Policy Note 83085 September 2013 PUBLIC FINANCIAL MANAGEMENT REFORMS Public Sector Accounting: Why Standards Matter to Cambodia Significance Most people (unless you are an accountant) find accounting pretty boring and dry, but on the other hand, many people find the end result of accounting, namely financial statements, pretty interesting and useful. Accounting is ‘the language of business’ and tells the story of the financial results and health of a public or private entity. When reviewing a national government’s annual financial statements, a reader can find out how much revenue the government received that particular year from taxes (customs, income, VAT, other taxes), from grants or other aid, or from the sale of government property or equipment. Similarly with expenses, a reader can study how much money was provided to and spent by a particular ministry or government entity such as Health, Education, Planning, the Council of Ministers, and so on. But that’s only part of the story! crowded, which meant that classification numbers were Objectives of Accounting Standards full, forcing heavy use of accounts labeled ‘other’. This rendered it practically impossible to track many expenditures Like any language, accounting has its own rules called or liabilities. Accounting Standards. The objectives of accounting standards are threefold. First, they help to standardize different accounting policies. Second, they facilitate presentation of transparent and comparable information. Third, they minimize subjectivity in financial statements. IPSAS sets out the requirements for Once such set of standards for the public sector is the the two main bases of accounting: International Public Sector Accounting Standards (IPSAS). Cash-basis accounting: Accounting method in which IPSAS are global financial reporting standards for revenue is recorded when cash is received & expenses governments that set out the requirements that are recorded when cash is paid out. The total of these applicable to all entities. receipts and expenditures are shown in the financial statements of the reporting period whether or not they The Old Story Line relate to that period. Example: A government entity enters into a contract for 3M Riels (payment is due after Public sector accounting in Cambodia is a mixture of accrual completion of a several tasks) and only records the and cash accounting with many transactions recorded on an expense when a particular cash payment is made. accrual basis. The previous Chart of Accounts (COA)—the Accrual-basis accounting: Based on the ‘accrual’ list used by government that identifies each item for which money or the equivalent is spent or received—was originally principal under which revenue is recorded when earned based on the French accounting system and over time was and expenses recorded when incurred (committed). The adapted to reflect the RGC’s accounting requirements and total of these receipts and expenditures are shown in the practices. It was not designed to handle both accrual- and financial statements of the reporting period whether or cash-basis accounting, to facilitate implementing accruals not cash was received or paid out in that period. In the or producing accrual based reports. The categories of the example above, the entity records the entire contract previous COA were different from IPSAS and International value of 3M Riels at the time the contract is signed. Financial Reporting Standards making it difficult for those accountants (or anyone) outside the Cambodia public Source: IPSASB Handbook, Vol II, 2012. sector to use or understand. In addition, the COA was Policy Note Public Financial Management Reforms In the future, the Government will need to provide its A New Chapter for Public Sector cash position, consolidate the statements of all reporting Accounting in Cambodia government entities, and ensure these statements are In 2012, the RGC adopted IPSAS accounting and reporting prepared using uniform accounting policies. To facilitate the standards and agreed to meet the requirements under transition in meeting the requirements under the standard, cash-basis IPSAS and gradually transition over time to the Government has prepared a sequenced plan of action accrual-basis standards1. It joined the many governments (roadmap). As a first step, the Government changed its around the world using these standards to prepare their classification structure and COA—commonly referred to as financial statements. In doing so, the Government a uniform Account Code Structure (UAC)—to be consistent expressed its commitment to improve the consistency, with the standard. The next step (currently under way) quality and transparency of its accounting and reporting is the preparation and dissemination of a detailed set of policies and standards. This change also signals the instructions, known as posting rules, for recording and Government’s desire to embrace the future direction of posting all transactions under the new COA. To achieve accounting in the country since Cambodian universities now these immediate and longer-term goals, the National teach either IPSAS or US accounting standards. Treasury will be required to lead the development and implementation of a training program to build officials’ capacity in the use of these standards. The RGC’s new COA meets the 7 principles of internationally recognized good practice: A key exercise undertaken as part of the roadmap was Comprehensiveness • the trial production of a draft set of government financial • Granularity (sufficient detail) statements for 2011 using both the budget-basis and • Mutual exclusiveness cash-basis financial data to meet the requirements under • Non-redundancy cash-basis IPSAS. While the prepared document reflects • Internal consistency remaining gaps in the financial data available, it does  • S calability (flexibility for further additions provide the blueprint necessary for further improvements and changes) to reporting formats and financial information, and paves • A unified framework the way for the preparation of the 2012 cash-basis IPSAS compliant statements. Conclusion The adoption of IPSAS will make the RGC’s accounting processes and reports easier to use and understand as the number of government officials and accountants trained in IPSAS grows and will accommodate the Government’s future requirements with an internationally recognized standard. In the future, information provided by these reports will enable those with an interest in tracking the Government’s allocations to health, education and other sectors over time, as well as to compare and contrast these allocations against those spent in other countries. 1 Although very few countries have adapted fully the standards for both cash and accrual accounting under IPSAS, most countries do adhere to the many guidelines and requirements as a matter of good practice. The World Bank Office For further information, Funding for the PFM trust fund from the please contact: AusAid, EU, and Swedish SIDA is gratefully No. 113 Norodom Blvd. Phnom Penh - Cambodia acknowledged. Tel: (855 23) 861 300 Leah April Fax: (855 23) 861 301/302 Senior Public Sector Management Specialist Visit our website: (lapril@worldbank.org) http://www.worldbank.org/cambodia Linna Ky This note reflects the views of the authors and not Team Assistant Phnom Penh necessarily those of the World Bank and the donors. (lky@worldbank.org)