Double-Entry, Accrual
Accounting in Financial
Management of ROK Gov't

The existing single-entry and cash-based accounting framework, was formulated originally in 1960s and is currently employed without any significant modification. The framework, however, possesses both strength and weakness. The strength is that it enables better control over budgetary spending. The weakness, on the other hand, is that it leads to relatively imprecise fiscal information.
To improve existing framework, the government is working toward adopting accrual-based accounting. It is expected that information and data under accrual-based accounting will be more reliable and accountable. For example, when receipt and expenditure occur, the corresponding decrease or increase in asset/liability is simultaneously recorded. Moreover, the amounts of assets and liabilities reflect current market value.
In addition to technical advantages, social and economic changes in 1990s played a central role in the government's decision to introduce accrual-based accounting. There has been recently more emphasis on the production of information required for measuring fiscal soundness and performance. In turn, most of OECD nations either have adopted or are going to introduce accrual accounting.

Benefits of Accrual Accounting
There are many outstanding benefits that the Korean government expects from new accounting framework.
First, it will be possible to identify financial position of the government at a glance. Currently, it is rather difficult to identify financial position because there is no single, unifying standard that govern the production of fiscal information. The introduction of accrual accounting standard is expected to provide diverse information. Therefore, the new system will promote more accurate assessment of financial position and fiscal soundness of government. In addition, the government will be able prepare its balance sheet and income statement as in corporate sector.
Secondly, fiscal operation will be transformed into more a performance-oriented system. The current accounting framework focuses on inputs, which is the assessment of whether fiscal expenditure is executed in accordance with law. This input-oriented process placed an emphasis on the level of spending, but not the level of performance. Accrual-based accounting will provide the government with information on the program-by-program costs and enable the assessment of performance for each program. In addition, each ministry will formulate its own financial report, which will provide more budgetary control and accountability. The public administration and business mind will converge and lead to more reasonable expenditure. In the end, this will prevent spending on unnecessary items.
Thirdly, fiscal operation process is expected to become more systematic. Currently, the fiscal information is rather fragmentary and hence not best suited for decision-making process. The accrual-based accounting will help to produce better information both in quantity and quality. Better information will allow for more rational and systematic fiscal operation. For example, the current number of fiscal indicators, at 29, will be expanded to 208 once accrual basis is adopted.
Lastly, the new accounting basis will enhance the management of government-owned resources. Under existing system, all government-owned resources, such as roads and ports, are not reported. The introduction of accrual accounting will eliminate this shortcoming and ensure that all resources are included in a financial report. Moreover, the government account receivables will be adjusted to the amounts that can be actually recovered. Through the new system, the government will establish an effective resource management framework that includes all government-owned resources. Therefore, this change will prevent negligence and loss of resources.

Road Ahead
The Korean government has been pilot-testing accrual-based accounting since FY 2005, with a goal toward the full adoption of new accounting basis in FY 2008. In FY 2005, the pilot project was adopted across 12 central government ministries. Currently, the Korean government is in the process of assessing the first-year result. As soon as the assessment is completed, it will be extended to all central government ministries. The government is working toward the enactment of a legislation that governs the introduction of accrual-based accounting, which is expected to be completed by the end of FY 2006. In addition, the government is scheduled to complete a series of essential preliminary steps, including pilot project and completion of asset/liability register through inspection. nw

By Lee Chul-hwan
Director-General,
The Treasury Bureau,
The Ministry of Finance and Economy