Introduction
Government accounting has several distinctive features and a specific purpose, which is reflected in legislation and the theoretical principles governing it. While private companies are accountable to public institutions, the government is also accountable to the people for the amount and purpose of the budget funds spent. According to Schiavo-Campo (2017), in order to comply with such accountability, it is essential to maintain the collection and analysis of relevant financial information and to report regularly on certain transactions.
Various financial and legal systems of specific states differ in their accounting standards and basis. This paper analyzes the nature of government accounting and its common features with private company accounting and discusses accounting standards, accounting basis, and budget principles and procedure for budget development in the UAE.
Nature and Characteristics of Government Accounting
The nature of the government environment is to perform public functions and serve the society within the framework set by the legislation. The state does not have a profit-making function, although it should spend the resources reasonably. As a rule, the state budget is primarily formed by taxes and trade transactions with state property or natural resources, which by default, are the public property. Thus, the government, when using these funds and resources, is obliged to be accountable to the people in this regard.
The government accounting system focuses mainly on recording, classifying, compiling, and publishing financial information on transactions conducted by authorities and public institutions. According to Schiavo-Campo (2017), “accurate and timely financial information, verification and assessment of results are crucial for transparency, accountability, and the rule of law” (p. 248). In order to satisfy this requirement, there is a strict hierarchy of accountability among the governmental entities. Unlike private sector companies, they have fixed functions and approved budget that should be spent exclusively on their implementation.
Nevertheless, there are several similarities between state entities and commercial organizations. Generally, legislation regulating market rules do not differentiate public and private entities. They function on an equal basis, according to the fundamental principles of competition, supply, and demand. Accordingly, the accounting systems for government and private sectors have certain similar features.
Due to the identical nature of the market activity, public and private entities are accountable for the same transactions and events. Schiavo-Campo (2017) states that “recording of all expenditures and revenues according to the same methodology” and “regular production of financial statements” are required for the government accounting system (p. 249). It bears mentioning that this also applies to private sector companies.
In addition, there are identical names for accounting provisions and units and also a unified classification of accountable operations in government and private accounting systems. Researchers note that accounting systems are divided into cash and accrual types, depending on the regulations that specify which financial events and transactions should be recognized for accounting (Schiavo-Campo, 2017). This division is inherent in both private and government accounting systems as both accounting bases can be used for either companies or public entities.
Accounting Standards and Accounting Basis in UAE
The UAE is an economically rapidly developing country that is becoming increasingly attractive to foreign investors. The researchers note that the UAE has not established national codified accounting standards (Aghimien, 2016). However, over time, the central bank has obliged certain financial institutions to report under the International Financial Reporting Standards (IFRS) in order “to meet the foreign investors’ requirements of reliable accounting information” (Aghimien, 2016, p. 81).
According to the UAE Ministry of Finance (MoF) official website, the UAE Cabinet adopted a Resolution No (2/2) of 2017, which included the Manual of Federal Government Accrual Accounting Standards (FGAAS) (UAE MoF, 2019). This document states that it is “mainly based on International Public Sector Accounting Standards (IPSAS),” which also complies with IFRS regulations (FGAAS, 2017, p. 5). Consequently, national government accounting standards in the UAE are in line with the principles of IPSAS.
The IPSAS is initially aimed at transparency and accuracy of financial data on transactions and events carried out by state authorities and public institutions. It also ensures the uniformity of such standards in different states, which is significant given the globalizing economic processes. The IPSAS contributes to the increased quality and transparency of public institutions’ accounting reports and more objective assessments. The FGAAS expressly enshrines these principles, arguing that its primary purpose is “to ensure the preparation of high-quality financial statements and presentation of transaction and events in the most transparent and accountable manner” (FGAAS, 2017, p. 21). Thus, the UAE is increasingly complying with international government accounting standards.
As the name of the above manual indicates, the UAE applies an accrual accounting basis. According to Schiavo-Campo (2017), it recognizes financial transactions and events to be relevant for reporting when a commitment has been made, rather than when cash has been paid or received under the commitment. The FGAAS states that the UAE government has only started a program to change the accounting basis from cash to accrual (FGAAS, 2017). This basis is more complicated because it deals with all commitments but is actively used in developed countries as it allows a better overview of economic dynamics.
Government Budget in UAE
The approach to the type of budget in UAE government accounting is constantly evolving. According to the UAE MoF official website available at www.mof.gov.ae/en/, “in 2001, program and performance-based budgeting was adopted, and input allocations were linked to output objectives” (UAE MoF, 2019). It also states that at the beginning of the second decade of the 21st century, the UAE began to adopt a three-year budget based on the zero-based framework. Thus, the UAE keeps pace with the latest trends in budget reporting.
The budget’s primary goal are to make government entities publicly accountable and to improve the transparency of budget spending by comparing the remaining funds with the adopted budget. The FGAAS, equally with this objective, points out that the importance of the budget is to demonstrate the public authorities’ compliance with the approved budget and financial indicators in achieving the budget goals (FGAAS, 2017).
With regard to the contents, the UAE MoF stated on the referred website that 37.62% of the overall 2020 federal budget was directed to social development and social benefits spheres. Besides, “14.00% was allocated to infrastructure and economic resources and 32.61% to government affairs”. The federal budget approval proceeds in several successive steps, including issuing a preliminary MoF circular, planning revenues and expenditures by public entities, drafting a budget law, its discussion, approval by higher authorities, and adoption. It should be concluded that the characteristics of the UAE budget demonstrate the high economic and infrastructural advancement of its government accounting standards.
Conclusion
The nature of public functions and the government environment has a strong influence on the specificity of government accounting, although it has a number of similarities with private sector accounting. The UAE government accounting is in a transitional period towards the goal of complying with current international accounting standards. The principles of formation and characteristics of the procedure for adopting the UAE federal budget indicate that the state is highly developed in the economic sphere.
References
Aghimien, P. A. (2016). Development of accounting standards in selected Middle Eastern countries in comparison to the United States of America. Review of International Business and Strategy, 26(1), 69-87.
Schiavo-Campo, S. (2017). Government budgeting and expenditure management: Principles and international practice. New York, NY: Routledge.
UAE Cabinet. (2017). Manual of Federal Government Accrual Accounting Standards. Web.
UAE Ministry of Finance, 2019. Web.