Accrual basis of accounting to be introduced once pilot project ends
The Indian Railways’ much-needed shift to the accrual basis of accounting will take place sooner than expected.
Once an ongoing pilot project in the Ajmer division in the northwestern zone is completed in March 2016, the proposed accounting system that would provide for assets’ valuation, sharper estimates of cost and better understanding of the return on investments, would be introduced in the northern division, followed by other divisions, official sources told FE.
The railways, which makes meagre operational surpluses that don’t match the need to make new investments, has always followed cash basis of accounting. “We recently reviewed the pilot project (on the accrual basis of accounting) in Ajmer with the help of the Institute of Chartered Accountants of India. The progress is really good and we may soon introduce the system in the Northern zone soon.” an official in the rail ministry said.
The accrual system of accounting records revenue and expenses when they are incurred; the system registers transactions carried out on credit basis, by recording these as either receivables or payables. in other words, 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. Special efforts are required to update the details of assets on any date, making it difficult to prepare balance sheets. Switching over to the accrual basis of accounting, analysts said, will ensure the net income (surplus) reported by the Indian Railways (IR) truly reflects the actual profits generated from operations.
“Ultimately, we all have to move to commercial accounting and that would be a step in the right direction, but we already have some elements of accrual accounting in the railways. In the accounting of suspense heads, traffic suspense demand recoverable and other areas, this system is practically employed,” Vijaya Kanth, former financial commissioner, railways, told FE.
Experts have long said that the 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 of the IR (predominantly traffic receipts) is shown to slightly exceed its ordinary working expenses, it is partly because of the flexibility it enjoys when it comes to appropriations to depreciation reserve fund and to a certain extent, even the safety fund, while the pension fund is one revenue expenditure item not much amenable to discretionary decisions.
With its own surplus being small, the railways’ Plan expenditure is funded by the support from the central Budget (as soft loan in perpetuity) and borrowings through the Indian Railway Finance Corporation (IRFC). The railways has set an ambitious and unprecedented Plan size of R1 lakh crore for the current fiscal, up a record 52% over the level last year, and there are plans to attract global pension and insurance funds and multilateral monies to railway’s expansion projects.
According to officials familiar with IR’s internal accounting systems, even though it follows a cash-based approach, partial commercial accounting is being followed in areas like demands payable, demand recoverable, traffic suspense, workshop manufacturing suspense, stores suspense. Sources, however, added that adoption of the accrual basis would require approval from the Comptroller and Auditor General of India.