CONVERGENCE OF FINANCIAL REPORTING IN THE PUBLIC SECTOR TO THE PRACTICE OF BUSINESS SECTOR

Name of the first author: Vesna Vaiek, Ph.D. Affiliation: Full Professor, University of Zagreb, Faculty of Economics and Business Address: Trg J. F. Kennedya 6, 10 000 Zagreb, Croatia Telephone number: ++3851-238-3110 Fax: ++3851-233-5633 E-mail address: vvasicek@efzg.hr

Name of the second author: Martina Dragija, B. Sc. Affiliation: Teaching and Research Assistant, University of Zagreb, Faculty of Economics and Business Address: Trg J. F. Kennedya 6, 10 000 Zagreb, Croatia Telephone number: ++3851-238-3110 Fax: ++3851-233-5633 E-mail address: mdragija@efzg.hr

Name of the third author: Mirjana Hladika, B.Sc., doctoral student Affiliation: Teaching and Research Assistant, University of Zagreb, Faculty of Economics and Business Address: Trg J. F. Kennedya 6, 10 000 Zagreb, Croatia Telephone number: ++3851-238-3116 Fax: ++3851-233-5633 E-mail address: mhladika@efzg.hr Key words: financial reporting, public sector, accounting basis, IPSAS, IAS/ IFRS 1. Introduction Current trends that encourage connection and cooperation of business entities at the international level create a need for a uniform framework of financial reporting. This process known as globalization is overtaking not just business sector but also public sector. Connection of national economies requires convergence and harmonization of financial reporting for public sector entities as this practice exists by the business entities. Towards better cooperation and business connection between business and public sector entities, business and public sector tends to harmonize financial reporting between themselves. Principles of business for business entities are looking to transfer and apply to business of public sector entities. Business like governments or entrepreneur governments often use private sector financial management techniques.1 The aim is to achieve comparability of financial reporting between business entities and public sector entities, both at the national and international level. The process of convergence of financial reporting of
This paper is the result of the research funded by the Ministry of Science, Education and Sports, Croatia, as a part of the scientific project No. 067-0811272-1074, titled The perspectives of the managerial accounting implementation in Croatian public sector. Chan, J. (2003). Changing Roles of Public Financial Management, in Bouvaird, T. and Loeffler, E. (eds.), Public Management and Governance, London: Rutledge, pp. 105
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public sector to the practice of business sector includes the implementation of International Financial Reporting Standards (IFRS) in the public sector. Assumption of convergence of financial reporting in the public sector with the business sector reporting is based on the application of International Public Sector Accounting Standards (IPSAS) who are approaching and are based on IAS/ IFRS. Implementation of IFRS in the public sector implies application of accrual basis of accounting. Applied accounting basis in different countries is still uneven, but international trends are showing that many countries have left cash basis and that they encourage implementation of accrual basis of accounting, which is present in business sector. This paper deals with problems that are connected with implementation of accrual basis of accounting and IPSAS. It shows problems that countries meet in crossing on accrual basis of accounting and advantages and disadvantages that implementation of accrual basis carries. The main emphasis is on highlighting changes that occur in the public sector of countries in transition in carrying out mentioned reforms. The paper analyzes the changes in government accounting of Croatia, Bosnia and Herzegovina and Slovenia. 2. Implementation of International Financial Reporting Standards in public sector In order to connect public sector with business sector at the international level there is a requirement for harmonization or acceptance and use of recognized and comparable international standards with the purpose of mutual informing. Related to this, in terms of internationalization of economic activities, there is a need for harmonization of accounting model for business sector and accounting model for public sector. The aim is to establish a quality information system for monitoring of financial position and performance of business and public sector entities. Today, the harmonization of financial reporting is conducting in three directions: a) harmonization of national accounting standards for business sector with the International Accounting Standards and International Financial Reporting Standards (IAS/IFRS); b) harmonization of national accounting standards for public sector with International Public Sector Accounting Standards (IPSAS); c) harmonization of International Public Sector Accounting Standards with the International Accounting Standards/International Financial Reporting Standards. In this paper, the emphasis is on IPSAS harmonization with IAS/IFRS and the possibility of implementation of IFRS into the public sector. The fundamental assumption, in the process of harmonization of financial reporting, is that public sector entities (its profit and non-profit segment) are treated at the same way as the business sector entities. The most important precondition for the implementation of IFRS in the public sector is the application of accrual basis. According to this basis, the effects of transactions are recognized when they incurred, not when it is cash or cash equivalent received or paid. Also, an important characteristic of this basis is that the users of information will be informed not only about past transactions, but also with information about obligations that must be settled in the future period and about assets for which money will be received in the future periods. The move to accrual based accounting is part of the process of adopting business sector style financial statements for the public sector. This includes the production of the equivalent of a balance sheet, a profit and loss account and a cash flow statement. 2.1. Coverage of public sector

