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Accounting, Economics, and Law: A Convivium

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Governmental Financial Accounting and European Harmonisation: Case Study of Finland

Lasse Olavi Oulasvirta
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  • School of Management, University of Tampere, Kanslerinrinne 1, FI-33014 University of Tampere, Finland
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Published Online: 2014-10-22 | DOI: https://doi.org/10.1515/ael-2014-0006


The Finnish government accounting has developed from its own premises which used to emphasise the importance of budgetary accounting and prudence. Since the 1990s and the impact of New Public Financial Management, the Finnish government financial accounting has been accruals based. However, the Finnish application of accruals is based on the income statement approach, realisation principle and prudence. The International Public Sector Accounting Standards (IPSAS) based more on the balance sheet approach and fair value accounting are not suitable for the Finnish government accounting culture and practice. Furthermore, this means from the Finnish perspective that the EPSAS standards should not be based on IPSAS but on a conceptual framework especially developed for the European context.

Keywords: financial accounting; harmonising; Finnish government; accounting model

Table of Contents

Thematic Issue on “Harmonising European Public Sector Accounting Standards (EPSAS): Issues and Perspectives for Europe’s Economy and Society”

  • 1

    Biondi, Y. Harmonising European Public Sector Accounting Standards (EPSAS): Issues and perspectives for Europe’s economy and society, DOI 10.1515/ael-2014-0015

  • 2

    Biondi, Y., & Soverchia, M. Accounting rules for the European Communities: A theoretical analysis, DOI 10.1515/ael-2013-0063

  • 3

    Calmel, M.-P. Harmonisation of EPSASs (European Public Sector Accounting Standards): Developments and Prospects, DOI 10.1515/ael-2014-0018

  • 4

    Oulasvirta, L. Governmental financial accounting and European harmonisation: Case study of Finland, DOI 10.1515/ael-2014-0006

  • 5

    Jones, R., & Caruana, J. A perspective on the proposal for European Public Sector Accounting Standards, in the context of accruals in UK government accounting, DOI 10.1515/ael-2014-0005

  • 6

    Newberry, S. The use of accrual accounting in New Zealand’s Central Government: Second thoughts, DOI 10.1515/ael-2014-0003

  • 7

    Mussari, R. EPSAS and the public sector accounting unification across Europe, DOI 10.1515/ael-2014-0019

1 Introduction

One important area of accounting research considers how accounting institutions develop and how their development is affected by international harmonisation efforts. The aim of this article is to describe the Finnish government accounting system and its development in the European context of harmonising public sector accounting. The case of Finland is interesting because it shows clearly the tensions between transnational standardisation efforts and a rooted national accounting institution. Under this broader framework, we will describe the national public sector application of accrual-based accounting. Based on the understanding of the Finnish accounting institution and its ability to function, we draw conclusions on how the international Public Sector Accounting Standards (IPSAS) or European Public Sector Accounting Standards (EPSAS) would suit Finland.

The contribution of the paper is that it complements the rather low number of case studies regarding the adoption and suitability of international standards in European public sectors. Many studies focus on accrual accounting choices made by governments (Carpenter & Feroz, 2001; Luder & Jones, 2003; Barton, 2005; Baker & Rennie, 2006; Arnaboldi & Lapsley, 2009; Collin, Tagesson, Andersson, Cato, & Karin Hansson 2009, among others). There are even international comparisons comprising a multitude of countries and their degree of adoption of the IPSAS standards (Pina & Torres, 2003; Benito, Brusca, & Montesinos, 2007; Pina, Torres, & Yetano, 2009; Christiaens, Brecht, & Caroline, 2010; Ernst & Young, 2012; European Commission, 2013; Christiaens, Vanhee, Manes-Rossi, & Aversano, 2013). However, few country-specific in-depth case studies explicitly address the adoption of IPSAS backed by the International Federation of Accountants (IFAC) 1 or other specific public sector accounting standards in Europe (for two exceptions, see Oulasvirta, 2014; Biondi, 2012a). This kind of information does not only have scientific value but also has value when considering efforts to develop the EPSAS. 2

The focus of this article is on central government accounting, not local government accounting. Furthermore, the focus is on the financial accounting of central government. The article explains why the chosen path of Finnish governmental financial accounting took the form that it did, and what other paths could have been open for development. The present practice cannot be understood without putting it into its historical and institutional context, and furthermore, particularly into the European context in which new coercive harmonising powers have emerged.

In Finland, international developments since the 1990s exposed Finnish public sector accounting to New Public Financial Management (NPFM). NPFM-inspired reforms led to both central government and local government adopting the accrual-based financial accounting model which had been applied in the enterprise sector. The chosen model in central government accounting was to have a dual system consisting of both a budgetary bookkeeping method serving budget follow-up and accountability purposes and a financial accrual accounting method producing general purpose financial statements in a similar vein as in commercial enterprises.

This change was connected to wider intentions to make governments more efficient by introducing performance management and performance budgeting into the public sector. In the local government sector, the reform meant that municipal budgets were harmonised to a structure of accrual-based financial statements, while central government kept its budget presentation model separated from the accrual-based financial statement model.

During the financial accounting reforms of the 1990s, both the central government and local government sectors chose the revenue–expense and income statement approach. The international standardisation movement promoted by IFAC and its International Public Sector Accounting Standards Board (IPSASB) could not challenge this choice during 2000–2014. The Finnish government’s rejection of the IPSAS and related balance sheet accounting approach has been thoroughly analysed in a separate study (Oulasvirta, 2014). However, the current situation is that the European Commission has launched a project to harmonise public sector accounting, affecting governmental accounting throughout Europe’s member states, including Finland. The development of European public sector financial accounting standards is analysed in relation to governmental financial statistics (GFS) and the need to control EU Member States’ debts and deficits. This context is explained further in Section 4.

