Open Journal of Accounting, 2012, 1, 27-37
http://dx.doi.org/10.4236/ojacct.2012.12004 Published Online October 2012 (http://www.SciRP.org/journal/ojacct)
Is There a Specific Accrual Basis Standard for the Public
Sector? Theoretical Analysis and Harmonization of Italian
Fabio Giulio Grandis1, Giorgia Mattei2
1Associate Professor of Public Administration Economics, Roma Tre University, Rome, Italy
2Candidate in Economy and Management, University of Urbino, Urbino, Italy
Email: email@example.com, firstname.lastname@example.org
Received September 10, 2012; revised October 12, 2012; accepted October 20, 2012
This paper aims to analyse the principle of accrual accounting when applied to non-business-oriented companies, in-
cluding most general government bodies. The analysis is carried out by referring to concepts that are well-established
and firmly anchored to the “history” of accounting and which, today, allow us to define the principle of accrual ac-
counting for “non-busin ess” activities differently to that app licable to profit-oriented companies. This also gives rise to
a different interpretation of the economic result. This work subsequently provid es a “fieldwo rk” analysis of how accrual
accounting has been introduced in the Italian public sector through an on-going accounting harmonization project. Fi-
nally, this paper offers a critical examination of the current accrual basis recognised by the International Public Sector
Accounting Standards (IPSAS), as compared to its theoretical d efinition. The conclusions of this paper support the the-
ory that the IPSAS can contribute to the current harmonization of Italian government accounting, but also reverse.
Keywords: Public Administration Accounting; Principle of Accrual Accounting; Accounting Harmonization;
International Public Sector Accounting Standards Board (IPSASB)
1. Objectives and Research Methodology
Up to 2002, the work carried out by the International
Public Sector Accounting Standards Board (IPSASB,
formerly PSC, Public Sector Committee) was that of
adapting the accounting principles of the International
Accounting Standards (IAS) to the public sector. Subse-
quently, IPSASB began to develop a number of specific
accounting principles for cases in which the IAS prince-
ples could not apply-hence the peculiarity of the public
sector. For example, the IPSAS 23 principle on “Reve-
nue from Non-Exchange Transactions” was published in
December 2006. During this second phase, IPSASB’s
strong attachment to the IAS framework conditioned its
choice to extend the so-called “accrual basis” principle of
accounting, applicable to private companies, to the public
This paper’s first objective is to analyse whether the
accrual basis principle set out in the IAS framework can
be implemented in non business organization without any
modifications, or whether it will have to be undergo the
typical adaptations or tailoring required for the public
This paper’s second objective is to examine how the
accrual system has been introduced in the Italian public
administration over the last 20 years and, in particular, to
study the recent process of accounting harmonization of
public financial statements, which is provided for in the
The methodology used in this paper is both deductive
and inductive. A deductive analysis has been applied
mainly in relation to this paper’s first objective. In that
regard, this paper offers a detailed and doctrinal research
on the topic, delving into the specific peculiarities of the
public sector, which is characterised by its non-business-
oriented nature, its specific funding regime and a fre-
quent lack of a market price for the services it provides.
Conversely, an inductive analysis has been applied
mainly in relation to this paper’s second objective. By
analysing concrete cases, the provisions on the imple-
mentation of accrual systems and the effective means of
implementation of such systems, one can assess to what
extent the doctrinal analysis is indeed accurate.
Such analysis highlig hts th e real difficu lties that public
bodies and administrations face when applying the prin-
ciple of accrual accounting adapted to non-business-ori-
ented companies. The reasons for such difficulties are
two-fold: the first reason, which can be extended to an
opyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI
international level, relates to how the economic result
isinterpreted according to the accrual accounting princi-
ple adopted; the second reason is specific to all public ad-
ministrations in those countries where the budget plays a
strong “authorizing” role.
The turbulent context in which European public ad-
ministrations operate would prompt a traditional ac-
counting system being implemented alongside one that
can maintain economic stability over time. However, it is
also true that economic stability for a profit-oriented
company is very different to that of a non-business-ori-
ented entity, such as general government bodies—at least
the Italian ones.
If we consider other international scenarios, the as-
sumption that all of the most economically advanced
countries have adopted, or are about to adopt, the “full
accrual” accounting system, is clearly put into question.
A new interpretation of the accrual accounting system
aimed at the public sector is likely not only to revive the
modernisation of public accounting systems, but also to
avoid any regrets in switching from the current public
accounting system to one with a focus on accrual basis
2. “Historical” Relevance of the Economic
Analysis of Public Administrations
Nowadays, public administrations are mainly made up of
non-business-oriented bodies which carry out a number
of activities that are similar to those of “business-ori ented”
In fact, it has been observed  that public admini-
strations also carry out business-like processes, have
their own asset management activities and carry out pro-
fitable corporate transactions. These activities, however,
play an instrumental role with respect to the all other
activities which such public bodies carry out in order to
reach their institutional, political and social goals.
In Italian general government bodies, economic rele-
vance gained notoriety only in the 1990s, notwithstand-
ing the fact that a distinguished scholar had anticipated
its importance by more than a cen tury [6,7]1.