Before talking about implementation of IFRS in public sector, it is necessary to define its scope. According to Government Finance Statistics2, the public sector consists of general government sector and public (financial and non financial) corporations and quasicorporations. General government sector can be divided into central, state and local government subsectors. Coverage of general government sector in the Republic of Croatia is adapted to the requirements of Government Finance Statistics. Regarding to institutional framework, the budgetary system relates to the general government sector. General government sector in the Republic of Croatia includes the state budget, budgets of local (regional) governments and extra-budgetary funds. In other words, the general government sector includes all institutions financed from the state budget, budgets of local and regional units and extra-budgetary funds. The central government, as the highest level of fiscal authority that exists in some countries, include all subjects who have as their core activity running the state's functions, and it consists of the state budget, users of state budget and extra-budgetary funds.3 Coverage of general government in the Republic of Slovenia and Federation of Bosnia and Herzegovina is determinate on the similar way like in Croatia. In the Republic of Slovenia, the coverage of public sector includes, except national and local authorities, National Bank, agencies, public institutes, various commissions and committees (eg, Health Insurance, Unemployment Insurance Supervisory Agency, the National Agency for Regional Development, etc .), as well as public institutions in the field of health, education, higher education, social welfare, etc. (public schools, kindergartens, schools, homes for children, seniors, students, etc.). 2.2. Influence of International Financial Reporting Standards on development of International Public Sector Accounting Standards Global convergence of public sector financial reporting systems has accelerated as national accounting standards converge with one another, strengthening International Public Sector Accounting Standards Board (IPSASB) as a global standard setter as regards public sector.4 The International Federation of Accountants (IFAC) within which (IPSASB) operates as a permanent committee has a major role in the international process of harmonizing the accounting and financial reporting systems, especially in encouraging the application of accruals. The objective of the IPSASB is to develop programs aimed at improving public sector financial management and accountability. Also, current activities of IPSASB are aimed
2

Government Finance Statistics Manual 2001, pp. 7-10, points 2.9.-2.27.

Detailed about this in: Hladika, M. (2009): Accounting vs. Statistical approach to the consolidation in budgetary system), in: Third Conference Croatian public sector in current economic conditions, Proceedings, Croatian association of accountants and financial employees, Opatija, 2-3 April, 2009, pp. 297311.; and Hladika, M. (2009): The impact of accounting and statistical standards on the quality of consolidated financial statements of budget. Master' Thesis, The Faculty of Economy and Business, Zagreb, pp. 6-11.
4

Roje G. and Vaiek V. (2008): The Impact of Globalization: the Convergence of Financial Reporting Systems and Harmonization Requirements, in: First International Conference Vallis Aurea Focus on: Regional Development, Proceedings, Veleuilite u Poegi, September 2008, Poega Vienna, Croatia Austria, p. 825.