The article is based on relevant academic literature and a case study. The case study material consists of three different types of primary sources:

  • 1.

    official documents relevant for understanding the accounting system and its functioning in the case country

  • 2.

    relevant research regarding governmental accounting in the case country

  • 3.

    participatory observation exercised by the author as a member of the Finnish Government Accounting Board (2005–2009) 3 and the Finnish EPSAS Task Force (2014–) preparing standpoints on European financial accounting harmonisation on behalf of the Finnish government.

The remainder of the article is organised as follows. Section 2 explains in more detail the Finnish central government accounting system and its chosen development path; Section 3 examines the Finnish financial accounting system in an international perspective; Section 4 and 5 are concerned with the current European accounting harmonisation process and Section 5 contains conclusions and a discussion.

2 The Finnish central government accounting system

2.1 General presentation

Finland is a unitary EU member state (since 1995) that consists of a central government and a single tier of local government. The Finnish central government budgetary organisation is divided into around 100 financial administration entities which take care of government bookkeeping, budget outturn follow-up, financial statement reporting and payment transactions at the entity level. In 2014 (as of 1 January 2014), there were 336 municipalities and around 200 joint authorities established by municipalities for services that require a larger population base than that of one single municipality. The total population of Finland was 5.5 million at the beginning of 2014.

The process of reforming national government financial accounting began in 1991 in the Ministry of Finance and was continued later in its Treasury office. The new financial bookkeeping model, including new financial statements, was ready by March 1996. The new legislation was prepared according to this new model in 1996–1997, and some pilot budget entities tried the new model in 1997. The amended budget law and statute came into effect on 1 January 1998. The reform required considerable preparatory work in accounting and budget entities: a great deal of training, changes in IT systems and programs and an inventory of all government assets. The first comprehensive balance sheet for the national central government was prepared on 31 December 1996 and published as an opening balance on 1 January 1997.

According to official documents, the reform to converge towards a commercial accrual accounting model was proposed because the traditional budgetary bookkeeping model did not produce sufficient information for steering governmental performance. According to the Budget Act Committee established by the Ministry of Finance in 1992, accrual accounting and the new financial statements included in the annual report were needed to provide information about the financial performance of the budget entities. Also linked to this was a policy change that required more cost accounting information for pricing those government goods in which fees and charges were increasingly charged to beneficiaries. Commercial accrual accounting, which recognises all assets and calculates the depreciation cost of long-term assets, gives information for management accounting and enhances cost consciousness in using fixed assets. Another argument for the change was better comparability of government accounting entities with local government and the private sector (Ministry of Finance, 1993, pp. 17–20).

The central government financial accounting reform of 1998 meant a shift from modified cash-based budgetary bookkeeping to a dual accounting system. The new part of the system consisted of accrual-based bookkeeping, which made it possible to present performance accounts in the form of an income statement (statement of profit and loss) and a comprehensive balance sheet. The other part of the government bookkeeping system consists of budgetary bookkeeping that fulfils the budgetary control function.

The State Treasury merges the ledgers of all of the 100 or so accounting entities into a consolidated central government financial statement. This contains the accounts of all government budget entities, but not those of government funds, Finland’s Central Bank, government enterprises and state-owned companies; these entities prepare their own separate financial statements. The current book closure model of central government bookkeeping in Finland consists of four primary financial statements:

  • 1.

    A statement of revenues earned and expenses incurred (performance accounts). Budget entities do not strive for profit: this is one reason why reformers did not want to refer to the statement as a “profit and loss statement”, but rather a “revenues earned-expenses incurred statement”. Moreover, the format of this statement differs from the standard Finnish enterprise profit and loss statement.

  • 2.

    A balance sheet that is now comprehensive, including long-term assets such as infrastructure and facilities, as well as long-term liabilities such as issued government bonds.

  • 3.

    A cash flow statement.

  • 4.

    An annual statement of budget accomplishment (budget outturn). The budget is based on modified accruals.

It is important to note that the Finnish central government budget is not purely cash based, rather it can be said to be based on modified accruals. Both on the expenditure and income side, exchange-based transactions are budgeted with accruals-based appropriations and revenues. Tax incomes are budgeted on a cash basis, while income transfers (social benefits, subsidies, grants, etc.) are recognised into the budget based on the point of time of legally binding commitments or payment decisions. Investments are handled in budgetary accounting in a way which differs from commercial accrual bookkeeping (there are no appropriations and hence no budgetary accounting for depreciation costs).

The Finnish system fulfils the budgetary information needs while adding to this accrual-based financial information. However, the Finnish government’s accrual-based financial accounting differs from commercial enterprise accrual accounting. Firstly, it is regulated differently. Government accrual-based bookkeeping and government budgetary bookkeeping are both stipulated in the budget law and statute (Act 423/1988, Statute 1243/1243), whereas commercial enterprise bookkeeping is stipulated in the Accounting Act (1336/1997) and Statute (1339/1997). Secondly, governmental recognition and valuation principles are not completely the same as in the private sector, especially if compared to listed companies following the IAS/IFRS standards. For instance, according to the Finnish Accounting Act (1336/1997), 2 a § (30.12.2004/1304), financial instruments may be valued at either their historical cost or their fair value. Fair valuing of financial instruments is not allowable in central government accounting.

The recognition and valuation methods are explained in more detail in the following section.

2.2 The Finnish approach to recognition and valuation

2.2.1 Recognition principles and consolidation

The recognition of exchange transactions in government accrual-based bookkeeping is made according to the realisation principle, i.e. when services or goods are delivered or when factors of production are received. According to the Budget Statute (1175/2002, Section 5 a), the main principle for allocating revenues from operations for which charges are levied, and consumption, investment and other expenditure, is the delivery of the product or rendering of the service, or the reception of the product or service (accrual basis), or the accrual of revenues or expenditure on the basis of provision by law or a commitment made (basis corresponding to accrual basis), unless otherwise provided – as explained below. Interest revenues and interest expenditure are allocated to the financial year for which they accrue under provision by law or a commitment made. However, minor revenues and expenditure, such as holiday pay of persons employed by the State, where the amount to be accrued on the basis of provision by law or a commitment made cannot be reliably estimated in advance without substantial additional cost before they fall due, may also be allocated according to the time of payment (cash basis).

