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«Public Sector Accounting - An Interdisciplinary Field Involving Accounting, Economics, and Jurisprudence 1 Ryosuke Tao Research Fellow, Institute of ...»

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Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No.1, June 2012 45

Public Sector Accounting - An Interdisciplinary Field Involving

Accounting, Economics, and Jurisprudence 1

Ryosuke Tao

Research Fellow, Institute of Administrative Management


Public sector accounting has recently been improved. Currently, there are requirements to

disclose stock information in addition to the flow information presented in budget statements or

accounts statements. Public sectors have prepared and disclosed their financial statements (including balance sheets and income statements) based on business accounting approaches.

Moreover, as a matter of policy, the government tends to prepare and disclose cost information along with the financial statements for the individual ministries and governmental agencies.

The objectives of clarifying the fiscal conditions in a state through the preparation and disclosure of financial statements are to fulfill the state’s accountability to its citizenry and market participants and to optimize and enhance the efficiency of its fiscal activities. Most importantly, the improved information should contribute to democratic decisions on public finance.

A perspective different from the business accounting is that public sector accounting places more emphasis on inter-generational fairness. With respect to the inter-generational benefits and burdens, however, various factors must be considered, and the differences between assets and liabilities in the balance sheet may not be the indicators for that purpose.

Public sector accounting is considered to have been developed based on the business accounting approach. As such, the objective of the accounting is to retrospectively review how assets and liabilities have changed as a result of past public finance operations. Yet, in considering compelling public finance conditions, there is a need to discuss and consider expected perspectives, in order to clarify what resources will remain in the future by I am deeply indebted to Professor Katsuya Uga (Administrative Law, The University of Tokyo) and Professor Kiyoshi Yamamoto (Public Sector Accounting, The University of Tokyo) for reviewing this paper and offering advice. As the author, however, I take full responsibility for all of the opinions expressed in this paper and full blame for all of the paper’s faults.

This paper has been developed as part of a series of study and research initiatives funded by subsidy grants for the Sciences Research Fund (Grant-in-Aid for Research Activity Start-up: Research No.


R Tao / Public Policy Review incorporating the aspect of future cash flows (this paper views this as a mixture of accounting thought and economic thought). It is important to recognize that both perspectives are commingled. If the forecast perspective is highlighted, the assets in the balance sheet should include taxation rights that give rise to future tax revenue. Another useful practice, from the perspective of information disclosure, is to prepare an individual balance sheet, in addition to a comprehensive financial statement, for each significant political agenda (e.g., public pension obligations).

Public sector accounting has been developed without implementing a necessary legal basis.

The effects of this reform may be a matter of not much interest without infringing any democratic control of public finance under cash basis accounting. The focus for public finance, however, has certainly been transferring from flow to stock and from the aspect of political decision to the aspect of administration. The role of public sector accounting should be clarified in conjunction with the various systems.

I. Introduction

Recently in a bid to better reflect the fiscal conditions of the central government as a whole, the national accounting standards and other requirements have been improved and stock information (information on assets and liabilities) as well as cash flow information through budgets and annual accounts have now been disclosed comprehensively and systematically. In this context, the balance sheet and the statement of administrative costs have been prepared and disclosed in accordance with the approach adopted in the business accounting. We have also witnessed recent initiatives to prepare and disclose cost information for each policy implementation, in addition to the separate financial statements by ministries.

The reform of public sector accounting focused primarily on adopting business accounting models such as accrual accounting. Amidst these efforts, certified public accountants, accounting academics, and national public accountants and NPM specialists initiated the improvement of the accounting standards. In January 2003, the office of public sector accounting was then formed in the Budget Bureau of the Ministry of Finance. The Public Sector Accounting Subcommittee, Legal and Public Sector Accounting Section, and Fiscal System Committee of the Fiscal System Council mainly strove to develop the criteria for preparing financial statements. As they did, academics and practitioners in public finance, law, and public administration contributed to their efforts.

In this paper, we clarify the relationship between jurisprudence and economics by considering various issues to do with public finance. We must note in this regard, however, that public sector accounting represents a field involving accounting, economics, and jurisprudence.

While accounting and economics focus on the functional aspect of the system, jurisprudence often places weight on the meaning of the system in terms of the relationships with related Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No.1, June 2012 47 various systems. (Because of this, jurisprudence is often thought to be conservatively opposed to changes in the status quo, yet it can be used constructively in conjunction with other fields, provided that it does not adhere to too closely to the history and background of the system).