to develop IPSASs which are recommended to be applied to all public sector entities other than government business enterprises (GBEs). In fact, the International Public Sector Accounting Standards Board (IPSASB) launched its Standards Programme in 1996. It was then decided to focus on the full accrual accounting and also to address the needs of constituents on the cash basis, which was yet the reporting basis for the large majority of governments globally.5 In undertaking the process of developing the IPSAS, the IPSASB attempts, wherever is possible, to maintain the accounting treatment and original text of the IAS or IFRS unless there is a significant public sector in which needs a divergence (as example, the recognition principles for tax revenues). To date IPSASB has issued 31 accrual-basis IPSAS reflecting an array of international trends and views concerning governmental accounting development. Also, IPSASB has issued a comprehensive cash basis IPSAS. Of all the previously published IPSASs, just IPSAS 22 Disclosure of financial information about the general government sector, IPSAS 24 Presentation of budget information in financial statements and the Cash Basis IPSAS - Financial reporting under the cash basis of accounting are not based on any of the IAS. Other IPSASs are derived from IFRS/IAS. The aforementioned standards includes (some of) specificity of business public sector entities arising from a variety purposes of work public sector entities in relation to business (profit) entities. IPSASs set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events in general purpose financial statements of all public sector entities. The Standards do not apply to Government Business Enterprises (GBEs). GBEs apply IFRSs. IPSASs include only a definition of GBEs. Government Business Enterprises are almost the same as their private-sector counterparts. The premises of private sector business financial accounting are valid for GBEs as well. Because of these similarities it is possible to have the same set of accounting standards for government and private business enterprises. The main goal and purpose of IPSASs development is to encourage states and governments to adopt the same as it would result in improving the quality and comparability of financial reporting in the public sector. IPSASB, therefore, encourages states and governments to implement the IPSASs, but it leaves them the right to continue with the appliance of national accounting public sector standards or any other framework for financial reporting in their competencies, as long as national accounting frameworks tend to be harmonised and compliant with the IPSASs. The following table shows governments that already apply full accrual accounting standards and apply accounting standards that are broadly consistent with IPSAS requirements.
Table 1: National Public Sector Accounting Standards Similar to IPSASs COUNTRY Australia Canada New Zealand United Kingdom

Ibidem, p. 829.

United States of America

Source: IPSAS Adoption by Governments, www.ifac.org

3. Accrual Vs. Cash Accounting In connection with implementation of IPSAS in public sector, the most important precondition is use of accrual basis of accounting in public sector. Also, over the last three decades public sector has been affected with requirements for reforms in public sector in order to be able to deal with increasing government expenditures in conditions of limited public resources. These reforms are often referred to as New Public Management6. NPM is a reform that carries following goals: improving the efficiency and effectiveness in the public sector, encouraging responsibility of government unit to users and customers of their services, reducing public expenditure, improving and strengthening the management accountability.7 So, to be able to fulfill all mentioned goals of New Public Management reform and to be ready to implement IPSAS, it is necessary to move from traditional public sector accounting cash accounting to a modern one - accrual accounting. Transition from cash basis to accrual basis is very demanding and complicated process and because off that it is very important to know advantages and disadvantages of both. 3.1. Advantages and disadvantages of accrual and cash basis

The public sector accounting is based on two different bases: cash and accrual basis8. According to cash basis, all accounting transactions and events are recognized when payment is made or money received. The advantages of this basis are: its simplicity and accuracy in measurement of elements in financial reports; it is easy to control collection and spending of public money; it is possible to monitor budgetary restrictions. But despite mentioned benefits this basis has many restrictions and doesnt give enough relevant accounting information, so from the point of usefulness of this basis many believe

In the following text will be used the acronym NPM for New Public Management

More detailed about NPM: Roje, G. (2008) New Public Management: concept of modern management in public sector, RIF 2008, 11, pp. 53-61
8

More detailed about mentioned accounting basiss:

Vaiek, V. (1997): Raunovodstvena osnova kao determinata oblikovanja financijskih izvjetaja prorauna (Accounting basis as a determinant of forming budgetary financial reports), XXXII simpozij HZRFD, Raunovodstvo, financije i revizija u suvremenim gospodarskim uvjetima, Pula,1997. Zagreb:Hrvatska zajednica raunovoa i financijskih djelatnika. Vaiek, V. (2000): Perspektive primjene naela nastanka dogaaja u proraunskom raunovodstvu (engl. The perspective of implementation of accrual basis of accounting in government accounting) , XXXV simpozij HZRFD, Raunovodstvo, financije i revizija u suvremenim gospodarskim uvjetima, Pula, lipanj 2000. Zagreb:Hrvatska zajednica raunovoa i financijskih djelatnika.

that it is better to move to accrual accounting. Most highlighted disadvantages of cash basis are: no attempt is made to match an expense with the revenue it generates; there is no information about the cost of provided service; it is not possible to measure performance; the balance sheet is not presented; real financial and economic position is not disclose.