In non-exchange transactions, which constitute over half of the expenditures and over 85% of the revenues in the budget, cash and cash receivable/payable principles are mainly followed in recognition. Tax incomes are recognised and recorded when the tax money from tax payers is paid into the tax administration bank account. This runs against IPSAS 23, which requires that taxes must be recognised when taxable events happen (accruals principle).

State subsidies and other money transfers to enterprises, households, local governments and other recipients are recognised and recorded according to the cash receivable/payable principle, which means they are recorded when the individualised legal obligation has arisen for the government to pay a transfer to that recipient. This may mean either the point of time of the granting decision (for instance, discretionary subsidies to enterprises) or the point of time of the affirmation of the detailed amount of a statutory transfer payment. According to the Budget Statute (1175/2002, Section 5 a), the principle for allocating transfer expenditure is the making of a decision to grant State subsidy (decision basis) or other commitment regarding an item of expenditure (other commitment basis).

The Finnish government’s application of financial accounting involves accruals not being pushed too far into speculative territories. This implies prudence in valuing assets and revenues. It also means cautiousness in accounting for liabilities. Post-employment benefits and social policy cash transfers are recognised based on the legal commitment for payments that become due. Assets are valued at the depreciated portion of the acquisition cost. If revaluations are allowed, they only have an impact upon the balance sheet. The transactions-based approach leads to the fact that only realised gains and losses can have an impact upon the performance accounts.

Both the principles of prudence and historical cost valuation are expressed in the Finnish Budget Decree Section 66 c and d (600/1997) regarding the valuation of non-current and current assets:

(1) The final accounts shall include entries as follows:

  • 1.

    receivables at their face value, but not in excess of their probable value;

  • 2.

    securities and other similar financial assets included in financial assets at their cost value or at their estimated market value at the end of the financial period, if lower than their cost value;

  • 3.

    liabilities at face value adjusted by the positive or negative issue premium arising when a loan is taken out or, if the debt is tied to an index or to another similar standard of comparison, at the higher value resulting from changes therein.

If the probable transfer price of a land or water area, building, security or other comparable commodity included in national assets or fixed assets is permanently significantly higher at the end of the budget year than the acquisition cost, a revaluation equal to not more than the difference between the estimated sales price and the undepreciated portion of the acquisition cost can be included in the balance sheet, in addition to the undepreciated acquisition cost. The amount of the revaluation shall be shown as a valuation item under liabilities. If the revaluation proves to be unjustified, it must be reversed. This has no impact upon the performance accounts.

On the liabilities side of the balance sheet, accounting for public debt (liabilities) management is undertaken using modified accruals-based accounting, in which long-term liabilities which are difficult to predict and value are explained in the notes to financial statements and annual report narratives rather than being recognised on the balance sheet. This avoids including figures that are not reliable. The government’s regular debt is valued at its historical cost (nominal value) adjusted by the difference from the issue price. These adjustments have no impact upon the performance accounts.

Concerning the consolidation principle, central government consolidates the accounting and reporting information from its on-budget entities but not from its controlled off-budget entities. This choice, again, runs against IPSAS 6 on consolidated and separate financial statements.

2.2.2 Accounting and financing for pensions

Government servants’ and workers’ pension benefits are managed by the Finnish State Pension Fund (VER), while national social pension benefits are managed by the Social Insurance Institution of Finland. 4 The State Pension Fund’s purpose is to assist the government in covering the future pension liabilities of those employees who fall under the state pension scheme. The Finnish State Pension Fund, which holds funding money for future state pension payments, applies the same accrual-based accounting system as central government, with some deviations (for instance, it may record provisions in the balance sheet). The Social Insurance Institution of Finland (Kela) delivers most of the social cash transfers to households. According to the law concerning the institution (Act 17.8.2001/731), it applies accrual bookkeeping as stipulated in the general Accounting Act (1336/1997) which applies to the business sector.

In government bookkeeping, neither compulsory nor optional provisions are recorded, in contrast to Finnish enterprises, which recognise these items according to the bookkeeping law (Act 1336/1997, Section 5: 14 §), which is in line with IPSAS 19 (Provisions, contingent liabilities and contingent assets).

The government reporting entities and the Finnish State Pension Fund (VER) do not recognise employee pension liabilities or long-term social policy cash transfer liabilities on their balance sheets. Employee pension payments are recorded on a cash basis: budget and accounting entities pay current pension contributions to the Finnish State Pension Fund and these contributions are recorded as expenses when they become due and are paid. Payments for the state pension scheme are paid from the State budget appropriations. The State Pension Fund does not pay out pensions, but annually transfers to the state budget a sum that is equivalent to 40% of the state’s annual pension cost. The remaining assets are left in the fund, which is then a buffer fund. According to the state pension law (1295/2006), the funding level must be 25% of the entire state pension liability. 5

KEVA (former the Local Government Pensions Institution) is in charge of handling pension applications, pension decisions, customer service and the payment practices of pensions for persons covered by both the local government and state. Overall, from an accounting point of view, it is essential to say that neither the government nor the State Pension Fund record long-term liabilities of pensions on their balance sheets. Hence, this accounting procedure does not follow IPSAS 25 (Employee benefits).

