Accrual accounting & the landing of a pilot

The Indian Railways' recent decision to switch from cash-based to accrual-based accounting brings to fruition a vision that found mention in the Railway Minister's Budget Speech for 2003-04

Bad news about IR (Indian Railways) usually grabs headlines, not good news. Therefore, every newspaper or site worth the name has carried news about the tea vendor who served tea/coffee with water taken from the toilet. I haven’t seen too many reports about the recent decision to switch from cash-based to accrual-based accounting. Every organisation, public or private, needs to fix HR and accounts. Everything else follows and without these, nothing follows. Accounting reforms in IR has been talked about a lot. Typically, it has been talk and no more. Accounting reforms means several things: (1) a switch to accrual-based accounting; (2) using that to devise a performance costing framework for different activities and services; and (3) using that to then do proper outcome monitoring. Therefore, you will find IR has always talked about three modules. The following quote is from the then Railway Minister’s Budget Speech for 2005-06. “However, recent trends witnessed worldwide lay stress on uniform accounting standards and deployment of information technology assisted accounting system with greater transparency in financial reporting of the organisation. The Railways have accordingly set in motion an accounting reforms process to meet the emerging business needs... Therefore, it is proposed to modify this accounting system, following due procedures, in such a way that the true nature of such transactions and contribution of such assets to railway revenues can be ascertained and the accounting is in line with the generally accepted and standard accounting practices followed for lease finance.”

It may have been mentioned in the 2005-06 speech, but it had indirectly been mentioned in Budget speeches earlier. For instance, the 2003-04 speech stated, “To transform the Indian Railways into customer-oriented organisation, it is proposed to improve its accounting system. In this regard, it is planned to review the existing accounting policies and practices and to introduce fully computerised accounting and management information system so as to generate costing data on passenger and freight services on commercial lines.” An accounting reform project was sanctioned in 2004-05, funded by Asian Development Bank. For any project, there must be a consultant and the consultant was appointed in 2006. The consultant submitted a report in 2010 (there was an interim report in 2006). There were several questions about the final report and iterations went back and forth. Eventually, there was a revised final report in 2014. To state it bluntly, between 2004 and 2014, nothing much happened, beyond appointing a consultant and receiving a report.  

IR is still part of the government of India system and has to maintain a link with that system of accounts

Things started to change in December 2004/January 2015. That first module, of switch to accrual accounting, was first implemented as a pilot project in Ajmer division and Ajmer workshops, with the Institute of Chartered Accounts (ICAI) brought in.  While that pilot progressed in 2015, there was the then Railway Minister’s Budget Speech in 2015-16, outlining the three segments/modules I mentioned earlier. “Madam Speaker, we have limited resources and thus must ensure that all public expenditure results in an optimal outcome. We, therefore, intend to set up a working group to modify the present system of accounting, to ensure tracking of expenditure to desired outcomes. The data on costing would be available online including costs incurred on constructing, augmenting, maintaining and operating railway lines. This would also help in undertaking post commissioning evaluation studies.” The first of these modules is the accrual accounting part. With the Ajmer experience (fixed asset registers, depreciation principles, guidelines for asset valuation when cost data are not available), in September/October 2015, IR expanded the scope of the pilot to all of North Western Railway (NWR). To try it out in a product unit, Rail Coach Factory, Kapurthala, was identified for a pilot in April 2016.

A pilot cannot remain a pilot indefinitely. At some stage, it must be extended to all of IR. I remember reading that the original deadline for this was August/September 2018. Therefore, the extension has happened a few months ahead of schedule. Such switches can’t happen overnight. Most countries take time. Australia took four years (2009-13), Brazil took five years (2003-08). Judged that way, IR’s record isn’t that bad. It is just that four years, between 2006 and 2010, seem to have been unnecessarily lost. I have a vested interest. The Debroy Committee had accounting reforms as one of its planks. Here is a straight quote from the Committee’s final report. “The cash based system does not provide a full picture of IR’s financial position at any given point of time and changes that take place in time as a result of government policy. The system lacks a mechanism to reflect IR’s liabilities, such as accrued liabilities arising due to unfunded pension and superannuation benefits and current liabilities arising from disconnect between commitments and payments. The current system does not track assets… It does not provide information on the assets and the impact of current consumption on the stock of assets. The present accounting system limits the ability to record the true cost of providing services by IR.” I can go on. Therefore, I am delighted the pilot has eventually landed.

A minor point. The Railway Budget may have gone, but IR still needs to conform to accounting norms of the Comptroller and Auditor General (CAG) and Controller General of Accounts (CGA). IR is still part of the government of India system and has to maintain a link with that system of accounts. It will, therefore, have to report both sets of accounts, not a big problem.

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The author is chairman, Economic Advisory Council to the Prime Minister. Views are personal