In the federal budget delivered on February' 18, 2003, finance minister John Manley announced that the federal government will use full accrual accounting according to Canadian GAAP, as recommended by the auditor general. Other countries, such as the UK, Australia, and New Zealand, have also made similar changes.
In the past, the method of accounting was a “modified cash basis,” which can be roughly summarized as follows:
■ Revenues = cash received in the fiscal year
■ Expenses = cash disbursed in the fiscal year
■ Surplus (or deficit) = revenues — expenses = cash received — cash disbursed
Under this old method of accounting, non-financial assets were not recognized on the balance sheet. For example, spending on the construction of roads or hospitals would be counted as expenses. (Financial assets and liabilities such as cash and bond obligations are recorded.)
Accounting critic A1 Rosen, who has a reputation for being blunt, complains that this move by the government is “trading one pile of manure for another even larger, more stinky pile” {Canadian Business, May 13, 2003). He argues that GAAP-based rules are “looser,” creating “thousands of new ways for the government to engineer the books.
Required:
Discuss the pros and cons of the government adopting GAAP accrual accounting standards.