Public sector accounting is one of the areas where practices have advanced before the theories have deepened. I will provide insights into the roles and meanings of the public sector accounting. While doing so, I will identify the interests and purposes for which these three academic fields of accounting, economic and jurisprudence jointly collaborate. This information will provide further support for an outlook for the design of a better system, one which in fact is widely being accepted. This is the objective of my paper, one that I believe is called for in the context of the latest Financial Review.

This paper is composed of the following. First, I will give an overview of the public sector accounting system, mainly from the perspective of the separate financial statements by ministries (II). Next, I will provide functional insights in the public sector accounting and then draw on knowledge on accounting and economics to discuss the desirable types of information disclosure, assuming that the purpose of public sector accounting is to enhance information disclosure (III). Finally, I will discuss the implications of improved public sector accounting from various viewpoints of jurisprudence, and conclude this paper (IV).

Separate issues on special accounting and accounting by independent administrative institutions are topics of great interest in the context of public sector accounting, I will address these issues in another paper. Some sophisticated approaches such as full business accounting models (double entry and accrual basis) in the Tokyo Municipal Government have been observed in accounting of local governments. I will refer to them in a limited scope from time to time in this paper, as appropriate.

II. Overview of Public Sector Accounting System II.1. History and Background Conventionally for the balance sheet of central government as a whole, the information on cash flow has been disclosed through the budgets and annual accounts and concurrently some stock information has also been disclosed partially through various materials and data1. As noted below, however, such materials and data used to be somewhat less exhaustive and to be For the budget compilation, the government shall file with the Diet the reference documents prescribed in Article 28 of the Public Finance Law. These reference documents include a written statement of the position of the Treasury, a written statement of the status of government bonds and borrowings, a written statement of holdings of national properties, and a written statement of the assets, liabilities, profit and loss, and other results from major corporations to which the government has made equity contributions.

For the annual accounts, the government shall file with the Diet with separate statements concerning the respective liabilities of the government pursuant to Article 40 of the Public Finance Law.

R Tao / Public Policy Review presented rather unsystematically.

That is, it has been difficult to piece together an accurate profile of the balance sheet of central government as a whole on an accounting basis, as previous data on assets and liabilities were separately reported in statements of general accounts and statements of individual special accounts (1). It is difficult to depict an overall picture of the national assets and liabilities, as the government discloses its fiscal disposition in separate reports such as the “General Report on Current Total Value of Government Receivables,” “Changes in National Properties and General Statement of the Current Total Value,” “Statement of the Government Liabilities,” and so on (2).

As the scope of data has been separately determined according to jurisdictions and forms of administration, the data have not exhaustively identified the conditions of government assets and liabilities (3). Unlike business accounting, public sector accounting does not conventionally recognize or measure values after depreciation and amortization, nor does it provide information on provisions for retirement benefits2 (4). These issues have consistently been identified and contested.

Efforts to improve the public sector accounting started with two guidelines: first, the “Basic View on the Preparation of the Balance Sheet of Central Government” which was developed by specialists and academics in the private sector, in October 2000; second, the “Balance Sheet of Central Government (draft)” developed and issued based on such guidelines (the statement has been prepared and issued from fiscal year 1998).

Next, the Fiscal System Council developed guidelines for the preparation of, and accounting standards for, the financial statements of special corporations or independent administrative institutions, and special accounts3. The Council issued its “Basic View on Public Sector Accounting” in June 2003, followed by the “Guidelines for the Preparation of Separate Financial Statements by Ministries, in June 2004. The first separate financial statements for fiscal 2002 by the ministries (general accounts and special accounts) were issued in October

2004. For the accounts for fiscal 2003 and thereafter, the government has issued “Separate “Basic View on the Preparation of the Balance Sheet” (October 2000).

For special corporations, Guidelines for the Preparation of the Statement of Administrative Costs were adopted in June 2001. For independent administrative institutions, Guidelines for Accounting for Independent Administrative Institutions were decided in February 2002 and revised in March 2003 and in June 2005. Individual ministries have issued these statements in the years since. For special accounts, the “New Guidelines for the Criteria for the Preparation of Financial Statement of Special Account” was issued in June 2003 (the criteria were incorporated into the criteria for the preparation of separate financial documents by ministries in June 2004). In addition, the Law Concerning the Promotion of Administrative Reform for the Realization of Small and Efficient Government (Act No. 47 of 2006) and the Law Concerning Special Accounts (Act No.23 of 2007) were enacted in June 2006 and March 2007, respectively, to form a common legal basis for accounting for special corporations and independent administrative institutions. After the enactment, it became mandatory to prepare financial statements in a manner consistent with the accounting practice of business enterprises (Article 19 of the Law Concerning on Special Accounts).

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