In the past, management analysis was limited to finan-
cial and monetary aspects, following a “kameral” ac-
counting system . Th is approach, ad opted due to trad i-
tional public administrations, revealed its shortcomings
when the public sector began to adopt increasingly com-
plex production processes as a result of public economic
intervention and the direct fulfillment of the collective
administration n ee d s .
Such an approach has given rise to a number of tech-
nical and administrative difficulties, many of which are
still relevant today [9,10], and the most important of
which relates to corporate asset fluctuation.
Net asset maintenance has therefore become the
minimum requirement for a company’s “survival” and
sustainability; without this condition, the public sector
would suffer “a continuing pathology” 2 resulting from
management trapped in an “irreversible coma”.
Net asset conservation is to be interpreted dynamically,
perhaps as a “re-conversion” of assets according to pub-
lic needs, which change through time and in accordance
with the main political class in power.
A management analysis based solely on financial as-
pects is now considered to be insufficient.
In Italy, the reform of the public accounting systems
introduced the requirement-for the public Administra-
tion-to also carry out an economic and asset management
analysis but different accounting models  prevailed.
Such models reflect two distinct approaches, which are
also found in internation al doctrine:
1) The first approach completely abandons “tradi-
tional” public accounting in favour of the same economic
survey models used by companies [13-17].
2) The second approach is based on different integra-
tion models for both financial and economic surveys
The choice of one approach over the other fuels
school-arly debates and clarifies the rationale behind se-
veral accounting provisions applicable to the various
areas of the public sector.
In any case, an economic analysis of management has
become both necessary and inevitable. Nonetheless, in
order to understand the actual relevance of such informa-
tion, it is important to examine how the accrual basis
system applies to non-business-oriented companies, as
opposed to the typical profit-oriented companies that are
active on today’s markets.
3. The Accrual Basis in
In most public sector entities, the production cycle of a
service provided only justifies costs and charges. Only
rarely are adequate earnings made on a service, since the
entire business process is not aimed at sales but, rather, at
meeting the needs of a community.
2Amaduzzi very aptly points out: “manifestazioni numerarie, imposte
dalla continuità della vita aziendale, possono anche richiedere lesioni al
otere di generazione di ricchezza che l’azienda di erogazione abbia. E
allora se non si verificasse una ricostruzione delle perdute forze eco-
nomiche, l’azi enda sarebbe destinata alla cessazione del suo unitar io pro-
cesso, o alla continuazione patologica della sua vita, quando l’azienda
fosse perenne per natura”. It is assumed that he term “long-lasting
company” used by the author refers to public sector companies that, as
such, cannot go bankrupt.Nevertheless, in today’s reality, such public
sector companies c an have their goods confiscated and a uctioned, can be
laced under temporary receivership or, potentially, be absorbed by a
higher-level administrative body.
1In the 19th century, the most prevalent scholar of Italian public ac-
counting was definitely Giuseppe Cerboni.
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI 29
Furthermore, most of the revenue which funds the
factors of production is, contrary to costs and charges,
entirely independent from the volume of the activity car-
ried out. For example, a state or government grant or a
mandatory contribution towards a public sector entity is
often awarded notwithstanding the quantity and quality
of the services provided. In these cases, the revenue per-
ceived is not consideration for a specific service provided,
but it generally falls within a general institutional objec-
Thus, in order to fully understand the differences be-
tween the economic management of a business-oriented
company and that of a non-profit-oriented one, it is nec-
essary to distinguish management details taken from the
economic results and based on the following points:
earnings and costs, implying an underlying exchange of
goods and services; revenue and charges, that do not im-
ply an exchange transaction, but relate to other unilateral
acts-be they casual, voluntary or compulsory; these would
include, for example, obtaining a contribution in cash or
in kind; an extraordinary variation in the value of assets;
endowments and donations; taxes and levies, etc.
If we look at needs fulfilled of services provided, we
can find the different public Administration structures.
These structures, in detail, are:
1) Specific and divisible services that are individually
requested; Figure 1.
2) General and indivisible services that is generally
requested; Figure 2.
3) Other typologies of contribution provided Figure 3.
In the first category, we find the production inside
public Administration. It will be necessary to sustain
some costs for the acquisition of production factors. The
latter will be put through the operating cycle. This pro-
cesses results in individually requested services, which
generate earnings. These earnings will be reused to sus-
We can identify an exchange transaction both from
costs and earnings. This specific accrual basis standard is
also found in business organization.
In the second category, we can also find a production.
It will be necessary to sustain so me costs for the acquisi-
tion of production factors that will be put through the
operating cycle. This processes result in collectively re-
quested services. Revenues come from higher Admini-
strations. The revenues will be used to sustain costs. We
can identify an exchange transaction from the sector
costs and non-exchange transactions from the revenue
sector; in this case, we think that it is more difficult to
implement the “traditional accrual basis”.
In the third category, public Administration revenues
come from higher Administrations, which are distributed
in various modalities (for example: scholarships, unem-
ployment benefit, etc.). These are charges that the public
Figure 1. Specific and divisible services.