The state pension liability at the end of 2013 was 94.0 billion euros. The pension liability refers to the present value of those pension rights that have been accrued within the state pension security system by 31 December 2013. This calculation of the unfunded portion is entirely based upon a balance sheet approach. It is dependent on assumptions about discount rates and/or market conditions for both sides (assets and liabilities). So, it is not sufficient to assist decision-makers in taking informed decisions about future sustainability, especially because funds (and fund returns) are not supposed to cover the liability (Figure 1). 6

State pension system in Finland
Figure 1:

State pension system in Finland

The liabilities of post-employment benefits and the unfunded part of the pension liabilities are disclosed in the notes of the respective balance sheets of the whole of central government, the State Treasury and the State Pension Fund. The liability and the unfunded portion of the liability are calculated by actuary experts from the State Pension Institute.

If post-employment benefits were recorded according to the principle of earnings-related pensions, then accrued liabilities should be recorded as long-term debt on the balance sheet. But the Finnish solution has been to retain a cash and short-term accruals basis here, providing users of financial statements with supplementary information on the accrued pension liabilities and the unfunded part of the liabilities in the notes and the annual reporting narratives.

The same is true for national basic pensions (based on citizenship status rather than employee earnings) and social policy cash transfers to households and other recipients. 7 Government social policy commitments for these cash transfers to recipients are not recognised before the individual legal obligations for the government to pay these transfers arise. This means that liabilities do not accrue before this, and that only transfer payments for which the recipients are fully eligible but which become due after the book closure day will be recorded as short-term liabilities (debts) in the balance sheet.

Having said all this, it seems that reporting of liabilities could be developed. However, this is not to imply that reference to the IPSAS is the best alternative solution (Oulasvirta, 2008). Following the IPSAS means, for instance, that long-term pension liabilities must be discounted with a reference to volatile market interests. Furthermore, the IPSAS Board has not issued a specific accounting standard for social policy cash transfers to households and individuals. 8

2.3 The context explaining the financial accounting model retained by Finland

According to the cameral accounting theory developed for public sector entities, accountability of budget money use is essential; for this purpose, the accounting information can be produced using administrative cameralistics (Monsen, 2002, 2007, 2013, 2014). Cameral accounting has another variant: enterprise cameralistics. Under enterprise cameralistics, the accountant can show the profit effect of revenues and expenditures, as in the case of profit commercial accounting. Enterprise cameralistics has been developed for governmental enterprises such as municipal power and transport companies (Monsen, 2013, 2014). Both variants of cameral accounting are based upon single-entry bookkeeping.

However, these special cameral accounting models originally developed by accounting scientists in German-speaking European countries were largely unknown in Finnish accountancy during the 1980s and 1990s. No reference to these models is made in the text included with the final report on renewing the bookkeeping of government budget entities (Ministry of Finance, 1994). No references were made to the IAS in the preparatory documents, either.

It is clear from reading the preparatory documents that the reform planners were accustomed to using the Finnish enterprise accounting institutions that for many decades had been based on dynamic accounting theory and the revenue/expense accounting approach (see Biondi & Zambon, 2013 for an overview). The traditional Finnish accrual-based bookkeeping model emphasised the income statement (flow method of accounting), while the balance sheet was considered as a carry-over calculation from one accounting flow period to the next period (the balance sheet closed accounts were then used as opening accounts for the next accounting period, transferring unexpired flows from one period to the next).

The Finnish application of this income statement approach was developed by the prominent Finnish professor Martti Saario after the Second World War (Näsi & Näsi, 2013). The transaction-based realisation principle and prudence in valuations are decisive traits of the Finnish approach. The purpose of financial accounting has been seen to be the calculation of distributable profit, which has been based on the strict interpretation of the realisation principle and on the assumption that bookkeeping follows the monetary process of the firm (Pirinen, 1996, p. 118). When the private sector accounting legislation was reformed in 1992, the expenditure-revenue theory was defended when confronted with the challenge of the IAS standards. Because Finland was planning to join the EU (this happened in 1995), the committee preparing the accounting legislation reform decided to make reference to the practically orientated EU accounting directives, rather than to the IAS, as a basis for its national reform (Pirinen, 1996).

In contrast to the private sector accounting reform situation, on the public sector side no coercive powers came from the EU or from any other direction that would have compelled Finland to adopt a certain kind of solution. Against this background, it was a “natural” choice for the reformers of governmental accounting to adopt the revenue/expense accounting approach instead of the asset/liability and fair value accounting approach of the IAS/IFRS, which was already emerging in Finnish private sector accountancy during the 1990s.

2.4 Discussion of relevant choice of accrual accounting model/approach

We can discern some distinctive characteristics regarding public sector entities compared to business entities. For instance, public sector entities are not equity financed, they do not have shareholders and they are mainly tax financed with the purpose of incurring expenses to provide services to the public, not profits (for a more thorough description see, for instance, Barton, 2011; Biondi, 2012b). Because of the many differences compared to the business sector, the conceptual framework and standards for the public sector should be designed for the specific nature and roles of government. From this perspective, the approach of sector neutrality for accounting standards, in which the standards are merely transplanted from the business sector to the public sector, is flawed (Barton, 2011, pp. 422–423, 426). Furthermore, budgetary accounting and follow-up of the budgets decided by the sovereign parliament and implemented by the accountable administration are still core features of public sector accounting. This is not the case so far for financial accounting and related general purpose financial statements. In fact, some Finnish studies have revealed that the actual use of information from accrual-based financial statements (the statement of revenues earned and expenses incurred and the balance sheet) has been quite modest in public sector practices in Finland (Kohvakka, 2000). 9

Against this background, the Finnish solution to retain the budget as the key element in accounting and add only a modified accrual budget and budgetary accounting seems reasonable. In addition to this, another more complete accrual accounting system is maintained for preparing financial statements. Budgetary accounting is not subordinated to financial accounting for general purpose financial statements; rather the opposite. This is illustrated, for instance, by the Budget Decree, Section 42 d, which stipulates that in commercial accounting, other expenses and revenues than those referred to in subsections 1 and 2 (expenses and revenues from exchange transactions, interest expenses and revenues) are recorded in the same manner as in budget accounting (1175/2002). Accrual accounting for general purpose financial statements is considered as an information source that just complements the information processed and delivered for budget planning and implementation. The most important elements in the book closure from the parliamentary surveillance point of view are the budget outturn calculations and the annual activity report. Because budgets are based on modified accruals, then naturally the budgetary accounting is at the same time modified accrual accounting.

