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The IPSASB has commented extensively on the benefits of accrual accounting for public sector entities in Studies, Papers and various presentations. Khan and Mayes also discuss the reasons for moving from the cash to the accrual basis of accounting (Khan and Mayes, 2009). In order to provide some context for readers who are not familiar with these other publications, this section contains a summary of  the benefits of reporting on the accrual basis.

The information contained in reports prepared on an accrual basis of accounting is useful both for accountability and decision-making. Financial reports prepared on an accrual basis allow users to:

1. Assess the accountability for all resources the entity controls and the deployment of those resources;
2. Assess the financial position, financial performance, and cash flows of the entity; and
3. Make decisions about providing resources to, or doing business with, the entity.

At a more detailed level, reporting on an accrual basis of accounting:

1. Shows how an entity financed its activities and met its cash requirements;
2. Allows users to evaluate an entity’s ongoing ability to finance its activities and to meet its liabilities and commitments;
3. Shows the financial position of an entity and changes in financial position;
4. Provides an entity with the opportunity to demonstrate successful management of its resources; and
5. Is useful in evaluating an entity’s performance in terms of its service costs, efficiency, and accomplishments.

Financial Position

Accrual accounting provides information on an entity’s overall financial position and current stock of assets and liabilities. Public sector entities need this information to:

1. Demonstrate accountability to the public for their management of assets and liabilities recognized in the financial statements;
2. Plan for future funding requirements of asset maintenance and replacement;
3. Plan for the repayment of, or satisfaction of, existing liabilities; and
4. Make decisions about the level of assets and debt held  in the context of financing the services they wish to provide.

Accrual accounting requires entities to maintain complete records of assets and liabilities. It facilitates better management of assets, including better maintenance, more appropriate replacement policies, identification and disposal of surplus assets, and better management of risks such as fluctuations in the value of liabilities. The identification of assets and the recognition of depreciation and amortization help managers to understand the impact of using fixed assets in the delivery of services, calculate service fees (where applicable), and encourage managers to consider alternative ways of managing costs and delivering services.

Accrual accounting provides a consistent framework for the identification of existing liabilities, and potential or contingent liabilities. The recognition of obligations meeting the definition of a liability and the criteria for recognition:

1. Compels public sector entities to acknowledge and plan for the settlement of all recognized liabilities, not just borrowings;
2. Provides information on the impact of existing liabilities on future resources;
3. Means that it is possible  to allocate responsibility  for the management of all liabilities; and
4. Provides necessary input for public sector entities to assess whether they can continue to provide current  services and the extent to which they can afford new programs and services.

Accrual accounting highlights the impact of financing decisions on net assets/equity and may lead public sector entities to take a  longer term view when making financing decisions than is generally possible when  relying on cash or modified cash reports. Information on net assets/equity also means  that public sector entities may be held accountable for the financial impact of their decisions on both current and future net assets/equity. Changes in an entity’s net assets/equity between two reporting dates reflect the increase or decrease in its wealth during the period, under the particular measurement principles adopted and disclosed in the financial statements. Under the accrual basis of accounting, the financial statements will include a statement of financial position whichdiscloses information about assets and liabilities. The residual figure, net assets/equity, can comprise some or all of the following components:

1. Contributed capital;
2. Accumulated surpluses and deficits; and
3. Reserves (for example revaluation reserve; foreign currency translation reserve).

Financial Performance

Accrual accounting provides information on revenues and expenses, including the impact of transactions where cash has not yet been received or paid. Accurate information on revenues is essential for assessing the impact of taxation and other revenues on the government’s fiscal position. Information on revenues helps both users and public sector entities themselves to assess whether current revenues are sufficient to cover the costs of current programs and services.

Public sector entities need information about expenses in order to assess their revenue requirements, the sustainability of existing  programs, and the likely cost of proposed activities and services. Accrual accounting provides public sector entities with information on the full costs of their activities so that they can:

1. Consider the cost consequences of particular policy objectives and the cost of alternative mechanisms for meeting these objectives;
2. Decide whether to fund the production of services within sub-entities, or whether to purchase goods and services directly from third party entities;
3. Consider the costs of particular services in relation to user fees; and
4. Allocate responsibility for managing particular costs.

Accrual accounting provides better information than cash accounting on the actual cost of specified services delivered by entities and whether current resources are sufficient to sustain the level of service delivery.

Accrual accounting allows an entity to:

1. Recognize the total costs, including depreciation of physical assets and amortization of intangible assets, of carrying out specific activities;
2. Recognize all employee-related costs and to compare the cost of various types of employment or remuneration options;
3. Assess the most efficient way of producing goods and services and of managing the resources over which they have been delegated authority; and
4. Determine the appropriateness of cost-recovery policies.

Cash Flows

Accrual accounting provides comprehensive information on current cash flows and certain projected cash flows, including the  cash flows associated with debtors and creditors. It can therefore lead to better cash management and may assist in the preparation of more accurate cash budgets.

IPSAS 2,  Cash Flow Statements permits cash flows from operating activities to be reported using either the direct method or the indirect method. Under the direct method major classes of gross cash receipts and gross cash payments are disclosed. Under the indirect method net surplus or deficit is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of  past or future operating cash receipts or payments, and items of revenue or expense associated with investing or financing flows. IPSAS 2 encourages the use of the direct method as it provides information that may be useful in estimating future cash flows.

source :  Transition to the Accrual Basis of Accounting: Guidance for Public Sector Entities, Third Edition – IPSAS 2011