Figure 2. General and indivisible services.
Figure 3. Other typologies of contribution provided.
Administration sustains for the community. In this case
we have only non-exchange transactions and, for this
reason, is more difficult to implement the “traditional
All administrative facts tied to the economic manage-
ment of a company can be sub-divided according to by
their effects on one financial year instead of another. The
costs and earnings, and the charges and revenue are re-
corded every calendar year on the basis of assumptions
on the “causal link” between positive and negative eco-
nomic elements. It is thanks to this causal link, called
“accrual basis”, that we can measure asset variations and
its respective economic result for the year.
However, the “causal link” is not only extremely dif-
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI
ferent, but literally inverted 3 when comparing the
dynamics of non-business-oriented companies and
profit- oriented o nes.
Indeed: in profit-oriented companies, the costs are
borne in order to make earnings; the company’s main
goal is to increase th e margin between costs and earning s.
in non-busin ess-oriented companies, th e opposite occurs:
revenue is obtained, often in a compulsory manner, to
bear costs and charges needed to reach social, political
and institutional goals; the volume of revenue and earn-
ings should represent the maximum limit of costs and
charges; in the medium-to long-term, there should be no
significant or stable margin between positive and nega-
tive economic elements.
The notion of “accrual basis” therefore takes on a par-
ticular meaning when it is applied to non profit-oriented
companies and, in particular, to public administrations.
When the accrual basis concept was applied at the
non-business organizations, this notion takes a special
connotations, particularly as applied at the public Ad-
Asset management and business activities find their
raison d’etre in non-profit-oriented companies only in-
asmuch as they generate positive net equity, which, seen
as a “means”, is subsequently “used” to reach an institu-
It is absolutely clear, in fact, that a business activity
carried out by a company in loss would have a negative
effect on its delivery process. This is due to the fact that a
public body, g iven its unitary character, should cover the
losses even where this is to the detriment of the very so-
cial needs for which it was created.
It follows from the above that the economic analysis of
the management of a public sector en tity requires that, as
a preliminary step, a distinction be made between events
that are directly linked to a market exchange transaction
and those that are not, by virtue of their social objec-
In the former, the accrual basis for income and ex-
penses can be traced back to the notion used for compa-
nies, i.e. income is distributed to a financial period on an
accrual basis when an exchange has taken place, in other
words where a transaction such as a succession, an asset
or a service has been completed in all its production cycle;
expenses are linked to the income for which they were
incurred. The correlation can therefore be deducted ana-
lytically and directly as a result of a cause and effect.
When there is no such causal link, the correlation can be
made by reference to the functionality or usefulness from
a rational and systemic point of view (for example a time
basis) or when utility and functionality of costs is lacking.
In any case, were it is feasible to gain earnings, on a
synallagmatic basis, notwithstanding its political price,
the aforementioned principle becomes entirely applicable
and must be referred to when defining the economic
components of a financial period.
In the latter case, and thus for most public sector enti-
ties, it is necessary to consider the accrual basis directly
in relation to the provision of social ben efits and services
rendered “outside” market rules i.e. where there is no
Revenue for a public sector entity is not u sually related
to the volume of institutional activities carried out (take,
for example, all taxes and all financial contributions from
higher administrations, etc.). Rarely do these constitute
consideration for the granting of goods or services. In
other words, the synallagmatic connection between in-
come and expenses in these context wanes, whilst reve-
nues and charges follow asynchronously. This therefore
implies that, while income derives from costs-as a result
of the production and sales process-revenue may have
nothing to do with charges: the body that provides the
revenue need not be that which benefits from the provi-
sion of goods or services.
3The different notions of accrual basis can be noted by the following
comment s by P. ONIDA: “But the revenue and expenses of a commercial
business cannot be assimilated, respectively, to earnings and costs of an
roduction company for the market exchange. In this company the costs,
or better still, complex data of costs—are usually borne on the assumption
that they will bring about earnings [...]. However, in a service company,
the provision of service s and the incu rring of expens es, i.e. the outgoings ,
are not stimulated by potential earnings relating to such outgoings, but
rather to satisfy the needs of the entity to which the company belongs.It is
also true that the volume of revenue influences expenses and that the
means at a company’s d isposal affects the propensity to consume, and its
increase seems to cause and stimulate needs, especially those that are
more supe rfic ial” .
4The difference between services on “individual request” and on “co llec-
tive request” is well-known. The former are particular and divisible ser-
vices, i.e. services that satisfy specific needs and for which it is possible to
quantify the service rendered to the individual beneficiary. The latter are
general and indivisible services, i.e. services of collective inte rest and fo
which it is not possible to quantify the benefit provided to the user.
Clearly, only the services on individual request can be managed in accor-
dance with a business regime, i.e. by requesting specific consid eration fo
the service, regardless of whether the amount of such consideration is
regul ate d by m arket pr ice s or re flec ts a po lit ical pric e.
Furthermore, this highlights the public sector’s duty to
redistribute nat i o na l we alth.
