Depreciation danger
Max Aiken. Intheblack. Melbourne: Feb 2005.Vol.75, Iss. 1; pg. 56, 2 pgs
Abstract (Document Summary)
Under traditional profit and loss/double-entry conceptual systems of financial accounting,
depreciation is not about infrastructure assets wearing out, but about who receives or pays
what and when. This is an intergenerational equity question. Under managerial accounting
cost allocations for economic efficiency, accountability and pricing in market places under the
surplus method of financial accounting, depreciation is about a fall in values of assets at two
points In time. Here, assets are to be measured at current market prices and periodic profit is
a related concept. Unfortunately, a failure to bring these long-lived concepts of equity and
growth together for public sector reporting may have already damaged the professionalism
and independence of public sector accountants.
Full Text (1112 words)
Public sector: PROFESSOR MAX AIKEN FCPA LOOKS AT THE CONTENTIOUS ISSUE
OF DEPRECIATING GOVERNMENT ASSETS
TWO SIDES OF THE ARGUMENT FOR depreciation in the public sector are given by Loftus
Dun FCPA and David Hope FCPA (see the letters page of Australian CPA, December 2003),
Two different perceptions are involved,
Dun knows that under traditional profit and loss/double-entry conceptual systems of financial
accounting, depreciation is not about infrastructure assets wearing out, but about who
receives or pays what and when. This is an intergenerational equity question.
Hope knows that under managerial accounting cost allocations for economic efficiency,
accountability and pricing in market places under the surplus method of financial accounting,
depreciation is about a fall in values of assets at two points In time. Here, assets are to be
measured at current market prices (entry or exit) and periodic profit is a related concept.
Unfortunately, a failure to bring these long-lived concepts of equity and growth together for
public sector reporting may have already damaged the professionalism and independence of
public sector accountants.
Over two decades they have become subservient to macroeconomic and fiscal theories of
treasury economists and their political masters. This occurs at the highest levels of
government, both state and federal.
The thin end of the wedge came into play with the introduction of accrual accounting in
government. This has been sponsored in America since 1973 and also in Australia and
elsewhere by large firms of accounting consultants. They have been vigorously anxious for
government patronage and for related services provision in the public sector generally.
Accrual accounting is employed in the private sector where ownership is clearly stated under
the law and, also, capital is contributed by owners as a start-up amount for credibility and for
attracting funds for continuity and expansion.
In my experience this happens rarely in government businesses where any start-up
taxpayers' monies are progressively withdrawn or, more usually, are not used at all.
A government guarantee provides collateral for attracting capital loans, This provides the
rationale for government to be declared the Owner1 under legislation, although no
government monies are involved and risk may or may not be relevant. Over time the loans
are paid off by generations of consumers. Under the bookkeeping of economics the assets
are then debited with a market price over time and a capital account is then created and
credited.
This procedure is not accounting. It manufactures a situation under the surplus method of
accounting for market prices where a fair rate of return on capital employed is mandated by
Treasury.
However, this microeconomic tenet for cost allocation, although bearing almost no
relationship to Dun's call for intergenerational equity for pricing and growth, is not about
microeconomics and efficiency anyway. In imperfect markets it is shorthand for
macroeconomic objectives (for example: debt reduction and lower interest rates) and fiscal
policies (budgetary surpluses, etc,).
These aspects of political and economic growth are achieved by applying economic
bookkeeping (public sector accounting standards) in two ways.
Firstly, it assumes that government is both the legal and economic owner of the entity and
applies accrual accounting and asset valuation in imperfect markets to achieve
macroeconomic, fiscal and political (arms length) goals under a microeconomic veil of
efficiency and growth. This gives no recognition of contributions by past and present
generations of consumers and other stakeholders in a community which has shared
obligations for the growth of essential services and monetary distributions quite differently to
the private sector.
Secondly, government advisers use these often unjustifiable or untestable market estimates
and amounts for residual calculations of periodic performance in order to provide supposed
market-based benchmarks for the ultimate ideological aim of the whole exercise with respect
to government business services - privatisation.
The first step towards regaining independence and professionalism in this area of accounting
is not simply to reject progress thus far. Economic bookkeeping - as contemporary public
sector accounting standards and associated notions of accrual accounting and unrestrained
application of the surplus method (current value) system of accounting - has provided many
important benefits to date. However, Dun's criterion of intergenerational equity, as
academics Russell Mathews and Ronald Ma have pointed out, is not optional in professional
accounting, For example, if privatisation has occurred at too high a value to reflect traditional
notions of rights and obligations of stakeholders under community codes, then subsidisation
of consumers might be fair given - transparent parliamentary debate - notwithstanding the
greater reduction achieved with respect to public debt as at least a partially separate issue,
The professional challenges faced by accountants has not changed markedly since large
organisations began to emerge with the growth of science in the mid-seventeenth century.
Despite technological change the solution remains a sensitive welding of the doubleentry/profit and loss system (and its traditional emphasis on the veracity of journal narratives
capturing the particulars of the environment) with the economics-based surplus method.
Profit or loss as a residual in a market setting of asset valuation is heavily qualified for
particular short and longterm strategies. Such a modified system can sustain many human
services, and is allowed for at present in the formation of accounting standards for the
private sector.
Jock Jude ASA (Letters, Australian CPA, March 2004) identifies this issue with using accrual
accounting in the public sector generally. It is "the growing discrepancy between the theory
and what actually happens" says Jude, which is now of concern to practitioners.
Since the passing of the Audit and Exchequer Departments Act (1866) in England, there has
been both tension and cooperation between treasury officials and auditors-general, many of
whom have not been accountants. It is, however, up to accountants themselves to ensure
that their scientific principles are founded upon testable observations of the environment of
action, not simply upon general assumptions and deductive logic. Also, attention to accepted
cultural codes of conduct with respect to changes in rights and obligations may ease the pain
to the community from inappropriate use of contemporary accrual accounting and periodic
financial reporting practices in government. Accountants themselves, not governments and
external parties and disciplines with their own agendas, need to continue to reject the bad
and introduce the new with respect to the truth and fairness of accounting practices in
complex and often unique environmental situations.
UNDER THE THUMB
Professor Aiken says: "Over the past 20 years accountants have become subservient to
macroeconomic and fiscal theories of treasury economists and their political masters."
FINDING A SOLUTION
The first step towards regaining independence and professionalism in public sector
accounting is not simply to reject progress thus far
[Author Affiliation]
Professor Max Aiken FCPA is a former first assistant to the Australian auditor-general