On the other side we have accrual basis and this is accounting basis under which all accounting transactions and events are recognized when they occur. This means that all transactions are recognized regardless when payment is made or receive. This accounting basis is the standard accounting basis for business sector, but today public sector accounting is getting closer to principles practiced in business sector. Passing to accrual accounting system is not a purpose in itself but rather a change of mentality regarding the budgetary process, by passing from a rigid situation of cashed incomes and paid expenses to a situation where emphasis is on achievements and forecasts.9 Some of most important advantages of accrual basis are: provides information about current assets and liabilities and financial position (based on balance sheet)10, also provides information on revenues and expenses (including the impact of transactions where money is not received or paid); it provides better incentives to manage assets and dispose of those no longer needed and better incentives in planning investments11 focus is put on outs rather on inputs; the information based on accrual accounting have better quality and are relevant and on that way improve decision-making; it enables comparison of full cost of service with the costs of provision of those service by the private sector12; the cost management is more effective. From mentioned advantages we can conclude that accrual based accounting encourage transparency, improves integrity and reality of accounting information and gives opportunities for performance measurement of government unit activity and public management. But despite mentioned advantages, accrual based accounting has some disadvantages that are the main reason why this basis is still in minority in compare with cash basis. Summarized disadvantages of accrual basis are: problems associated with long term non-financial assets (how to identify and value existing assets in public sector?), while in public sector mentioned assets in most

Bunea-Bontas, C. and Petre, M. C. (2009.): Arguments for introducing accrual based accouniting in the public sector, University of Pitesti, Workong paper, http://ssrn.com/abstract=1491663 [Accessed 26.02.2010.]
10

Wynne, A. (2004.): Is the Move to Accrual Based Accounting a Real Priority for Public Sector Accounting?, http://www.accaglobal.com/doc/publicsector/ps_doc_008.pdf [Accessed 19.03.2010.]
11

Blondal, Jon R. (2004), Issues in Accrual Budgeting, OECD Journal on Budgeting, Volume 4, No.1, p. 105

12

Wynne, A. (2004.): Is the Move to Accrual Based Accounting a Real Priority for Public Sector Accounting?, http://www.accaglobal.com/doc/publicsector/ps_doc_008.pdf [Accessed 19.03.2010.]

cases is not in function of achieving future economic benefits (like in business sector), because this assets are in function of main government functions execution. Also, we have assets that are characteristic only for public sector, like infrastructure assets, heritage assets, military assets, natural resources such as mineral reserves and forest. So, it isnt easy to measure these assets in financial reports and there are many disagreements about the valuation methodology and which assets to value. very high cost of moving on accrual based accounting (costs of trainings for developing of all necessary skills for accountants and users of financial reports, costs of establishing new accounting system, costs of employing more professionally qualified accountants); complexity of the financial statements produced.

When we talk about cash and accrual basis, it is necessary to point out two modifications of mentioned bases that country often use for financial reporting and that are; modified cash basis and modified accrual basis. Specificity of modified cash basis is in the period when payment is made or received and according to this basis the business year is extended for about 30-60 days. While, modified accrual basis recognized expenditures when they appear regardless of payments, but income are recognized when the money is received. 3.2. Key problems of moving on accrual accounting

The trend of moves toward accrual accounting, which began to take place in the late 1980s, primarily in Australia and New Zealand is now claimed to be a global trend.13 Until today the number of countries, that have adopt accrual basis of accounting, is increasing and the half of OECD members countries use some form of accrual accounting. Also there is much greater acceptance of accrual basis for financial reporting in public sector than for budgeting process. But nevertheless the number of countries that have moved on some form of accrual basis is still modest. What are the key problems why many countries despite this global trend dont want to implement accrual accounting? A number of problems arise when moving to accrual basis and every country has its own issues that appear in connection with implementation of accrual accounting. First problem14 is in certain types of assets and liabilities that is specific just for public sector and doesnt exist in business sector. These include heritage assets, military assets, infrastructure asset and social insurance program. The main problem is how to measure and recognize these assets because of their special characteristics that arent present in business sector; very long life cycle, their value increase over the year, they dont have replacement value and their acquisition costs are not known. The similar problem exists with recognition of military assets. Every country can define military assets on specific way. For example, the United States divide military assets on military's general purpose assets and specific military assets. Infrastructure assets are also assets that exist only in public sector and it is very difficult to measure. This asset has extremely long live cycle and it isnt easy to separate original investments and maintenance costs. So, in recognition of the mentioned assets and costs
13

