrutiny, as all assets and liabilities would have to be accounted for in the balance sheet while contingent liabilities are disclosed in the notes to the accounts.

“Debt levels might not necessarily go up with the change in accounting method because we have to remember that there might also be assets that have not been disclosed as well. We cannot just look at one side of the coin,” says the economist.

That said, if accrual accounting is successfully implemented in Malaysia, it would be one of the first few countries in Asia to adopt the method for its public sector.

“Globally, there are not many countries that have fully complied with the accrual accounting requirements under the International Public Sector Accounting Standards. There are a lot of variations in the adoption. Our (Malaysia’s) approach is to comply fully with the relevant standards, although this may take a couple of years to achieve it,” says Syarizal.

Nevertheless, the switch could prove to be a painstaking process given the vast differences between the two accounting systems.

This article first appeared in The Edge Malaysia Weekly, on June 8 -14, 2015.

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