Certain Aspects of the Use of Accounting Principles in the Accounting of Public Corporations

Martin Pernica


Purpose. An accounting reform of public finances was initiated at the beginning of the 2010s. The need arose to respond to the increase in the pace of the overall indebtedness of the Czech Republic, to which the indebtedness of local government (municipalities and regions) contributes significantly. Furthermore, it was necessary to ensure greater transparency in the management of local governments in accordance with the requirements of the European Union. Accounting policies and principles are the basis of accounting. There are two different accounting principles - accrual approach and cash approach. Simplified bookkeeping is characteristic of the cash approach. Its main feature is the recording of transactions only if cash is received or paid. This accounting principle was used by local governments until the initiation of the accounting reform. Cash accounting is outdated today. The main reason for the transition to accrual accounting is the need to obtain comparable and reliable information on the economic situation of the accounting entity. However, accounting policies and principles used in the private sector have not been fully transferred to the public sector accounting. The method of their application and implementation is also significantly different from business accounting. Especially in the case of depreciation of assets, creation of provisions, reserves and accruals. Finally, the scope of application of accounting policies and principles in the public sector is insufficient. They do not apply to all business entities that may obtain public funds, or manage public property.

Methodology. Logical methods are used to process the paper. In particular, induction and deduction, analysis, synthesis and abstraction, and concretization. The theoretical background of the paper is based on the review of information from monographs, specialized scientific journals, legislation, Czech and International Financial Reporting Standards.

Results. The paper presents proposals for the utilization of selected instruments of the principle of prudence (depreciation, residual value of assets, provisioning) in a manner that makes it easier to fulfil the principle of true and fair view of reality.

The theoretical contribution. Defining the theoretical background for the proper use of the principle of prudence in accounting in the Czech public sector which will allow accounting cases to be entered, valued and reported in a uniform manner within globally accepted accounting statements.

Practical implications (if applicable). Demonstration of problems related to insufficient implementation of accounting policies and principles in public sector accounting on specific examples. Improper application of accounting principles, in particular the principle of prudence, distorts information about the condition and management of local governments and forms the basis for incorrect decision-making of the public corporation as well as other entities that enter into economic relations with it. Full application of certain accounting principles in the conditions of management of small municipalities with a population of several hundred in the Czech Republic, is highly expensive and ineffective. Small municipalities do not have extensive property and do not report receivables from local fees to be collected from their citizens reaching thousands of Czech Koruna. The share of such small municipalities in the Czech Republic in the total number of municipalities is more than 50 %. The above insufficiencies lead to expressing the value of assets, liabilities, amount of costs, revenues and financial results that do not correspond to reality.

Keywords: Accrual principle, principle of prudence, accounting reform, public finance.


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