Why Governments Should Use the Government Finance Statistics Accounting System

Abstract

In May 2008, the Australian government presented its budget to parliament solely in terms of the IMF Government Finance Statistics (GFS) accounting system; and in December 2008 it announced that all outcome financial statements were also to be GFS based.These two decisions brought to an end a long and arduous controversy over the use of accrual accounting by governments in Australia since their adoption the early 1990s. Initially, the Australian Accounting Standards (AAS) business‐based system was adopted, with a few modest extensions covering the public sector. However, there was much controversy over the displacement of cash accounting and budgeting systems by accrual accounting; and secondly whether the AAS system was appropriate for the public sector.In May 1999, the Australian government introduced accrual budgeting in place of cash budgets. However two sets of accrual budgets were presented to parliament—an AAS‐based one and a GFS‐based one. The two budgets presented substantially different results, causing endless confusion in parliament. Furthermore, departments and the whole of government continued to present only AAS outcome financial statements.In this paper, the above history is traced out together with the reasons for the decisions. The final decision to adopt the GFS system, covering both cash and accrual accounting systems, is explained in terms of the roles and operating environments of governments. These determine the financial information needs of government, and they are shown to be fundamentally different from those of business. Finally, the structure and concepts used in the GFS system are explained.