Moreover, accrual accounting for the financial statements is based on revenue–expense theory and the income statement approach, which takes into consideration the specificities and information needs of the public sector better than the balance sheet and asset-liability approach – this was the conclusion of the thorough investigation carried out by the Finnish Government Accounting Board (FGAB) in Finland during 2005–2009 (FGAB, 2009; Oulasvirta, 2014). However, the present accounting practice is currently severely challenged. The external forces connected to the public sector accounting standardisation process led by the European Commission may change the public sector accounting institution and practice in Finland. This new situation is further considered in the following sections.

3 The Finnish financial accounting system in an international perspective

3.1 Variety of accounting regimes

In Finland, financial accounting has traditionally been tied to tax accounting, while bank financing has dominated the majority of enterprise financing (Pirinen, 2005; Troberg, 2013). These traits show a link to the so-called continental European accounting system, which differs from the Anglo-American accounting system which emphasises equity financing from (nowadays global) capital markets. Figure 2 contextualises the current Finnish accounting model in relation to impacting factors using Nobes’ (1998) general framework of analysis. This framework was developed to explain differences in financial reporting systems and the main distinction between the Anglo-Saxon and continental European financial accounting regimes. Belonging to one of these groups of accounting systems may affect a country’s position on the kind of standards that are deemed to be suitable for financial accounting in both the private and public sectors.

Decisive factors influencing the Finnish financial accounting system (adapted from Nobes, 1998)
Figure 2:

Decisive factors influencing the Finnish financial accounting system (adapted from Nobes, 1998)

It is true that Nobes’s framework can be applied to explain differences in enterprises’ financial accounting regimes (Nobes, 1998, pp. 177–178, 2004), not in public sector financial accounting regimes. However, this general framework is important because accounting for tax and creditors has influenced the theoretical accounting model that has prevailed for decades in Finland, namely the revenue–expense theory and income statement approach. This approach affected the accrual accounting model that was chosen during the reforms in the Finnish public sector in the 1990s. In addition, international research has discovered that local business accounting practices affect the choice of the public sector variant of accrual accounting (Christiaens et al., 2010, 2013).

3.2 Comparison of Finnish and international accounting approaches

The IAS/IFRS and IPSAS are based on a balance sheet approach which emphasises current (market) values of assets and liabilities when possible. Market values are difficult to find in a reliable manner in many public asset categories. Expense and revenue items in Finnish public sector accounting have traditionally been based on historical costs and on the realisation principle, which emphasises prudence. In fact, to a great extent, those categories of assets in which market values are more relevant and practical have been transferred to off-budget entities that are nowadays established under corporate form in Finland. For instance, real estate, such as office buildings, has been transferred to state-owned corporations, which then rent them back to governmental entities. A large proportion of the state-owned shares in listed companies have been transferred to a holding company (Solidium Ltd).

McCullers and Schroeder state (1982, p. 72) 10 that accountants used to take the general position that the best purpose of financial reporting is to represent past performance, and that reporting anticipated gains involve an element of subjectivity in the calculation that could impair the usefulness of financial statements. This thinking has held firm in Finnish public sector accounting so far, although fair value accounting has gained more credit among the younger generation of private sector accountants. In fact, under the EU regulations, the IFRS must now be adopted by Finnish listed companies for consolidated statements, while non-listed companies may voluntarily adopt the IFRS in Finland (Accounting Act 3 § (30.12.2004/1304)).

Undoubtedly, the parliament needs to obtain a “fair and true view” of government liabilities regarding employee pension benefits and long-term social policy cash transfers, and the impact of these liabilities on the government’s financial position in the future. However, this information can be provided through fiscal sustainability reports, the notes to the financial statements and the government budget plans and budget outturn reports. It is not necessary to include this information on the balance sheet, contrary to the IPSAS provision. In the latter case, the balance sheet would be expanded on an accrual accounting basis; it would also contain more subjectivity and predictions than before: this could impair the usefulness of the information provided by the governmental financial statements. The following example explains why.

Changes in assumptions made for the actuarial calculations may cause tremendous changes in the amounts of liabilities in the balance sheet. In the notes of the financial statement for 2005, the Finnish State Treasury determined that the employee pension liability was 57.6 billion euros. One year later, at the end of 2006, the State Treasury calculated that the state employee pension liability was 79.3 billion euros (State Pension Fund, Annual Report, 2006, p. 16). The amount of pension liability had risen by 20 billion euros. This astonishingly huge appreciation was mainly due to updated statistical information; the change of the discount rate, which was raised from 2.5 to 2.7, had a minor and reverse effect. If the change of the pension liability had been included – which it was not – in the financial performance accounts, it would have affected the net balance of the period enormously, blurring its meaning and usefulness for on-going budgetary and financial considerations. 11

Useful information on employee pension benefits and long-term social policy liabilities can be released without having recourse to a balance sheet accounting approach. The Finnish government budget contains a section on government financial policy and budget policy, government finances and sustainability over a longer time period. It provides some information on the predicted ageing of the population, retirement demographic statistics and the expected needs for funding future pension expenditures in order to maintain employees’ and employers’ contribution payments at reasonable levels. In addition, the notes on the general purpose financial statements have been developed and made more informative over time.

This policy of disclosing long-term liabilities should be systematic. This requires that public sector economic plans and balancing calculations should include not only long-term liabilities but also predictions and forecasts of taxes and other long-term government receivables (assets) for the same period being planned or analysed. In addition to taxes, other major funding sources, including debt issuance and refinancing, should be evaluated on a longer-term perspective.