Adhikari, P. and Mellemvik, F.: International Trend in Government Accounting, International Journal on Governmental Financial Management 2008, http://www.scribd.com/doc/10269017/Adhikari-MellemvikInternational-Trends-in-Government-Accounting [Accessed 26.02.2010.] More detailed: Blondal, Jon R. (2003), Accrual Accounting and Budgeting: Key Issues and Recent Developments, OECD Journal on Budgeting, Volume 3, No.1
14

associated with its use there are certain dilemmas: regarding the recognition in the financial statements and regarding with reliable and measurable value at which those assets can be followed in the accounting records and financial statements. Problem of moving on accrual basis exist also for obligation that are specific for public sector like social insurance programs. Social insurance programs represents obligation for the government in the future even though some believe that that social insurance programs should not be treated as liability for the government. The main problem with this program is how to recognize current liability based on current level of benefits, because social insurance programs are not contractual exchange transactions. It is noted that these programs are income transfers financed by compulsory taxation (contributions) and that level of benefits often bears a very indirect or even disproportionate relationship to the levels of taxes actually paid.15 Second problem or it is better to say issue that appears when moving to accrual accounting is a valuation issue. What base should be taken for valuation of assets; historic cost or current value? Some believe that historic cost is better because is based on assets valued at their acquisition costs with subsequent depreciation, but the problem with historic cost is that original acquisition cost is often not known or that the assets value is out-of-date.16 Current value eliminates problems of historic cost but has problems with valuation because requires many professional judgments to be made. There are number of different methodologies for applying current valuations; depreciated replacement cost, value in use and net realizable value. Each of mentioned methodologies has their own problems17, so it isnt easy to decide which basis is right one. Also, important problem that appear in connection with current valuation is fluctuation of value from one year to another and this can reflect very negative on financial reporting in public sector. Third problem that often arise in many countries is problem of inadequate employees that arent able to move on accrual basis because they have been trained in the cash basis. So, to solve this problem it is necessary to employ professional accountants and to train existing employees to be able to work in different accruals process. This is very expensive work and many countries simply cant afford it. In connection with accountancy skills appears also problem of IT equipment. Major investments in information technology equipment arise from moving on accrual accounting and that increase costs of every government that decide to implement accrual basis in their own government. Above mentioned problems are mostly main barriers why countries move so slowly from cash to accrual basis of accounting. Of course the list of problems is much longer and different for every country. But despite of all problems, the positive trend of moving on accrual accounting exist and great number of countries is moving in direction of partial or total implementation of accruals, because only accrual accounting can improve transparency of financial reporting of government and their units and can give relevant informations for planning process and for improvement of public sector management process. 4. Accrual accounting challenge for countries in transition
15

Blondal, Jon R. (2003), Accrual Accounting and Budgeting: Key Issues and Recent Developments, OECD Journal on Budgeting, Volume 3, No.1, p. 46 Ibid, p. 47

16

More detaild: Blondal, Jon R. (2003), Accrual Accounting and Budgeting: Key Issues and Recent Developments, OECD Journal on Budgeting, Volume 3, No.1, p. 50

17

The demand for public sector reform is present in almost every country, but as it was mentioned in previously chapter many problems arise with this reform. Countries that are in transition have along with all mentioned problems more additional problems that derive from economical and political situation of those countries. Government accounting of every country is integrated in unique political and economical environment of budgetary processes so that every change or improvement in this area is altogether connected on some way with changes and improvements of public sector reform as unity.18 In the next chapter, the current situation and future developments in government accounting of the Republic of Croatia, the Republic of Slovenia and the Federation of Bosnia and Herzegovina will be presented, as an example of countries in transition. 4.1. Example of Republic of Croatia

Until the end of year 2001, the Republic of Croatia has used cash basis in the government accounting. This basis, as it was mentioned, has many advantages and disadvantages, but the main characteristic is that accounting based on cash basis reports primarily about receipts, expenditures and changes in public cash and cash equivalents19. The system based on cash basis didnt give any information about financial position, assets, receivables, liabilities and costs of provided services. So in the spirit of public sector reforms, with emphasis on harmonization and standardization at the international level, and because of mentioned disadvantages of the accounting system based on the cash basis, many countries abandoned this system and are going in the direction of introducing principle of accrual basis of accounting which reflects a complete economic reality. So, the Republic of Croatia applies from 01.01.2002 modified accrual basis in government accounting. In relation to the application of full accrual, this accounting basis is marked with following adjustments20: Revenues of public sector entities are recognized when the cash is received, therefore, the cash basis. Expenses of current non-financial assets are recognized at the time of purchase, therefore not at the time of actual consumption. The costs of procurement of fixed asset with small value are not capitalized, because they are entirely presented as expense at the time of purchase.