The amount of costs and charges is closely related to
the amount of institutional activities carried out, since
one generates the other. Following such logic, revenue is
obtained by virtue of a “formal commitment”, or by a
“solemn promise” to use it to cover the costs and charges
necessary to carry out the required social functions.
Such “formal commitment” and “solemn promise” are
contained in the annual budgets which thus become not
only the legal bond which regulates the relationship be-
tween individual public administrations and their gov-
ernment entities, but also—on a business level-represent
the main element when identifying the correlation be-
tween cause and effect of revenue and management costs
The legally binding requirement for public administra-
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI 31
tions to budget and management forecasting can now be
seen in light of its unavoidable managerial aspect, since
the significance of economic analysis would be compro-
mised without them.
In fact, in business, management forecasting is neces-
sary and appropriate, but not essential; in this context,
“corporate governance” works “rationally”  expect-
ing earnings as soon as costs are incurred; the economic
result for the years is relevant regardless of whether any
management planning has taken place.
In public administrations, on the other hand, the ex-
pected profits must be identified and agreed upon before
any costs are incurred and, more importantly, before the
revenue has been collected. A causal link must therefore
be established in the planning phase so as to allow the
economic result to be of greater informational value in
indicating management progress. In this case, a net defi-
cit could also be the result of a conscious and express
Furth ermore, cos ts and charges mu st be conside red, as
a rule, on an accrual basis—not when the corresponding
earnings are made, as is expected for profit-oriented
companies—but when the following two conditions are
met: production cycle of goods and services is over; the
service was allocated.
There is a transfer of property rights as a result of an
individual request, in the case of goods or services, or the
goods or services become a public benefit in the case of
social and service activities provided on the basis of a
The participation of the costs and charges in the pro-
duction and distribution cycles takes place when: the
costs incurred in a financial year by a company relate to
items which are not longer relevant by the end of that
financial year, or their future relevance cannot be as-
sessed or calculated; the accrual basis of costs can also
be determined on the basis of cost flow forecasts or, fail-
ing a more direct link, of the repartition of the long-term
utility or functionality from a systematic and rationale
basis (for ex. amortisation); the potential social utility of
the factor of production which incurred costs in the pre-
vious financial years is lower or can no longer be as-
sessed; is irrelevant the relationship to the productive
process or utility allocation on a rational and systematic
There are specific rules concerning the survey of costs
concerning long-term activities, namely the production of
goods and the provision of services whose productive
process goes beyond a financial year.
Revenue, as well as all the positive economic compo-
nents provided by non-exchange transaction, must be
linked to the costs and charges of that financial year.
That link, which is opposite to that concerning income
and expenses, represents a fundamental corollary to the
principle of accrual accounting for facts of management
which characterise the activities of non-profit-oriented
companies. It is therefore essential that expenses in a
financial period, whether definite or presumed, be set
against the respective income. Such a link can be
achieved: by a causal link between income, costs and
charges. The link can be made analytically or directly
(for example: fund-specific taxes, tied loans, en tailments,
etc.); by the direct allocation of income to the financial
statement of a financial period. This can be time-related
(for example, year-based taxes) or disjointed in the
cost/taxes correlation (for example, income from gains);
by transferring, from the balance sheet to the income
statement, income that was previously obtained but
which is linked to one or more activities carried out in
that financial period.
In the last example cited above, there is a need to de-
fine a specific set of rules in order to properly account for
revenue provided to carry out long-term activities. These
are, typically, grants given by the State and other gov-
It becomes apparent that a proper accounting arrange-
ment within a financial statement should reflect the real
animus with which such grants are given [23,24]5 and,
therefore, should take in to account the accrual basis used
when making the effective animus assessments.
The animus, intention, purpose and reasons for the
grant as well as the possible recipients thereof must, in
this context, be differentiated on the basis of the role they
play in the management of a single public administration.
We can therefore differentiate between grants intended
to restore or increase net assets and those intended for
“consumption” or, more precisely, for management.
The animus, intention or purpose of the grant is often
retraceable to the laws of the individual county or to the
motivations of the governing entities that have given the
funding. Thus, once the reasons for a grant has been
identified: grants that represent a transfer of funds de-
signed to pursue institutional goals in a lasting and sus-
tainable manner are to be considered as an increase in net
assets; grants “for management”, designed “for consump-
tion” or covering costs and charges of the year’s man-
agement will converge into the income statement, among
the positive items of that financial period; grants that are
to cover specific institutional services over a number of
years (carrying out public works, long-term research
projects, purchasing fixed assets, etc.) compensate the
“social” value generated by the public administration by
carrying out its activities; in this case, the grants could be
5On this point, refer to F.G. Grandis, 1996. Similarly, in the case o
usinesses, it has been said: Riteniamo che il metodo più corretto per la
contabilizzazione dei contributi in conto capitale debba essere scelto
facendo riferimento alle finalità e alle peculiarità di ogni iniziativa
agevolata, considerando anche le modalità in base alle quali tale inizia-
tiva si inserisce nell’ambito dell’economia dell’impresa che ha fruito
del contributo; solo in questo modo può essere valutata la validità di un
determinato approccio e l’efficacia informativa del conseguente criterio
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI
treated like deferred income i.e. “deferrals”, or accounted
for as a specific liability passive entries to be linked to
the cost incurred to carry out the activities for which the
grant was given, by using the accounting procedure of
In the latter case, the grant could represent, on an ab-
stract level, a “ommitment debt” 25] taken against the
community for future services to be rendered or, more
precisely , in the form of “true accrual basis reve-
nues” In this manner, the balance sheet counterbalances a
specific funding source with a specific on-going in-
vestment, thus highlighting the binding objective of the
In conclusion, a principle of accrual accounting tai-
lored to public administrations does indeed exist. Such a
principle, in some aspects, is the opposite of that which
applies to profit-oriente d companies.