In 2008, a consultancy report was prepared by the Finnish KPMG audit and consultancy firm on behalf of the Controller’s Office of the Ministry of Finance. In this report, the government balance sheet was calculated using the (asymmetric) IFRS/IPSAS method, which resulted in net assets on an accrual basis being significantly more negative compared to the published balance sheet of the same year. Net assets, which were –8.0 billion euros calculated using the Finnish accrual method, leapt up to –51.3 billion euros when calculated using the IFRS/IPSAS method. The difference was mainly caused by the post-employment benefit liabilities (KPMG, 2008). This report led to no changes regarding the Finnish way of doing accruals. The confusing results on net assets (among others) were not tailor-made for enhancing the popularity of the IPSAS way of doing accruals among Finnish law-makers.

However, the work of the IFAC and IPSAS Board in creating international standards and recommendations has promoted the provision to expand the reporting of long-term liabilities, including pensions. In 2008, the IPSASB launched a project around long-term fiscal sustainability reporting, resulting in a draft (2011) and final recommendations (2013). This project produced recommendations, as many other institutions have done already (EU, OECD, IMF, World Bank, etc.), for the development of national governments’ planning for sustainability. Long-term fiscal sustainability in the IPSASB recommendation (2013, p. 5) means the ability of an entity to meet service delivery and financial commitments, both now and in the future. Hence, financing possibilities and fiscal capacity to manage future long-term liabilities are incorporated in this planning.

4 The current European accounting harmonisation process and new emerging coercive powers

In Finland, the Ministry of Finance has created a national Stability Programme every year since 2011 in accordance with the EU Stability and Growth Pact. The Finnish Stability Programme sets out both short- and medium-term economic policy measures, with a particular view to ensuring stable and sustainable general government finances. Following the EU Council’s Budgetary Frameworks Directive (2011/85/EU), which reached the financial policy agreement of 25 EU member states on 2 March 2012, the Finnish government stipulated a fiscal discipline law (869/2012) that limits the structural deficit 12 to 0.5% of GDP in the medium term. This directive was transformed into a 2012 law and a government statute of 2014 that requires central government to create a balanced four-year general government financial plan that is allocated to all subsectors (central government, local government and social security and pension funds). According to the EU Budgetary Frameworks Directive, this medium-term fiscal sustainability planning must be assessed by an independent expert body. The fiscal plans are audited by the National Audit Institution (NAO) and also assessed by an independent body of economists nominated by the Cabinet for the first time for the period of 1 April 2014 to 31 March 2019.

The public sector accounting harmonisation in the EU after 2010 was triggered by the Eurozone debt crisis that pushed the EU Commission towards new control measures of Member States’ finances. The Treaty on the Functioning of the European Union includes articles of budgetary discipline and the Excessive Deficit Procedure (EDP). The EDP was clarified in the 1992 Maastricht Treaty (Article 104), but its importance was reinforced by the introduction of the euro in 1999, which required much closer fiscal surveillance of the Eurozone states’ finances. The Treaty requires budgetary discipline of the member states in terms of their respect for the Maastricht criteria, the reference values for which are based on concepts defined in ESA95 terms. 13 Member states must report their EDP-related data to Eurostat twice per year. The data should be fully consistent with the government financial statistics (GFS) data of each country. However, in practice, Eurostat has endeavoured to assure a proper application of this statistical framework of reference, the European System of Accounts (ESA), in order to obtain reliable and comparable statistics across Member states (Eurostat, Manual on Government Deficit and Debt 2013, pp. 1–3).

Although the fiscal crisis revealed problems in the EDP-related data to Eurostat, very few public sector accountant experts in the governmental sector in Finland are convinced that the EU should compel member states to adopt a particular micro-accounting structure for all public sector entity levels (including not only central government but also all local governments) for the purposes of statistical fiscal data collection. Further doubts are raised about the suitability of relying on very detailed, technically burdensome IPSAS-like standards, which are vague on principles and leave possibilities for different (creative) accounting solutions. When it comes to the theoretical underpinnings of the standards, few influential Finnish public sector accountants consider the fair value accounting approach to be a suitable solution for governmental accounting (see also Robb & Newberry 2007; Biondi, 2012b).

Fundamental policy questions arise concerning the advantages and disadvantages of integration between the three accounting systems that exist in the public sector, each with its separate purposes and underpinnings (Table 1). It is obvious that one combined accounting system cannot be formed which serves all three purposes without compromising their special requirements. According to the IPSASB (2012, p. 27), although financial reporting as well as government financial statistics (GFS) are accrual-based – and both show government assets, liabilities, revenue and expenses – substantial differences remain, some resulting from underlying conceptual differences, which must remain in place because of the different objectives of the two reporting frameworks. Adjustments between them must be made for national accounting purposes, and, importantly, the adjustments must and can be made in a transparent and reliable manner.

Further differences exist between accrual bases as applied to private and public sectors. In Table 1, by budgetary accounting we mean accounting based on the existing budgeting principles. According to the definitions of IPSAS 1 (Presentation of financial statements), accrual-based accounting means that transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). The elements recognised under accrual accounting are assets, liabilities, net assets/equity, revenue and expenses. Monsen (2014) has criticised the fact that the concept of accrual accounting is used imprecisely in the accounting literature. Monsen explains that profit commercial accounting means that revenues and expenditures are accrued to the period in which they have positive and negative profit effects. Because public sector tax-financed entities do not exist for profit-orientated purposes, the Finnish solution was to name the income statement the “statement of revenues earned and expenses incurred” instead of “profit and loss statement”. Furthermore, Biondi (2012b) adds that a generic reference to an accrual basis of accounting does not consider the variety of accounting models/approaches that belong to the accrual-basis family. In this context, in line with Biondi’s (2012b) recommendations, the Finnish solution retains a combined approach between a modified cash basis and historical cost accounting approach, limiting the application of fair value accounting and the balance sheet accounting approach.

