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Financial Management and Accounting Principles

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Practice Advice on Public Financial Management

Financial Management and Accounting Principles (OECD)

Summary Advice: The OECD advises that modernization of financial management and accounting within governments includes the introduction of accruals, capital charges, carry-overs of unused appropriations, and interest-bearing accounts.

Main Points:  


  • The objective of moving to accruals is to make the true cost of government more transparent.
    • Instead of spikes in expenditures when individual capital projects are undertaken, accruals incorporates them into the annual operating expenditures through an allowance for depreciation.
    • Treating loans and guarantee programmes on an accrual basis fosters more attention to the risks of default by those who have been granted them, especially if there is a requirement for such default risks to be pre-funded
  •   Adopting accruals helps improve decision-making in government by using this enhanced information.
    • It is expected that managers should be responsible for all costs associated with the outcomes and/or outputs produced, not just the immediate cash outlays.
  • There are a number of issues with accruals which are beyond the scope of this paper, such as...
    • To what extent to adopt accruals (for financial reporting only, or for budgeting as well; or for certain categories of transactions only)
    • How to treat certain types of asset and liabilities that simply do not exist in the private sector (heritage assets, military assets, infrastructure assets and the treatment of social insurance programmes);
    • What valuation methods should be used (historical cost or current cost); who should be responsible for setting accounting standards as a great number of judgements and assumptions need to be made in accrual environment.
  • A significant number of countries have very serious reservations about the use of accruals, such as... 
    • The introduction of accruals could undermine fiscal discipline
    • Accruals depend on complicated technical assumptions that can be easily manipulated.
    • Accruals are poorly understood by politicians.

Capital charges

  • Intended to track and charge for the cost of capital tied up in the asset by levying a charge on the cost of capital tied up in all assets in an agency.
  • When the system is first introduced, the appropriations to all agencies will be increased by the amount of their capital charge, so there’s no net impact on agencies or for the government as a whole.
  • Agencies will in future be allowed to dispose of the assets and thus relieving themselves of the capital charge while retaining the original appropriation to cover it (or part thereof)


  • Attempts to eliminate the irrational rush to spend money before the end of the fiscal year by allowing expenditures to be freely transferable (sometimes up to a certain limit) from one year to the next.
  • Only in cases where an agency continuously, year-on-year, builds up carry-overs does the Ministry of Finance intervene.
  • The advent of medium term expenditure frameworks also gives a benchmark for agencies to see that their appropriations are in fact being carried-over.

Interest-bearing accounts

  • For example, the appropriation of an agency is divided into twelfths (representing each month) and deposited into an agency’s account (either within the Finance Ministry or with a commercial bank).
  • If an agency spends at less than this rate, they will receive interest on the difference. If they spend at a faster rate, they will pay interest on the difference.

Source: OECD (2003) Budget Reform in OECD Member Countries: Common Trends at (accessed 21 October, 2012).

Page Created By: Matthew Seddon on 1 November, 2012. Updated by Ian Clark on 2 January 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.


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