Only in this manner can the economic result for the
period of a “non-business” company be of relevance.
4. The Importance of the Economic Result
for the Year
The different notion of the accrual basis for public ad-
ministrations finds a logical, strategic and managerial
meeting point with “rofit-oriented” businesses.
The economic result of a profit-oriented business indi-
cates, when positive, that the year has closed profitably,
yielding a net earning; conversely, a loss is recorded
when a year is unprofitable.
In public administrations, like in all “non-business”
companies, the economic result of a financial period is
not viewed in the same manner . In fact, when a par-
ticular public administration constantly generates a net
surplus, it is considered not to have allocated all of its
resources to reaching its institutional goals. Rather, it is
considered to be making an undue pro fit and to be asking
citizens to make an excessive sacrifice in light of real
needs and the actual services provided.
In fact, such a scenario effectively indicates that re-
sources can be assigned to services through an increase
of charges and of costs which relates to: an increase in
the number of users and beneficiaries; an increase in the
type of services o ffered; an increase in the quality of ser-
As an alternative, the net surplus could be placed in a
reserve fund in order to address potential situations of
short-term deficit 7. In fact, in public administrations,
there is no payment of dividends to individual citizens.
In any event, should one not want to take any of the steps
described above, one could still: lower the prospective
political price of the provision of the services in question;
request less funding from the State, which can thus allo-
cate such resources to the pursuit of oth er public policies;
return the surplus to the government entities.
A positive economic result of the year is not consi-
dered to be a “profit” as it is understood in “business-ori-
ented” companies—It rather acquires the meaning of a
“saving” 8. Such “saving” is justifiable only in the
short-term, provided it does not affect the quantity or
quality of the services , or if it is used to cover short-
term deficits or fund future services. Instead, it will be
seen as a “harmful” saving if it detracts funds from the
social objectives sought by the government entity, or if it
requires citizens or local councils to prov ide an excessive
contribution for services rendered to the community.
On the other hand, the prolonging of a deficit situation
6The term “sterilization” comes from the fact that, through such an
operation, the economic result from costs incurred is sterilized, driven
by the same activities for which the contribution was given. For exam-
ple, in the hypothesis that a contribution has been obtained to cover the
entire disbursement for the purchase of fixed assets, they following
accounting entries will ensue:
Administration Earmarked contributions 100
Fixed assets Debts v/suppliers 100
Treasurer (bank) Credit v/funding
Debts v/suppliers Treasurer (bank) 100
When carrying out writing, adjustment and general account closing, the
following entries will ensue:
Fixed assets amortization Fixed assets amortization
Earmarked contributions Earmarked contributions
Income statement Fixed assets amortization 20
implementation Income statement 20
Final net asse t Fixed assets 100
Various Earmarked contribu-
tions implementation Final net asse t 100
Earmarked contributions 80
Fixed assets amortization
As stated above, the effect on the income statement and net asset is
immediately d e d uc t ib l e.
Naturally, in the hypothesis that the contribution of grants related to
assets is not able to fully cover the purchase, the income statement
write off must be calculated by applying the same amortization rate to
the consistency of the contribut ion of grants related to assets.
7“Attraverso la politica del risparmio il criterio informatore del pareggio
economico dei risultati di esercizio viene a tramutarsi in una politica di
normalizzazione dei risultati di esercizio, che intende, mediante un
accantonamento di ricavi di contributi, per fare fronte a maggiori costi
di futuri esercizi, a fare sì che nei vari esercizi l’amministrazione non
conduca al disavanzo economico, ma a quel pareggio o a quell’avanzo
economico che esprima un normale soddisfacimento di bisogni.
La politica della normalizzazione dei risultati economici dei vari eser-
cizi dovrebbe perciò possibilmente consentire il soddisfacimento di
ogni nuovo ed eccezionale ordine di bisogni che l'amministrazione
aziendale dovesse affrontare: prevedere quelle temporanee impellenti
circostanze non economiche che condurrebbero a squilibri se non
fossero fronteggiabili, e dovrebbe anche provvedere a quella mutevole-
zza di forze economiche dell'azienda e dell’ambiente che potrebbe
condurre a ri s ul t a t i troppo vari nel tempo”.
