20 May 2008
The States of Jersey is planning to adopt Generally Accepted Accounting Principles in its financial accounts. GAAP is a set of best practice rules and procedures for reporting financial information. In preparation for the new accounting regime, the Treasury and Resources Minister is seeking the views of interested parties.
This move brings Jersey into line with public sector accounting methods already operating in countries like the UK, New Zealand and Canada. Jersey will be one of the first small jurisdictions to adopt these standards. Neither Guernsey nor the Isle of Man produces GAAP compliant accounts. The IMF and World Bank now expect governments to use GAAP accounting or to plan to do so.
At the moment, the States vote a cash allocation for a specific purpose, then the year end accounts report the cash spent against the amount voted. Under the proposed new arrangement, the States will report on the resources consumed and generated, rather than just on the cash spent. This should provide more relevant information for users of the States accounts.
A key element of the changes is the introduction of depreciation into departmental accounts.
This should lead to increased accountability for effective asset management and greater transparency over the real cost of services. In other words, the reduction in value of an asset (like a building) due to its use and age will be more accurately reflected in the financial figures.
The consultation paper outlines the reasons for the proposed move to GAAP accounting, how it would be implemented by the States, the key differences between the current and proposed accounting regimes and the impact of GAAP on the States’ Financial Statements.
The intention is to prepare financial statements on a GAAP compliant basis for the financial year ended 31 December 2009.
Deputy Ian Gorst, Assistant Minister for Treasury and Resources, commented:
‘This is an important but technical piece of work, which will bring greater understanding and transparency to the States accounts. It will enable both members of the public and States Members to evaluate the efficiency and effectiveness of key public services and it will show the relationship between financial cost and performance. Financial information will be more comparable to the UK, allowing for improved benchmarking of department services against both the public and private sector. The consultation process will allow interested parties to comment on the proposed standards before they are adopted by the Minister’.
The consultation paper can be accessed at:
http://www.gov.je/TreasuryResources/ReportsPubs/ConImpGAAP.htm
Responses are invited by 31 July 2008.
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Notes to editors
For further information, please contact Deputy Ian Gorst, Assistant Minister for Treasury and Resources, on 720403 or text 07797 851706, or Alisdair MacLeod, Project Manager for GAAP implementation, on 440220.
The key principles and rules underpinning GAAP accounting are that:
- income is recorded when it becomes due rather than when it is received
- expenditure is recorded when it is incurred rather than when the cash goes out
- the cost of assets is spread over the period from which the organisation benefits from its use
- all likely liabilities must be included
- information must be recorded in the correct period and must be consistent period to period
GAAP accounting brings a transparency and accountability to the process that is missing from a cash-based system – resources consumed in the delivery of services can be directly related to what is delivered and the performance achieved in that same period. Therefore it is possible to make a direct correlation between inputs, outputs and outcomes. Identifying all the resources needed also allows users to make better balanced comparisons between alternative programmes and projects.
The new system encourages and incentivises good financial planning, management and decision making as full account is taken of the resource consequences of decisions whether utilising capital or revenue funds. It helps improve resource allocation due to better understanding of the costs of policies, by including the cost of assets held to deliver that policy.
Under GAAP there will be records of all assets, including fixed assets. This will also allow managers to identify the ongoing costs, such as depreciation and maintenance, of owning and operating assets.
The introduction of depreciation charges – whereby the value of an asset is attributed across its useful life – will represent more clearly the financial implications of holding assets. This should encourage departments to maximise the lives of assets – through improved maintenance regimes, for example – so as to reduce the annual depreciation charge.
In summary, a GAAP-based accounting framework will provide improved and comprehensive financial information for decision-making and control.
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