What Accrual Accounting Would Have Exposed, Part II
In response to my last post (What Accrual Accounting Would Have Exposed, Part I), a journalist asked if California was not already employing accrual accounting of the type I describe.
The short answer is “no.” The accrual basis form of accounting to which I referred in that post is known as “full accrual,” which is defined in the California Department of Finance glossary in the manner pasted at the bottom of this message. The less robust form of accrual accounting California currently employs is known as “modified accrual,” the definition of which is also pasted below.
A key difference is that modified accrual doesn’t pick up the creation of obligations for deferred compensation such as pensions and retiree healthcare that will require future fiscal year appropriations. For example, this year California will exclude from its budget the creation of more than $3 billion of OPEB (retiree healthcare) Costs (see chart on page 8 of State Controller’s 2015 OPEB report). There are also big differences in the reporting of revenues, a subject for a future post.
From California DOF glossary:
Accrual Basis of Accounting
The basis of accounting in which transactions are recognized in the fiscal year when they occur, regardless of when cash is received or disbursed. Revenue is recognized in the fiscal year when earned, and expenditures are recognized in the fiscal year when obligations are created (generally when goods/services are ordered or when contracts are signed). Also referred to as the full accrual basis of accounting.
Modified Accrual Basis
The basis of accounting in which revenues are recognized if the underlying transaction has occurred as of the last day of the fiscal year and the amount is measurable and available to finance expenditures of the current period (i.e., the actual collection will occur either during the current period, or after the end of the current period, to be used to pay current year-end liabilities). Expenditures are recognized when the obligations are created, except for amounts payable from future fiscal year appropriations. This basis is generally used for the General Fund and special funds.