8“L’avanzo economico è in sostanza un risparmio, che varrà a incre-
mentare il patrimonio dell’azienda, e a migliorare la sua condizione
economica futura.Va, tuttavia, ricordato che l’avanzo economico non
deve considerarsi una méta della gestione erogativa, che è in equilibrio,
se i componenti negativi sono pari ai componenti positivi, se cioè si
a una situazione di
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI 33
would indicate a serious imbalance in the allocation of
resources and, rebus sic stantibus, the wish to pursue
institutional goals —in other words, the ability to
satisfy the future needs of the community, which the lo-
cal administration was set up to address .
In this case, the management variables with which to
operate should be, in particular, “internal” ones, namely
those that can be amended by means of decisions or ac-
tions that are not dependent on any external influence.
These relate in particular to: carrying out a radical analy-
sis of efficiency, return and costs; determining the spe-
cific needs to be satisfied, some of which may no longer
warrant “public” assistance and can, therefore, be man-
aged by the business sector; examining the effectiveness
of the services provided. In some cases the fulfilment of
needs could even fall below the minimum social neces-
sary needs; thoroughly analysing earnings and revenue
by means of, for instance, an increase in the political
price of some services; increasing the output amount-
only the minimum amount of such output is usually
binding-by imposing a “price” that is at least greater than
the unitary variable cost, without increasing fixed costs.
A situation could also arise where the resources avail-
able are insufficient to achieve institutional goals. The
public sector entity is then compelled to obtain more
funding from the State or from general government enti-
ties, or if it has fiscal autonomy, to increase the tax levy
on citizens, thus increasing the tax burden on the com-
However, obtaining greater revenue of this kind
should be conditional on the State or government entity
bearing this burden expressing a social, political ad
macro-economic opinion on this.
In brief, the scalar income statement must be read “the
other way round”: once the balance statement balances
out, the intermediate results, for example EBITD (Earn-
ings before Interest Tax and Depreciation), must be as
low as possible and not, as for companies, as high as
The lower the EBITD, the more income has been al-
located to covering institutional costs and charges rather
than facing extraordinary and unforesee n o perations.
Once again the economic logic behind public admini-
strations, as for all non-business organisations, is “in-
verted” compared to profit-oriented businesses .
5. The Implementation of Accrual
Accounting in the Italian Public Sector
In Italy the accounting system of every public admini-
stration is characterised by the legislation applicable in
its particular field and the authoritative legal bond sanc-
tioned by the budget forecast. This also weighs heavily
on the general principles and the framework that is set
for fina n c i al reporting .
As a result of accounting reforms implemented be-
tween 1992 and 2003, accounting in Italy has been cha-
racterised by its ambiguous rules  and its heterogene-
ous application, even among public administrations of
the same kind.
Although the analysis below relates only to obligatory
financial reports, accounting principles in Italy can be
summarized as follows:
1) The state accounting system provides for the draw-
ing up of a “balance sheet”; in 1997 a cost accounting
system was introduced, but which does not, however,
provide general results or an economic appraisal9; the
general principles of this system were extended to re-
gional level in 200010;
2) Provisions ap plicable to local authorities (provinces
and councils) since 1995 enforce the mandatory “balance
sheet” and “income statement” schemes, but leaves to
their discretion the ways in which to introduce accrual
accounting11; on analysis, there are remarkable differ-
ences among the accounting systems of over 8000 local
authorities, despite the fact that a specific body was set
up to draft u n iform accounting principl e s12;
3) Since 1992, the accounting method to be used by
bodies linked to the National Health Authority (Aziende
del Servizio Sanitario Nazionale) is that set out in the
provisions of the Italian civil code applicable to limited
liability companies, although regional authorities the
power to establish more detailed rules13; consequently,
this has resulted in 21 different legal regimes (19 regions
and 2 autonomous provinces) being applicable to 250
public health companies scattered throughout the coun-
4) Since 2003, the rules applicable to national institu-
tional entities (welfare entities, research entities, Gov-
ernment entities, national parks, etc.) are essentially
analogous to those of local authorities; the rules in fact
specify the general accounting principles, including the
accrual basis principle14.
Based on the analyses carried out, public administra-
tions falling under points (b) and (d) use the “theoretical”
accrual basis principle defined in chapter 3 of this paper.
This is substantiated by: the latest version of the ac-
counting principles publish ed by the National monitoring
centre for the finance and accounting of local authorities
9L. 94/1997 e D.Lgs . 279/1997, Ar t i cle 10.
10L. 208/1999 and the subsequent D.Lgs. 7 6 / 2 0 00 .
11D.Lgs. 77/1995 transposed by D.Lgs. 267/2000. Concerning accrual
basis accounting, see Article 232 of the D.Lgs.267/2000.
12This organization, called “Osservatorio sulla finanza e la contabilità
degli enti locali”, is provided for by Article 154 of the D.Lgs. 267/
13Lgs. 502/1992, Art. 5.Regional bodies have aligned themselves to
these standard with considerable delay and, even now, there are entities
ertaining to the National Health Authority that have only formally
introduced accrual basis accounting.