Table 1:

Accounting systems for different purposes in the public sector

Both national rule-makers and transnational harmonisers should take into consideration all of these three accounting systems and assess the extent to which they should be converged or differ from each other when developing accounting information systems to better answer users’ needs. A critical issue here is to avoid causing information overload, which confuses decision-makers in parliaments. Furthermore, all accounting reforms should be based on a cost–benefit analysis that considers the potential informational advantages against the cost to establish and maintain the underlying informational infrastructure and process.

It is realistic to assume that international harmonising policies cannot be targeted for all of the three accounting systems with equal force. Government Financial Statistics (GFS) have already been standardised by the IMF, and the EU requires the Member States to follow the GFS. When it comes to the relationship of budgetary accounting to the two other accounting systems, it is not appropriate to harmonise budgets through any transnational compelling rules because of the sovereignty of national states in budget decision-making.

However, this does not mean that there would not be any possibility of integrating the above-mentioned accounting systems, if a national government wishes, or if independent countries allow supranational bodies such as the EU to exercise a coercive harmonising power that leads to one integrated accounting system. It is extremely interesting to note that Australia is the first nation to use one integrated system based on a GFS cash and accrual accounting system for both its budgeting and financial reporting. One reason for the 2008 reform in Australia was the wish to avoid the confusion caused by presenting different accounting calculations with different results to the parliament (Barton, 2011).

5 The problem and the cure

Accounting systems are often developed and reformed because key actors consider them to be outdated and incapable of processing relevant and reliable data. This is the situation now in Europe, where the EU plans to compel Member States to reform their financial accounting systems to include an accrual basis in order to better fulfil the need to apply the Fiscal Compact and better control public sector deficit and the debt of Member States. However, a major question is whether this suggested cure is the best one for the problem. It is possible that the rules for collecting statistical information on fiscal data from member states could be managed and policed by EUROSTAT for GFS purposes without imposing uniform and complex rules for public sector entities’ financial accounting and statements at all levels of government. Since Greece (Irwin, 2012) raised a major problem by delivering “creative” and misleading fiscal data to Eurostat, the control procedure should be strengthened to enable Eurostat to better control and verify the reliability of fiscal data from Member States. It is true that Eurostat already has the power to make so-called methodological visits to Member States in order to control the reliability of their fiscal data processing. 14

So far (July 2014), no official statement has been released by Finland on EPSAS governance. However, the Ministry of Finance has established a Finnish EPSAS Task Force consisting of key experts from the central and local government sectors as well from academia and some other stakeholders. The author’s unofficial discussions with government accounting experts and the meetings of the Finnish EPSAS Task Force give grounds to utter the opinion (i) that a possible EPSAS should be governed by a new EU-overseen EPSAS Board rather than by the IPSAS board and (ii) that harmonised rules must be explicitly developed for the public sector. National Regulatory Bodies should play an important role in the harmonisation process. The Finnish EPSAS Task Force held its first meeting on 12 May 2014 and another on 2 June 2014. 15 Among other matters, these meetings discussed the possibility that the implementation of future EPSAS could be based on flexible directives rather than on strict and detailed EU regulations. 16

6 Discussion and conclusions

The Finnish accrual accounting tradition based on expenditure-revenue theory and income statement reached strong sedimentation after the Second World War. When the Finnish government adopted commercial bookkeeping in 1998, the natural choice was to make reference to this accrual accounting framework, instead of the asset/liability accounting model promoted by the IPSASB. Because the Finnish revenue–expense and income sheet approach has been deeply rooted, it is probable than only coercive “isomorphic” pressures can change this situation (for an analysis of the Finnish case using concepts of institutional theory, including isomorphism, see Oulasvirta, 2014).

If the European public sector standardisation takes the IPSAS as a strong point of reference, this will cause problems for Finnish government accounting. If EPSAS-driven changes are based on reasonable accruals, this will not imply any drastic changes for Finland. The changes are obviously greater in those EU member states whose accounting tradition has been based on cash-based accounting.

One important quality attribute of financial statement information is that the costs of that information are not greater than its benefits. Adoption of the IPSAS would not mean only an unfamiliar accounting framework but also additional costs of producing information compared to the present method of producing general purpose financial statements in the Finnish government sector. If the EPSAS, announced by the EU Commission to be a near-future target, strongly resembles the IPSAS, this may imply unnecessary costs and a bureaucratic burden that do not pass the test of benefits over costs. A negative opinion regarding the IPSAS has been officially uttered by Finnish governmental accounting experts from the Finnish Governmental Accounting Board (FGAB, 2009), which drew members not only from the departments but also from the National Audit Office and Treasury.

Theoretically, public sector accounting standards could be developed based on the cameral accounting tradition and single-entry bookkeeping (Monsen, 2013). But, being aware of the lack of knowledge and practice of modern cameral accounting methods, and of the reasons for the present European standardisation movement, it is more realistic to try to develop standards based on accrual double-entry bookkeeping and on the income statement accounting approach as an alternative to the IPSAS. This means that the “indisputable reference” would not be to the IPSAS, but to an income sheet approach emphasising principles of realisation and prudence and, furthermore, avoiding the reference to fair value accounting.

It is interesting to put forward this standpoint in relation to the discussion about the proper view of business firms for accounting purposes. Proprietary and entity theories provide different views of firms’ balance sheets and of the roles of shareholders and other financiers. The proprietary theory of accounting has emphasised accounting for shareholders as owners. Entity theory moves the accounting basis from the balance sheet, which is understood from an owner’s perspective, towards a flow basis of accounting, in which transactions concerning revenues and costs form the essential core of the business cycles of production. For accounting representation, then, the business cycle of the firm is more important than the valuation of the firm (Biondi, 2012a). We hold that similar reasoning is also valid for the public sector accounting side, with the important adjustment that tax-financed entities do not aim to earn revenues for profit-orientated purposes, but for the provision of public services in a cost-efficient manner.

