IFAC International Federation of Accountants : Emerging Role of Government Balance Sheets for Sustainable Public Finances in the Post-COVID19 World

IFAC & MOSAIC Initiative Building Resilient and Sustainable Economies Forum presented diverse global perspectives on supporting and strengthen transparency, accountability and good governance in the public sector. Over 400 representatives from donor organizations, governments, professional accountancy organizations (PAOs) and the accountancy profession discussed key themes, including sound public financial management (PFM) in an emergency, which focused heavily upon the current and future actions that governments may take as they navigate the COVID-19 crisis.

As policy makers globally take swift fiscal and monetary policy actions toward a sustainable recovery preparing for the post-pandemic world, it is imperative that the decisions are based on reliable financial information that faithfully reflects the financial position of the governments. Government financial statements prepared on a timely basis using credible accounting standards are best placed in providing such information.

The World Bank recently released the paperGovernment Financial Reporting in Times of the COVID-19 Pandemic, which reflects on how governments could use existing financial reporting systems during the pandemic while identifying opportunities for their improvement for the post-pandemic stage. It also shares insights into the possible impact of the pandemic on government financial performance, position, and cash flows. This paper complements and could be used in conjunction with the COVID-19 Intervention Assessment Tool developed by IFAC and the Zurich University of Applied Sciences, in partnership with the International Public Sector Accounting Standards Board, to assess the COVID-19 impact.

Taking a balance sheet approach enables a comprehensive view of fiscal-policy making from the perspective of government financial statements. The degree to which a country can use the balance sheet approach largely depends on the reliability of its accounting and financial reporting system as well as the inclination of key decision makers in using information generated by the financial statements.

Those few countries with strong accrual basis financial reporting, like New Zealand, are in a better position to use the balance sheet approach and clearly establish the impact of COVID-19. Nevertheless, given the urgency during the recovery phase of COVID-19 pandemic, governments should endeavor to provide more useful, timely and reliable financial information for decision making, using the existing accounting system, either cash or accrual basis. Concurrently, governments need to accelerate their public sector accounting reforms toward the implementation of accrual-based accounting systems aligned with the International Public Sector Accounting Standards.

The fiscal impact of the COVID-19 crisis on the government's financial performance, position, and cash flows depends on the country context. The table below provide an overview of the possible fiscal impact from a conceptual standpoint:

Statement of Financial Performance

Overall decrease in tax revenues, including value added, profit, and wage taxes. Overall increase of public expenditures, including public health, unemployment benefits, social security, subsidies and grants, disaster relief packages, and lending to public enterprises and lower levels of government. A higher deficit could be reported at the end of the reporting period.

Statement of Financial Position

Lower revenues and higher expenditures, caused by the pandemic, could lead to a decrease in the overall level of assets, particularly of current assets, including cash and cash equivalents; The overall level of liabilities, particularly public debt, provisions, and pension liabilities could be higher. Net assets/equity could be lower, leading to decreasing Net Worth to Gross Domestic Product ratios

Cash Flow Statement

Operating activities could generate large cash outflows, given the decrease in tax revenues and increase in expenditures. Investing activities could also generate large cash outflows, mainly because of lower spending on capital expenditure in infrastructure and other government fixed assets. Financing activities may show large cash inflows in several countries, reflecting an increase in borrowing. A net decrease in cash and cash equivalents is expected.

The notes to financial statements are an opportunity to make the financial information more understandable to users by explaining materially large figures and significant changes caused by the COVID-19 pandemic. Some of the items that may need to be disclosed given their direct link with governments' response to extraordinary circumstances are: (i) arrears; (ii) extraordinary items; (iii) contingent liabilities and guarantees; (iv) public debt; (v) indrawn borrowing facilities; and (vi) sovereign wealth funds.

It would be helpful to also report on long-term fiscal sustainability of the government to analyze the fiscal risks associated to the financial performance and financial position of the government. This type of reporting is particularly relevant because of the long-term impact of the large-scale policy measures taken by governments to lessen the economic impact of the pandemic. Sustainability reporting can be drawn from and/or accompany the government financial reports, and it also represents a valuable source of information for all stakeholders.

COVID-19 heralds the dawn of a new era of opportunities to strengthen the role of accountants and auditors in promoting more sustainable public finances. Closer collaboration between governments, professional accounting organizations, and development partners play a catalyst role in strengthening a balance sheet approach in governments while increasing the quality of their financial information.

For more information, please visit the following Public Expenditure and Financial Accountability, World Bank and IFAC resources:

• The PEFA Steering Committee Adopts an Ambitious Work Plan for 2021 to Support Public Financial Management in the Context of COVID-19
• World Bank Group Governance and Institutions COVID-19 Response Resources
• COVID-19 Resources from IFAC's Network

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