14See addendum n.1 of the President of the Italian Republic Decree
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI
(Osservatorio per la Finanza e la Contabilità degli enti
locali), for administrations falling within point (b) ;
both in the text of the law itself and the technical docu-
mentation relating to its publication .
Furthermore, when analysing the liabilities in the bal-
ance sheet15 of institutional bodies, local authorities16 and
companies forming part of the Italian National Health
Authority17, one can see how multiannual earmarked
provided by government entities are recorded under a
specific liability entry. Consequently, in order for such
data to be used, an accounting “sterilisation” proced ure is
necessary, implying the “correlation between revenue
and cost” and not the “correlation between cost and
Recently, within the context of the government account-
ing harmonization process provided for in the Italian
Constitution18 after a 2001 amendment, public admini-
strations have had to adopt accrual accounting19, in addi-
tion to—and not in replacement of—traditional public
accounting. Accrual accounting will only be of informa-
tional value, providing support to managerial processes,
but will be devoid of any legal or authoritative value.
As a result of the aforementioned prescriptive provi-
sions, some common principles of general accounting
were set out20, Amongst these is the “accrual basis prin-
ciple”, compatible with the results of the theoretical
analysis discussed in chapter 3.
It is in this very context that IPSAS could be particu-
larly useful if they were not the result of a mere unques-
tioning transposition of IAS but were able to take ac-
count of the particular characteristics of public admini-
strations in general and, in particular, those in which the
budget still plays a strong “authorizing” role.
6. The Accrual Basis Principle in IPSAS
Taking into account IPSAB’s strong attachment to the
IAS framework, it seems clear how the accrual basis
principle21 has also become the standard for public ad-
ministrations that opt for IPSAS.
Paragraph 22 of the IAS framework, entitled “accrual
basis”, indicates that this basis is useful for the prepara-
tion of financial reports. However, it specifies that under
this basis, the effects of transactions are recognized when
they occur, and not when cash or its equivalent is re-
ceived or paid. Consequently, these transactions are
noted and merged into their corresponding time frame in
When comparing this d efinition with the one provided
for in the Italian civil provisions22, which provide for an
inclusion in the budget of “[…]” period revenues and
charges, irrespective of the collection or payment date’,
no fundamental differences seem to exist between the
two. Here we can also see that the basic idea is to estab-
lish a link between costs and earnings, therefore estab-
lishing that the economic effect of all the period events
must be attributed to th e relevant financial period and not
to that where the corresponding payments are made or
In the light of the above, as well as the concept which
was developed at length in chapter 3 relating to the im-
possibility of applying the accrual basis principle tout
court to the public sector, it becomes apparent that it is
necessary to adapt such a standard to the particular
characteristics of public administrations.
The cash basis has always been taken into account by
IPSAS, even though it was intended to be a transitional
system though which to reach the “full accrual” system
. Only as from 2006 onwards  did the IPSASB—
aware of the difficulty of extending all the “private”
standards to the public sector—undertake the planning of
a specific IPSAS framework in which it would have even
been possible to redefine the standard of accrual ba-
sis23.The last of the four documents issued by IPSASB
dates back to January 2012, when the IFAC website pub-
lished an Exposure Draft and a consultation paper enti-
tled “Conceptual framework for general purpose finan-
cial reporting by public sector entities: presentation in
general purpose financial reports”.
An analysis of the draft documents pertaining to the
IPSAS framework illustrates the well-rooted position that
the accrual basis should be used in drawing up public
accounts. In fact, one can easily appreciate the main ad-
vantages24 of using accrual basis for management-related
issues. It therefore seems that the findings based on the
cash basis provide considerably less information than
22See Article 2423 bis, Italian Civil Code, point 3.
23The expectations of the transactors find their raison d’etre in the fre-
quent misapplication of certain IPSAS principles—especially the one
connected to accrual basis accounting-were these may not be applicable
to public Administrations. The IPSAS framework elaboration has been
divided into four stages. AN exposure draft has been published for each
stage: 1) Users, objectives, scope, qualitative characteristics,reportin
entity; 2) Elements and recognition in financial statements; 3) Meas-
urement of assets and liabilities in financial statements; 4) Pre- senta-
tion and disclosure.
24This statement can be found on the 31st January 2012 IFAC website
entry, which says: “
inancial statements prepared under the accrua
basis of accounting inform users of those statements of past transac-
tions involving the payment and receipt of cash duringthe reportin
eriod, obligations to pay cash or sacrifice other re
ources of the entity
in the future and the resources of the entity at the reporting date.
Therefore, they provide in
ormation about past transactions and other
events that are more usefulto users for accountability purposes and as
input for decision making than is information provided by the cash
basis or other bases of accounting and f inancial reporting”.
15See addendum 13 of the D.P.R. 97/2003.
16See model 20 of the D.P.R. 194/1996.
17See D.M. 13/11/2007.
18Art. 117, item n. 3of the Constitution of the Italian Republic.
19Art. 2,item n. 2, point d) of L. 196/2009.
20See addendum 1 of the D.Lgs. 91/2011. Similar regulations are con-
tained in addendum 1 of the D.Lgs. 118/2011.
