Come financial year 2018-19, the Indian Railways (IR) may shift to accrual-based accounting from the current cash-based system, a move that will help it identify its lakhs of unknown assets, assess long-term liabilities and draw a clear picture of return on investments. The change in accounting practice will also help the transporter identify its loss- or profit-making lines of businesses and services and take necessary steps to stem losses and boost profits. A pilot project on accrual-based accounting has already been completed in the Ajmer division of Northwestern Railways and at the Kapurthala rail coach factory. The accrual system of accounting records revenue and expenses when they are incurred; the system registers transactions carried out on a credit basis, by recording these as either receivables or payables. This means a transaction is recorded when the right to earn income is established or when expenditure is committed.
In the cash-based system being followed currently, however, transactions carried out on credit basis are not recognised. Also, in this system, since the main objective is to record only the flow of cash, the records of assets created, purchased, disposed of etc are not kept. IR’s inability to attract private funds or even multilateral finance for its huge expansion needs is partly due to the opaque system of accounting it follows and lack of clarity on return on investments. Even though the gross receipts are shown to slightly exceed ordinary working expenses, it is partly because of the flexibility the transporter enjoys when it comes to appropriations to various funds, including DRF, safety and capital funds.
The ministry of railways has adopted the Mission Beyond Bookkeeping to bring in the much-delayed accounting reforms. Under the process, pilots to move towards accrual-based accounting have already been completed in the Ajmer division, Northwestern Railways and the rail coach factory, Kapurthala. The pilot in Ajmer was conducted with the support of the Institute of Chartered Accountants of India (ICAI), which is also helping in a pan-India roll-out, and showed that the division had over 70,000 assets though the value of most of the assets was unknown. “Some assets such as houses dated back to the 18th or 19th century, for which there were no records to establish the cost,” said a senior railway official, who was part of the Ajmer pilot.
Assets of the Indian Railways — which has 17 zones — includes buildings, tracks, overhead lines, signalling and rolling stock, among others, across the country. Such assets were assigned a value of `1 to ensure the asset is mapped and a disclosure was given in the notes to account. For this purpose, a format called fixed asset register was prepared. Earlier, there was no system of capturing fixed assets as block accounts were used, which are an aggregation of the amount spent on assets till date, but a particular value to an asset was not maintained. This necessitated the need to map all the assets physically. “Recognising assets at `1 is an accepted standard which the postal department was the first to adopt,” said another railway official.
Under the current cash flows-based system, the railways may have tendered services but not received payment or it may have received payment but service could be due. For instance, if a passenger books a ticket on March 30 for a journey to be undertaken on April 2, the current system will account it as an income for the year ending March 31. However, the passenger may decide on April 1 to cancel the ticket which will entail a refund. Though this liability is not recognised in the current format, the accrual system will put the liable refund amount under current liability. “We did an actuarial study of our pension liability which came to around pension `27,000 crore for the Northwestern Railways alone over the life of every staff.
We used a longevity table of 79.8 including tentative promotions and pay commissions,” said the first official. At present, the railways budgets for around `40,000 crore a year as pension outgo. “In the current scenario, we could be spending without even knowing the future capital requirements. The total long-term pension liability of the railways could run into several lakh crores for the current staff,” added the second official, adding accrual accounting gives a true picture of assets and liabilities which one may not liquidate immediately but gives a glimpse of liabilities today over a period of time to come as an organisation expands.
All government departments and states will eventually move to an accrual-basis system as per a recommendation of the Twelfth Finance Commission. The cash-based system of accounting is followed by many countries across the world — New Zealand, Australia, Canada, the US, the UK and Sweden are some of the countries which have moved to accrual-based accounting. Currently, countries such as Russia and even organisations such as the United Nations are also in the process of adopting the accrual system of accounting.