Switch to accruals for improved credit ratings, says agency boss

10 Mar 17

Switching to accrual accounting can secure better credit ratings for governments, Fergus McCormick, chief economist and co-head of sovereign ratings at agency DBRS has said.


McCormick explained that accrual information could strengthen the reliability of ratings by increasing accuracy and consistency with other economic data, as well as deliver individual countries more favourable scores.

With better information leading to better management and efficiency, accruals would boost the score given by ratings agencies to a government’s fiscal activities, he said, adding that this is true despite the fact it will require greater disclosure of liabilities.

“Why? Because we know what is on the balance sheet,” he explained, noting that when agencies have to work with limited information its estimations of factors like pension liabilities can “swing wildly” from between 50% and 300% of GDP.

However he explained that the “extremely important” merits of accrual accounting are better realised if the method is applied universally. This is because the process needs to rely on comparable data, which limits what information can be used.

“A universal application of accrual accounting, I think would be a very important step to improving the quality, the consistency and of course the transparency of data and therefore increasing the accuracy of risk assessment and sovereign credit ratings,” he stated.

For this to happen, he said, global institutions like the International Monetary Fund would need to support the imposition of an accruals standard on countries.

“Short of that, I don’t think this is going to take off,” he said. “I’m a very optimistic person but I simply don’t see enough progress around the world.”

McCormick was speaking at a seminar on the next steps for accrual accounting organised by the World Bank, IMF and IPSASB in Washington DC earlier this week.

Afterwards, officials from the fund and Global Initiative for Fiscal Transparency (GIFT) also outlined the importance of accrual information to the statistics discipline and citizens.

Gabriel Quiros, a deputy director of the IMF’s statistics department, said accrual information provides better input data for statistical frameworks such as the fund’s Government Finance Statistics (GFS), which is used by governments around the world.

Better financial statements from governments would mean “more accurate” information for GFS on the impact of government activity on job creation and the wider economy.

He highlighted an example: a government buys a healthcare service from one of its domestic providers, but does not actually pay for another three years. If the cash data is used in GFS, the impact of the procurement on jobs, income and the economy is missed because it has already happened by the time it is recognised in cash accounts.

Government spending on basic services such as health is the area where citizens are most interested in financial information, Juan Pablo Guerrero, network director of GIFT, told the seminar.

However, he said governments have work to do in terms of meeting their needs. The information provided needs to be more granular, relevant, timely and accessible – for example, it needs to be provided in machine-readable formats rather than as a PDF, so it can be easily analysed.

He said it was critical that governments make their transparency activities more “responsive and user-centred” and said citizens want to engage with the information provided.

One study found that between 2007 and 2017, there were 225 million searches for government financial information in Mexico alone – equal to over 61,600 searches per day (from Jan 1 2007 to 31 Dec 2016). 

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