Vaiek, V., Vaiek, Davor., Roje, G. (2009): Meunarodni raunovodstveni standardi za javni sektor (IPSAS) vs. raunovodstvena regulativa u tranzicijskim zemljama (International public sector accounting standards (IPSAS) vs. accounting regulations in transition countries), Zbornik referata IV. Meunarodnog Simpozija "Meunarodni standardi u sektoru financija i raunovodstva vs. nacionalna praksa", Mii, Augustin (ur.).Mostar: Fircon d.o.o Mostar, p.148 Vaiek, V. (2004) : Stanje i pravci razvoja raunovodstva prorauna (Current situation and possible development of government accounting) . U: Tadijanevi, S., Cota, B., ur. XXXIX. simpozij, Pula. Financijski i raunovodstveni aspekti korporativnog upravljanja u profitnim i neprofitnim subjektima. Zagreb: Hrvatska zajednica raunovoa i financijskih djelatnika, p. 192.
20 19

18

More detailed:

Vaiek, D., Mra, J., Dragija, M.,(2009): Depreciation and the price of public services: Croatian experience, 8th International Symposium ECONOMY & BUSINESS, Economic Development and Growth, Marijan Cingula(ur.), Sunny Beach: Bulgarian Academy of Sciences, pp.570-581

The costs of procurement of fixed asset are not capitalized and they are not systematically apportioned on a time or functional basis as expenses during the period of useful life. Therefore, does not calculate the annual amount of depreciation but the cost of asset become expense of reporting period when the asset is purchased. This principle applies to advances that have been given in the process of procurement as well as investments in progress, so regardless what the process of procurement are not completed, or that asset is not ready for use. Increase in assets during the procurement fixed non-financial assets without the costs (capital received donations) are not recognized as revenue but directly increased the sources of ownership (public capital). Spending fixed non-financial assets during the administration estimated life is expressed as the expense of the sources of ownership (public capital) using proportional basis of value adjustment. Residual value of fixed non-financial asset that is sold or decommissioned is not reported as an expense, which arises from the fact that the total expense was recognized at the time of purchase. The changes in value and volume of assets and liabilities are not reflected in the financial result but they directly reflect on the value of sources of ownership (public capital).

Thus defined and set budget accounting system provides a significantly expanded volume of information which is primarily seen in the available information, especially information about obligation and on the condition and changes in the value of assets and receivables. Available information is necessary to determine the financial position of the government unit. Reliable records on these obligations is extremely important at the stage of budget execution and treasury, because it enables the exercise of control of money in correlation with future liabilities and oversight of current liabilities enables monitoring their effect on cash flow projections in the Single Treasury Account. A high degree of normative framework is deemed as one of the most important features of government accounting system, both in Croatia and all over the world. Since the accounting framework in Croatia has been set up as a law based system and since governmental activities have been financed through the Budget, the legislative framework regarding governmental accounting development was determined by the Budget Act and other additional set of regulations. Those additional regulations (decrees, instructions, and policies) define and analyze certain parts of the main Act more precisely and thus enable faster and easier qualitative adoption of regulated solutions.21 The most important legislative documents that regulate the existing Croatian government accounting system are as follows: The Budget Act (Croatian Official Gazette, No. 87/2008.), The Policy for determining budget users and managing the Registry of budget users (Croatian Official Gazette, No.80/2004.), The Policy for budgetary accounting and Chart of Accounts (Croatian Official Gazette, No. 27/2005, No 127/2007.), The Policy for financial reporting in budgetary accounting (Croatian Official Gazette, No. 27/2005, 2/2007.), The Policy on budget classification (Croatian Official Gazette, No. 94/2007.).
21

Roje G. and Vaiek V. and Vaiek D. (2008) Development of Governmental Accounting, Proceedings of the 12th World Congress of Accounting Historians Accounting History and Culture: From the Past to the Present. Istanbul: Turkey. ISBN 978-975-01960-7-2, pp.2253-2570.

