Governmental budgetary reporting systems in the European Union: is the accounting basis relevant for the deficit reliability?

Abstract

When reporting to Eurostat for the purpose of deficit assessment, EU member states follow National Accounts (NA) rules, specifically the European System of National and Regional Accounts. However, the information reported is gathered from Governmental Accounting (GA), namely budgetary reporting. Consequently, several adjustments are needed when translating data from GA into NA, including those concerning the accounting basis -in some countries GA budgetary balance is already accrual-based while in others it is still cash-based. This research aims to analyse adjustments derived from different accounting bases adopted in GA and NA, demonstrating their diversity and materiality and the consequences for EU member states' deficit/surplus reliability. It analyses cash-accrual adjustments to be made in Central Government data, using a few EU countries and data from the respective Excessive Deficit Procedure notifications covering the years 2005 to 2010. The main findings show that cash-accrual adjustments are more diverse and tend to be material in relation to the final deficit/surplus, in countries still adopting cash-based budgetary reporting in GA, raising questions concerning the reliability of the deficit/surplus they report. Points for practitionersThis article contributes to a better understanding of the accounting basis differences for the convergence process between GA and NA, allowing for more reliable and informative budgetary reporting to be reached from both micro and macro perspectives. It highlights how important it is that GA moves from cash to accruals, namely

Accounting basis adjustments and deficit reliability: Evidence from southern European countries

“…According to the Inventories of Sources and Methods 7 (hereafter named Inventories) each EU member-State discloses, the main adjustment categories relate to: (i) cash/accrual adjustments for taxes, social contributions, primary expenditures and interest; and (ii) reclassification of some transactions, namely capital injections in State-owned corporations, dividends paid to GGS entities, military equipment expenditures and EU grants (Jesus & Jorge, 2014, 2015. The differences related to the definition and scope of reporting entity under GA and NA and the preparation and disclosure of consolidated financial statements are not explicitly mentioned in those Inventories.…”

“…Analysing the Inventories, it can be observed that the procedures are not harmonised between countries, both in terms of the issues adjusted and in the way the adjustments are done (Jesus & Jorge, 2014, 2015.…”

“…The quantitative impact of the accounting differences between GA and NA on the Central Government deficit/surplus reported by the three counties analysed, is evaluated, as explained, using data reported in Table 2A Regarding Portugal and Spain, the 'working balance' in Table 2A concerns only to the subsector State data as the deficit/surplus of other Central Government entities is disclosed as a whole in a separate item (Jesus & Jorge, 2014, 2015. The Italian 'working balance' reports the Central Government deficit/surplus for all entities included in this subsector (EUROSTAT, 2010a(EUROSTAT, , 2013a.…”

Introduction to a Symposium on New Challenges for Public-Sector Accounting: IPSAS, Budgetary Reporting, and National Accounts

“…Given that the macroaccounting information (national accounts-NA), whose outputs are used to control and assess the Maastricht Treaty criteria, is derived from microaccounting (governmental accounting-GA), good-quality reporting systems for accounting at microlevel are demanded to assure debt and deficit data, among other, at accrual-based macroaccounting level (Jesus & Jorge, 2015).…”

“…Nevertheless, one remaining question is whether the IPSAS approach, covering essentially financial reporting systems, is the most suitable to avoid problems of governmental deficit and debt reporting (Benito, Brusca, & Montesinos, 2007), considering that information to NA is obtained from the microbudgetary accounting systems, mainly cash-based, hence requiring adjustments when translating data from micro-into macroaccounting (Jesus & Jorge, 2015;Jones, 2003 comparability and accuracy problems remain regarding reporting within the NA framework. This is particularly relevant, in the current context of financial crisis, when a government does not accomplish the deficit and debt levels under the EU fiscal surveillance requirements, questioning the quality of those ratios reported based on NA data.…”