Some Algebra of Fiscal Transparency: How Accounting Devices Work and How to Reveal Them

IMF Working Papers, September 1, 2012

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Accounting devices that artificially reduce the measured fiscal deficit can be analyzed as transactions involving unrecognized assets and liabilities.
Different accounting systems recognize different sets of assets and liabilities and are thus vulnerable to different sets of devices.
Some devices can be revealed by moving progressively from cash accounting to modified accrual accounting to full accrual accounting.
Revealing all devices would require the publication of extended fiscal accounts in which all future cash flows give rise to assets or liabilities.

The identification of accounting devices is fundamentally an exercise in mapping transactions onto the set of recognized assets and liabilities specified by an accounting system.
Shifts in accounting basis (cash → modified accrual → full accrual) expand the recognized set of assets and liabilities and thereby expose devices that rely on narrower recognition rules.
Complete transparency requires recognizing future contingent and noncurrent cash flows as present assets or liabilities through extended fiscal accounts.

Progressively adopt broader accounting bases (from cash to modified accrual to full accrual) to improve detectability of deficit-reducing devices.
Publish extended fiscal accounts that treat all future cash flows as giving rise to assets or liabilities to reveal devices that remain hidden under conventional bases.
Align national fiscal reporting standards with comprehensive recognition of assets and liabilities to reduce opportunities for manipulation via accounting rules.

1. Summary Extended Accounts, Clean Surpluses
- 1. Summary Extended Accounts, Clean Surpluses (Markdown version)
- 1. Summary Extended Accounts, Clean Surpluses (PDF)