A complete set of basic financial statements that public sector entities should assemble, according to IPSAS 1, are:22 The statement of financial position The statement of financial performance The statement of change in net assets/equity The cash flow statement and Accounting policies and Notes. Appropriate reporting system is defined in accordance with the settled accounting information system which is based on modified accrual basis. Entities that are obliged to prepare the basic financial statements are the state budget, budgets of local and regional governments and extrabudgetary users. A complete set of financial statements comprises: The balance sheet, The report on changes in assets and liabilities volume, The report on revenues, expenditures, cash receipts and expenses, The cash flow statement, and The notes. Together with preparing the aforementioned financial statements, budget users compose additional financial statements. These are: The statement of expenditures according to functional classification, The statement of liabilities, and The statement of revenues and expenditures of budget users. According to the above, it is clear that the basic financial statements in government accounting in the Republic of Croatia are only partial complied with the basic financial statements according to IPSASs. A main difference is in the quality of presented information as a result from different applied accounting basics. Also, the difference is in part of additional financial statements. The necessity of strictly determination the coverage of the general government sector particularly is evident when determining the entities who are obliged to apply government accounting. Entities that are obliged to use government accounting are defined in The Budget Act23. Government accounting is obliged to use all the state budget users24 and users of local or regional budget and their budget users. Extra-budgetary users are obliged to use
22

IFAC IPSASB: IPSAS 1 Presentation of Financial Statements, point 21., pp. 37., http://www.ifac.org The Budget Act, Croatian Official Gazette, No. 87/2008, article 99.

23 24

According to the Policy for determining budget users and managing the Registry of budget users (Croatian Official Gazette, No.80/2004.), it is prescribed that budgetary units are those entities: 1. whose founder is the government and/or local government, 2. whose income source is the government budget and/or local government budget in the amount of 50% or more, and 3. who are listed in the registry of budgetary units. Extra-budgetary users are those entities: 1. where government and/or local government have a decisive influence on the management, 2. where one of source of founding is a dedicated income, and 3. who are listed in the registry of budgetary users. At central government level, governing ministries and their budgetary beneficiaries are covered. Among extrabudgetary units of the Republic of Croatia (at central government level) count extra-budgetary funds and some of the corporations controlled by the government. Extra-budgetary entities at local government level are only county road administrations.

government accounting only in part of financial reporting. For this purpose, in the Republic of Croatia was established the registry of budgetary users based on criteria that are consistent with the requirements of the international system of the financial statistics. Provisions of IPSAS have been implemented in articles of regulations, laws and ordinances that regulate the area of application of government accounting. There is no legal obligation to use IPSASs, but solutions that are recommended in IPSASs are applied in government accounting in the Republic of Croatia. All participants in the budgetary process are obliged to apply the prescribed chart of accounts and recording schemes. The application of uniform methodology allows identification of data and indicators of financial performance of general government sector. 4.2. Example of the Republic of Slovenia

In the Republic of Slovenia public sector accounting has as well transitional characteristics. The government accounting in Slovenia represents also a kind of hybrid of cash and accrual basis like in Croatia. So, government accounting is based on modified accrual basis and budgeting process is based on cash basis. The current legislative framework for public institutions involves the following Slovenian regulations25: The Accounting Act (issued in 1999 and renewed in 2002 and 2006) and its implementing regulations: Rules on analyzing and measuring revenues and expenses of public law entities (hereinafter: Rules on Analyzing and Measuring); Rules on the methods and terms of harmonizing receivables and liabilities under Article 37 of the Accounting Act (hereinafter: Rules on Harmonizing); Rules on the methods and writing-off rates of intangible and tangible fixed assets(hereinafter: Rules on Writing-off Rates); Rules on the preparation of annual reports for the budget, spending agencies of the budget and other public law legal entities (hereinafter: Rules on the Preparation of Annual Reports); Rules on the uniform chart of accounts for the budget, budget users and other public law entities (hereinafter: Rules on the Uniform Chart of Accounts); The Institutes Act (issued in 1991 and renewed in 1992, 1993, 1994, 1996, 2000 and 2006); The Public Finance Act (issued in 1999 and renewed in 2000, 2001, 2002, and 2007); and The Slovenian Accounting Standards SASs (issued in 1993, renewed in 2001 and 2005). "The financial reporting framework for a public institution in Slovenia is determined by the Accounting Act and all the accompanying rules. This financial reporting framework is materially different from the Slovenian Accounting Standards which are harmonized with the International Financial Reporting Standards."26 The financial statements to be prepared by a public institution pursuant to the Accounting Act are the balance sheet and statement of revenues and expenses, both including additional disclosures. Items in the financial statements are presented in two columns whereby the first column comprises actual data and information
25

