Treasury finances 1997-1998. 5. Financial reporting reform

Treasury Finances 1997-1998
Iceland, December 1997

Last spring a new act was passed on the presentation of the Budget. This is a comprehensive act covering the central government financial statements, the Budget and the Credit Budget. The act comes into effect now with a changed presentation of the 1998 Budget Proposal, where it is presented on an accruals instead of a cash basis. The new comprehensive classification system for government entities ensures that the government's financial reporting system encompasses all government activity. These reforms should promote more effective and efficient financial management practices in the government and should make it much easier to gauge government activity.

Cash vs. accruals basis. Until now, the Budget has been presented on cash basis, while the central government financial statement has included commitments made during the fiscal year. Cash basis has advantages for tracking expenditures in a fiscal year and showing short term effects of Treasury finances on the economy. The greatest flaw of this method is that it does not show the total commitments made in the fiscal year, only the part that is payable during the year.
The main aim of presenting the Budget on accruals basis, is to show in a concise manner the total activity of the central government and aid in assessing the long term effects. Several of the decisions made within the fiscal year have effects beyond that year. Commitments for central government employees' pensions and interest payments accumulate, although actual payments do not take place until a future date. To utilise the advantage of each of these accounting methods, the Budget and the financial statements will from now on be presented on accruals basis, accompanied by the accounts on cash basis.

Other changes. Another significant change is in treatment of allowances. Until now, allowances for borrowing and expenditure has either been sought through the Budget, the Credit Budget or a separate act. From now on, these allowances will only be made through the Budget and thus all decisions regarding the central government finances are made at the same time, whether regarding appropriations, operation of government institutions, investment, borrowing or guarantees. The separate Credit Budget will thus, be abolished.
Furthermore, changes are being made to the financial statements, which will now be divided into five groups. Group A consists of central government operations, i.e. financing of constitutional bodies, ministries, capital projects and transfers to non-government entities. Group B consists of non-financial public enterprises, while Group C consists of lending institutions. Groups D and E consist of financial enterprises and government majority-owned companies, but these have not been accounted for in the central government financial statements until now. The finances of entities in groups A, B and C will be covered by the Budget and Budget Proposal.

Changes to aggregate figures. As a result, considerable changes take place both on the revenue and the expenditure side. The revenues increase by 26 billion krónur from cash basis in the former system to accruals basis in the new one. Thereof, 10 billions are due to items formerly netted out on the revenue or the expenditure side which are now accounted for on the opposite side as well as items that were previously not included in the Budget, and 8 billions are due to changes from cash basis to accruals basis. The expenditures increase by 28 billion krónur, 18 billions due to the aforementioned transfer between revenues and expenditures, while 10 billion are due to the change from cash basis to accruals basis. These changes are shown in the table below.

Billions of krónur	1998
Revenues:
Total revenue, former presentation, cash basis	137.6
1. Items formerly subtracted from revenues, now counted as expenditures	10.0
2. Items formerly subtracted from expenditures or not included in the Budget	8.4
Total revenue, current presentation, cash basis	156.0
3. Difference between cash basis and accruals basis	7.5
Total revenue, current presentation, accruals basis	163.5
Expenditures:
Total expenditures, former presentation, cash basis	134.4
1. Items formerly subtracted from revenues, now counted as expenditures	10.0
2. Items formerly subtracted from expenditures or not included in the Budget	8.4
Total expenditures, current presentation, cash basis	152.6
3. Difference between cash basis and accruals basis	10.4
Total expenditures, current presentation, cash basis	163.0

The items formerly subtracted from revenues, which are now counted as expenditures include child benefits and interest rebates which are a part of the personal income tax system and charges to the church and cemeteries which the central government collects, but hands over to local authorities. The items formerly subtracted from expenditures, which are now counted as revenues include various user charges and items which were not included in the Budget before, such as user charges for state radio and TV and the Development Fund in the fisheries sector. The difference between cash basis and accruals basis, aside from the difference in cash flow and when charges are levied, include accrued public employee pension rights (2 billion krónur), accrued interest payments on outstanding debt (3.9 billion krónur) and tax claims written off (3.9 billion krónur).