National standard-setters in EU countries, together with the EU’s possible future standard-setter for the EPSAS, could cooperate in creating public sector-specific standards, which should be readable, understandable and easy to translate into all EU languages. Some reference could also be taken from the US GASB (Governmental Accounting Standards Board), which has clearly identified the differences between financial accounting for the purposes of for-profit and non-profit entities (see GASB, 2006). 17 Also noteworthy is the fact that Australia has chosen the GFS system as an integrated accounting information source for the government (Barton, 2011).

In conclusion, research on and discussion of public sector financial accounting should not concentrate only on whether business-style accrual accounting suits the public sector or not, but rather on analysing which alternative options of accrual accounting may best serve the needs of public sector stakeholders. The discussion has focused too much on one option, the IPSAS, as the best choice or the “indisputable reference”, when there are, in fact, viable alternatives in the context of public sector financial accrual accounting. We consider developing the income statement and expenditure-revenue accounting approach for governmental financial accounting purposes to be more valuable than working with the balance sheet and asset-liabilities approach. Some researchers have brought up other relevant theoretical possibilities, such as cameral accounting models or GFS-based accrual models 18 (see, for instance, Monsen, 2014; Barton, 2011). All viable alternatives should be seriously investigated and discussed with the aim of developing suitable and efficient solutions for public sector accounting information systems from the perspective of user needs.


The author thanks Yuri Biondi and two anonymous referees for their valuable comments on the various versions.


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    Primary Internet sources


  • 1

    The International Federation of Accountants (IFAC) has a special committee, the International Public Sector Accounting Standards Board (IPSASB) which issues the IPSAS. 

  • 2

    In 2013, the European Commission launched a project to develop the EPSAS (European Commission, 2013). 

  • 3

    This observation is more thoroughly described in Oulasvirta (2014). 

  • 4

    Both entities are public off-budget entities and prepare their own financial statements separately. 

  • 5

    At the end of 2013, the funding rate was 17%. During 2013, VER’s pension contribution income, which consisted of pension contributions by employers and employees, was 1,634 (1,639) million euros in total. After the transfer of 1,678 (1,604) million euros to the State budget has been deducted, VER’s net contribution income will remain at −45 (35) million euros. The same trend is assumed to continue. Over the coming years, VER will increasingly balance the pressure of rising state pension costs (Press release, 5 March 2014, http://www.statepensionfund.fi/public/default.aspx?contentid=50139&nodeid=17004, used 11.4.2014). 

  • 6

    The recorded accrued long-term liabilities are volatile depending on the discount rate used. The Finnish actuarial calculation of the accrued pension liability at its present value was undertaken with a discount percentage of 2.7% per year. The market value of the investments of the State Pension Fund (VER) was 16.3 billion euros at the end of the year, which means that the current unbalanced value was about 78 billion euros (State Pension Fund, Press release, 5 March 2014, http://www.statepensionfund.fi/public/default.aspx?contentid=50139&nodeid=17004, used 11.4.2014.) 

  • 7

    The only public sector entity to recognise employees’ pension benefit liability in its balance sheet is the Social Insurance Institution of Finland. It records the pension liability of its own personnel in the balance sheet, but does not present any long-term liabilities of the cash transfers that it delivers to citizens. 

  • 8

    In 2008, IPSASB issued the Exposure Draft 34, Social Benefits: Disclosure of Cash Transfers to Individuals or Households, but never decided on a final standard on the matter (IFAC, IPSASB, 2008). 

  • 9

    This finding concerns the use of financial statements, and not so much the fact that the data in accrual accounts provide the basis for management and cost accounting in public sector entities. 

  • 10

    Note, this was before the triumphant march of fair value accounting first in the Anglo-American world and then more widely. 

  • 11

    For the sake of comparison, the governmental surplus on budgetary basis was 109 million euros in 2006 and in 2005 the deficit was 2.2 billion euros. Source: http://www.statetreasury.fi/en-US/State_Treasury, accessed 19.5.2014. 

  • 12

    Structural deficit is calculated according to structural budget balance, which means the actual budget balance net of the cyclical component and one-off and other temporary measures. http://ec.europa.eu/economy_finance/economic_governance/sgp/glossary_en.htm, used 19.5.2014. 

  • 13

    ESA is the European version of the United Nations’ SNA (System of National Accounts). 

  • 14

    The Council Regulation of 25 May 2009 (No 479/2009) specified the rules, coverage and quality of statistical data from Member States. The Council Regulation of 26 July 2010 (No 679/2010) amended Regulation 479 and strengthened the rules for methodological visits to Member States. 

  • 15

    The author of this article is a member of this group, participated in both mentioned meetings and has the minutes of the meetings. 

  • 16

    It was noticed at the first Finnish EPSAS Task Force meeting in May 2014 that the IPSAS run to around 1,600 pages, while the Finnish governmental accounting manual (comprising the rules for financial accrual accounting) has around 300 pages. 

  • 17

    GASB in the USA proposes the application of fair value to only certain assets, namely, to investment assets that are kept primarily for future income or profit and the asset’s present service capacity is based solely on its ability to generate cash or to be sold to generate cash (GASB, 2014, pp. 25, 40). 

  • 18

    It is interesting to note that the GFS system divides operating statements into transaction flows and other economic flows consisting of abnormal events and price movements. The transactions-based system differs from the balance sheet approach, in which profit and loss statements are also affected by non-transactions-based changes in assets and liabilities (see Barton, 2011). 

About the article

Published Online: 2014-10-22

Published in Print: 2014-12-01

Citation Information: Accounting, Economics and Law, Volume 4, Issue 3, Pages 237–263, ISSN (Online) 2152-2820, ISSN (Print) 2194-6051, DOI: https://doi.org/10.1515/ael-2014-0006.

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