Duhovnik, M. (2007): The Problems of Accounting in a Public Institution: The Case of Slovenia, Financial Theory and Pratctice 31 (4), p. 423-424. Ibid, p. 425

26

relevant to the period, and the second includes the data relevant to an identical previous period.27 Both of mentioned financial statements dont give enough relevant information because there are based on modified accrual basis. Future development of government accounting in Slovenia can go in two directions; it is possible to adjust the Slovenian Accounting Standards to specificity of Slovenian public sector on the way that the IPSAS are adjust to IFRS or it is possible to accept IPSAS as an obligatory standards. For both directions it is necessary to implement full accrual basis in government accounting. Before taking a final decision on future direction of public sector development, Slovenia need to consider the costs and benefits connected with each possible solution. 4.3. Example of the Federation of Bosnia and Herzegovina

Legal framework for government accounting and financial reporting in the public sector of the Federation of Bosnia and Herzegovina is based on the Budget law28 and other regulations. Also in the Federation of Bosnia and Herzegovina, as in Croatia and Slovenia, government accounting is based on modified accrual basis. In Bosnia and Herzegovina many developmental stages for financial reporting were skipped. Through technical assistance from international institutions, developed systems of financial reporting for the public sector was immediate inaugurate. In this sense, accounting information system in Bosnia and Herzegovina should be in the performing stage dress and rationalized and then insist on his consistent on the application. After that it is possible to move to full implementation of accrual basis. Introduction of accrual basis can be accessed in several ways. The one option to adopt IPSAS, as the standard with the mandatory application of the Federation for public sector reporting, has already been assumed in the Accounting Act.29 But although the application of International Public Sector Accounting Standards is stated in the Accounting Act, the application has not happened neither directly nor completely. The responsibility for the implementation of uniform accounting procedures and the content and method of financial reporting is given to the Ministry of Finance. This has traced the way of the introduction of an accounting basis in the public sector, but the deadline for implementing the decision of the law is not given. 5. Conclusion Nowadays, the process of convergence of financial reporting of public sector to the practice of business sector is highlighted and present in many countries. This process carries several very important changes for public sector and two most important are; implementation of International Public Sector Accounting Standards (IPSAS) who are approaching and are based on IAS/ IFRS and moving on accrual basis of accounting.
27 28

Ibid, p. 425 Budget Law of the Federation of BiH, Official Gazette FBiH 19/06, amendments 78/08 and 4/ 09. In the FBiH, all regulations are published in each of the official languages: Bosnian, Croatian and Serbian. Vaiek, V., Vaiek, Davor., Roje, G. (2009): Meunarodni raunovodstveni standardi za javni sektor (IPSAS) vs. raunovodstvena regulativa u tranzicijskim zemljama (International public sector accounting standards (IPSAS) vs. accounting regulations in transition countries), Zbornik referata IV. Meunarodnog Simpozija "Meunarodni standardi u sektoru financija i raunovodstva vs. nacionalna praksa", Mii, Augustin (ur.).Mostar: Fircon d.o.o Mostar, p.157
29

International trends are showing that many countries have left cash basis and that they encourage implementation of accrual basis of accounting, which is present in business sector. But still, the number of countries that have move from cash to accrual basis of accounting is in minority compare with countries that still use cash or some modified basis. Also, only several countries have implement IPSAS successfully in their government accounting systems. The main reason for that is because the process of moving on principles of business sector is very complicated, long-lasting and expensive process, and actually benefits in practice cannot be achieve advance. Countries that are in transition, such as the Republic of Croatia, the Republic of Slovenia and the Federation of Bosnia and Herzegovina, have beside all mentioned problems of moving on accrual and implementation of IPSAS, more additional problems that derive from economical and political situation of those countries. So, the process of convergence of financial reporting system of public sector to practice of business sector is a process that deepens about specific country circumstances and environment that should be reviewed in that context. But it is very important to highlighted that neither one of three observed countries have not give response on the key problems of implementation IPSAS in their government accounting systems.

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