21Paragraph 22 of the IAS framework entitled: “Accrual basis”.
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI 35
that obtainable from documents drafted on the accrual
Furthermore, there is no evidence in the IPSAS stan-
dards of the need to combine a cash system with accrual
basis accounting. However, in Italy many authors [36-40]
advocate for an integrated approach to accounting. The
coupling of traditional accounting which, by its very na-
ture, is suitable for the financial aspects of management,
with full accrual basis which can cover also other finan-
cial aspects could provide more information to stake-
holders, in particular national governments that have
signed international agreements on financial stability.
As reiterated above, accrual basis accounting estab-
lishes a correlation between costs and the income result-
ing from bearing such costs. Such income is recorded
under the period in which the transaction takes place.
However, this begs the question whether one can apply
the accrual principle to entities whose revenue derives
primarily from non-exchange transactions? Can this ac-
crual principle apply to entities where most of their costs
are unrelated to their income?
Until 2006, none of the IPSAS standards had consid-
ered the possibility that income could derive from
non-exchange transactions26. A non-e xchang e tran saction
implies that the income is not linked to an exchange, but
to a levy, to a tax or a transfer. In Italy, the financing of
the management of the public sector comes mainly from
taxes, transfers from other entities or from the payment
of services or products rendered. The latter items fall
within IPSAS 9, while the others are subject to IPSAS
Taxes are linked to the institutional activities of the
entity and to the carrying out of functions that satisfy
general societal needs. Taxes, from a legal point of view,
can be seen as a forced levy on wealth, while, from an
economic point of view, they constitute indirect com-
pensation for providing services to society . Gene-
rally speaking, taxes can be collected directly by the in-
dividual public entity or can be acquired indirectly by
means of transfers from other entities. Based on how
they are collected, they can be divided into levies and
taxes. Levies are linked to income and assets—and not to
the activities of the public body. Taxes, on the other hand,
are linked to certain financial operations carried out by
the public sector for the benefit of citizens-despite the
fact that the beneficiary need not be the person having
paid the tax.
Transfers are a source of indirect funding because they
come from a system of public relations that is established
between different government levels and which varies
according to the public governance model adopted. Fur-
thermore, no specific correlation exists inasmuch as their
entity depends on the organization and provisions which
vary from country to country.
The major criticism voiced in relation to IPSAS 23 is
the use of the accrual basis—in its traditional sense—
when having to attribute to one period rather than another
income obtained from non-exchange transactions.
Based on an analysis of cases in some European coun-
tries where IPSAS have been implemented, the principle
of accrual accounting is subject to a specific derogation
for non-exchange transactions. Such derogation has re-
sulted in the cash accounting principle being applicable
in order to allocate all income deriving from non-ex-
Conversely, under the accrual basis principle, tailored
to the public sector, as described in chapter 3, income
deriving from non-exchange transactions could have
been attributed not to a cash accounting system, but to
the economic relevance of charges for which they were
In Italy, the public sector accounting harmonization pro-
ject should have begun in 2001, as a result of the
amendment of Article 117 of the Italian Constitution.
However, only at the end of 2009 did the Italian Parlia-
ment issue the law that marked the launching of such a
project, whic h i s currently on-going.
The true incentive for such accounting innovation is
the fact that the Italian Government must provide EU-
ROSTAT with the data necessary to check compliance
with the stability parameters set by the European Coun-
EUROSTAT, and ISTAT in Italy, draw up the data in
compliance with Regulation (EC) 2223/1996, more
commonly known as “ESA 95”, which is a collection of
statistical-not accounting-rules. The accounting data un-
der ESA 95 pertains to cash flow and not the principle of
As a result, the macroeconomic tendency at European
level is to give increasing primacy to cash flow. Accrual
accounting will gain relevance only if it can bring “added
value” in terms of informational content to those who
govern single public administrations, i.e. at microeco-
nomic and managerial levels.
25The necessity of implementing an accrual bass system is highlighted.
In fact, on page 3 of the document we find: “Under the accrual basis o
accounting, transactions and other events are recognized in financia
statements when they occur (and not only when cash or its equivalent is
received or paid). Therefore, the tran
actions and events are recorde
in the accounting records and recognized in the financial statements o
the periods to which they relate”.
26The absence of a IPSAS that could acknowledge non-exchange trans-
actions is to be attributed to the derivation of international public sector
accounting principles from the private. Due to the difficulty of compa-
nies in obtaining this type of revenue, no specific IAS exists.
In order to put this into effect, the principle of accrual
basis ratified by IPSAS should not be implemented
without question by IAS, but should reflect all the par-
Copyright © 2012 SciRes. OJAcct
F. G. GRANDIS, G. MATTEI
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In fact, the IPSAS’ accrual basis standard not consider
non exchange transaction effect, such as revenues derive-
ing from: general and indivisible services supply; other
typologies of contribution provided; where the “causal
link” between revenues and charges are inverted.
In all likelihood a new definition of the accrual basis
principle, applicable to the public sector, would be ap-
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