Government is Eyeing on new way of managing fiscal Deficit

The Comptroller and Auditor General of India (CAG) plans to move from cash to accrual basis accounting in government within a five year time frame.

Reasons for transformation :

The accrual based financial statements are expected to provide more appropriate presentation of financial performance and position of the government. The Union and States would have a common format of financial statements that would include a Balance Sheet, a Statement of financial performance and a Cash flow statement. The framework for the accrual accounting shall be Indian Government Financial Reporting Standards (IGFRS) issued by GASAB. IGFRS are harmonized with International Public Sector Accounting Standards (IPSAS), the international standards for governments.

Methodology :

Stage 1 : The country’s priceless assets will carry a negligible price in the first of its kind valuation attempt, even as the government rejigs its accounting system and plans to put a value on all the assets it holds.

Stage 2 : Value would be assigned to the identified assets.

Basic Issues and Assumptions:

It was decided that all buildings and heritage sites that are in existence for more than 25 years and whose historical cost is not available would be given a notional value

Buildings that are less than 25 years old, the actual cost of construction will be provided, said G Srinivas, director with the GASAB secretariat.

Final decision on how to value the forests and lands owned by the Centre is yet to be taken. However, it has been decided that all acquired assets, including the land acquired under the Land Acquisition Act, would have to be provided upfront

Accounting Effect :

Implication of accrual-based accounting is for providing non-cash items like depreciation and bad debts. Based on the total value of assets, the government will decided on a appropriate rate of depreciation over the useful life of the asset.

Under liabilities, the government cannot keep certain liabilities outside its balance sheet. For example, off-Budget items like oil bonds issued to state-run refiners would have to be accounted for.

Economic Effect :

During last two decades, government is able to cover Fiscal deficit by capital receipts (most of them is through sale of government land and IPO of government companies. But it is not long term solution because government will become insolvent after few decades.

Now, CAG has come up with innovative solution that for first five years, government will make up all previous assets. So, high Capital Receipts will cover fiscal deficit for next 10 years. (Because it will give huge asset surplus. Do not forget that forest, railways, defence will be capitalised) No one will care for liability part. It will be left under logical incrimination approach of government officials. 

Government Budget Extract

Result :

Government will allocate revenue expenditure into capital initial years, will decide low depreciation rate to same revenue losses, which is quite logical as all government assets are for very long term use. After 20 years we will reach to same problem again as logic of development government accounting will be exposed. (Provision and Depreciation will match capital expenditure, may be go higher).

But, we need not to worry because, we are creative and innovative, we will find some other method to overcome from that problem.

 

Resources :

Following can be read for details.

The Hindu ; Tax Guru ;Business Standard