The Challenge of Accruals Accounting in the Ministry of ... · ‘Air-power’, ‘sea-power’ and...

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The Challenge of Accruals Accounting in the Ministry of Defence

Ross CampbellDirector, Public Sector ICAEW


“Unlimited money forms the sinews of war”

Marcus Tullius Cicero


Accruals Accounting in a Defence Ministry

• Context: Accruals Accounting in the UK

• Where to begin…

• Some particularly stubborn problems

• Cultural resistance… and how to overcome it

• The to-do list…


UK timeline for adopting accruals

Timeline Event

1994 Political decision to implement accruals accounting

1995-99Work begins – public consultation & drafting legislation

Recruitment, training & systems development

2000 Government Resources & Accounts Act (GRAA 2000)

2001First accruals accounts prepared on a UK GAAP basisand audited in parallel with cash accounts

2002Full implementation of accruals accounting for centralgovernment

2005-06 Government departments adopt IFRS

2007Clear Line of Sight project begins – alignment of budgets,parliamentary estimates and accounts

2010 First Whole of Government Accounts published

2011-12 Clear Line of Sight adopted


“This is a very significant day for Government.

From now on, the Government will be using best

practice in financial management . . . The

implementation of resource accounting and

budgeting puts Britain among the world leaders in

public service reform’”

Andrew Smith

Chief Secretary to the Treasury

2002



• Context: Accruals Accounting in the UK

• Where to begin …


• Cultural change… and how to bring it about



Where to begin…

MOD had 7 years to prepare but a lot of “up-front” work wasneeded:

• Deciding accounting policies

• Putting in place the accounting systems

• Interfacing the accounting systems with the existing logisticssystems (c.300)

• Recruiting & integrating accountants – (c450.)

• Training of existing finance staff (2,000 plus in MOD)

• Establish business processes – including consolidation

• Valuation of assets – everything from nuclear submarines tonon-explosive inventory!

• Valuation of liabilities – everything from service pensions toliabilities for environmental clean-up


Putting the assets in MOD’s accounts…

Setting accounting policies was not alwaysstraightforward…



Which of the following should be accounted for by MOD?

• Land and buildings equivalent to 1% of the UK land mass?

• Dry docks and harbours owned by industry but usedexclusively by MOD?

• Communications satellites?

• £7bn of financial instruments?

• Stately homes occupied by senior offices?

• A sunken treasure galleon?


Assets in the MOD’s accounts…

Which of the following should be accounted for by MOD? All!

• Land and buildings equivalent to 1% of the UK land mass?

• Dry docks and harbours owned by industry but usedexclusively by MOD?

• Communications satellites?

• £7bn of financial instruments?

• Stately homes occupied by senior officers?

• A sunken treasure galleon?

MOD should account for these under IFRIC 4 but doesn’t!



Three of the more significant challenges….


The stock-taking challenge

1.5 million lines of inventory in over 100locations….some dating from the 1914-18 war!


The valuation challenge - what is it worth?- purchase price?- resale value?- something else?


The completeness challenge: at what point- is this an aircraft?- or a collection of components?

How does the ‘repair loop’ record the asset?



• Background to Accruals Accounting in the UK






Non-cash: Depreciation & Impairment

Policy-makers do not always take the accounting consequencesinto consideration and changes to policy assumptions can createunforeseen costs that consume budgets…

Depreciation is modelled, but… the expense is based onassumptions on useful life of assets

….for example the decision to return British Forces in Germanyto the UK added £1.5bn of unexpected cost to the 2011-12accounts to write down the value of the estate in Germany!

….this hadn’t been budgeted for….


Embedded leases in contracts

Under IFRS as adapted for UK public sector entities IFRIC 4requires government departments to recognise assets where thesubstance of contract is that it contains an embedded lease:

For example… contracts with a privatised ex-naval shipyardwhich only does work for MOD and where MOD payments coverall the costs. In theory the docks, cranes, etc. should beaccounted for by MOD…

In practice, there are over 500,000 contracts extending over 10years and the information has proved impossible to get……estimates are about £2bn of assets have been left out.

… the Auditor qualifies the accounts every year.


“This brings me to my present purpose, which is to request

elucidation of my instruction from His Majesty’s Government so that I

may better understand why I am dragging an army over these barren

plains. I construe that perforce it must be one of two alternative

duties, as given below. I shall pursue either with the best of my

ability, but I cannot do both:

1. To train an army of uniformed British clerks in Spain for the benefit

of the accountants and copy-boys in London or, perchance…

2. To see to it the forces of Napoleon are driven out of Spain”

Arthur Wellesley

1st Duke of Wellington


Overcoming cultural resistance

Senior military and defence policy makers tend to be resistant tounderstanding the concepts and principles of accounting. It canhelp to have a different concept!

‘Air-power’, ‘sea-power’ and – ‘Spending Power!’

Need to show that good accounting practices act as an enablerof getting the most out of the resources given to defence,specifically:

• Supporting realistic estimating and planning – avoiding waste

• Creating systems & disciplines to understand financial position

• Linking ‘cost inputs’ to defence capability ‘outputs’




• The challenge with MOD: air-power, sea-power, spending-power


• Particularly stubborn problems




“…shortfalls in financial management have significant

consequences. The over-commitment in future spending

plans has led to additional savings being necessary.

During 2009-10, the Department had to find additional

savings of £800 million to bring its planned expenditure

back into line with its budgets. Finding these reductions

mid-year is a time-consuming and de-stabilising exercise.

Many areas have to revisit or adjust their plans leading to

delays, material changes to project specifications and

costly renegotiation of contracts with industry. Delaying

projects also leads to significant increases in the project

cost.”

Sir Amyas CE Morse

Comptroller & Auditor General


What modern financial management can do:

Good quality accounting which links costs to outputs can:

• enhance visibility and understanding of the cost of deliveringdefence capabilities

• help defence recognise the actual cost of projects; and

• Improve financial planning to increase spending power!

Professionally skilled finance staff can:

• Develop a long term financial strategy and associated riskmanagement strategy to support delivery of defence

• Create a culture of greater efficiency

• Help prioritise defence resources to deliver defence outputs!

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The Challenge of Accruals Accounting in the Ministry of ... · ‘Air-power’, ‘sea-power’ and...

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