FM 106
Date of issue: 18 October 2000

1.     The purpose of this FM is to describe Resource Accounting and Budgeting (RAB).

2.     RAB was launched in 1993 with a commitment to introduce Resource Accounting. This was followed by a White Paper in 1995 (Cm2929) which gave a commitment to use resource accounting as the basis of public expenditure planning and control – Resource Budgeting.

3.     RAB applies to central government the practices of much of the rest of the economy. It involves producing the equivalent of the main financial statements from commercial accounts, in particular a balance sheet and the equivalent of a profit and loss statement, and using this as the basis for planning and controlling public spending.

4.     Resource Accounting is the application of accruals accounting for reporting on the expenditure of central government and a framework for analysing expenditure by departmental objective, relating these to outputs where possible.

5.    Resource Budgeting is a system of planning and controlling aggregate public expenditure on a resource accounting basis.

6.    Accruals Accounting is a method of recording expenditure as it is incurred, and income as it is earned, during an accounting period. By contrast, cash accounting records cash payments and receipts when they are made or received.

7.     Resource Accounting is about:

• reporting on resources consumed rather than cash spent; and
• relating resources consumed to department objectives.

8.     The measurement of resources consumed uses accruals-based accounting. Under this, costs and incomes related to departmental activities are reported when the goods or services are consumed in carrying out the activities. This compares with the current cash-based system under which such transactions are recorded when the cash payments are made or received.

    Resource Budgeting

9.     Resource Budgeting provides a new basis for the planning, management and control of public expenditure at both departmental and aggregate levels based on resource accounting techniques and information.

10.     Resource budgeting will mean that instead of cash alone being used as the financial measure, departments will be managed on the basis of a Resource Budget measuring ongoing operations (in resource terms), a Capital Budget for new investment and an associated Financing Requirement.

    Accruals Accounting

11.     Accruals Accounting reflects the following important differences from cash-based accounting methods.

• Current expenditure and income. These transactions are recorded in the year to which they relate, even if the cash was not paid or received in that year.
• Capital expenditure. The cost of an asset which lasts for several years is spread over the life of that asset in the form of an annual depreciation charge. This, together with an annual cost of capital charge to reflect the opportunity cost of tying up funds in this way, makes up the capital charge on departmental assets.

12.     RAB makes three significant improvements.

On the input side:

(i)    RAB will ensure that the full economic costs of government activities are measured properly both by including non-cash costs, eg capital consumption, and matching the costs to the right time period.

This will provide a better basis for deciding on the allocation of resources (inputs), eg comparing the cost of providing a service within the public or private sectors.

(ii)    RAB will also bring about improvements in the treatment of capital spending.

The difficulties with cash planning for capital are well understood; by scoring the cost in full in the year of acquisition, but not depreciating or recognising the opportunity cost in future years, there is an initial bias against the acquisition of capital, and no incentive to manage capital assets properly once purchased. Under RAB, the cost and consumption of capital will be spread over its useful life.

On the output side:

(iii)    RAB will, for the first time, require departments to report systematically on how their resources are allocated to their objectives, and on what is achieved as a result.

This will improve transparency, by making it easier to see what taxpayers are getting for their money, and will help to improve the process of deciding where to allocate resources to achieve the best results.

13.     The public expenditure control framework is consistent with and paves the way for the introduction of RAB. In future, RAB will enable public expenditure to be measured, taking account of the full economic cost of policies, with a clear idea of what the expenditure is intended to achieve, and with a reporting framework in which performance against those objectives will be measured and published, and Ministers held to account for them.

14.     Under RAB, capital and current spending will be planned and managed separately, but accounting and budgeting of public expenditure will move onto an accruals basis and be supplemented by a system of cash management at departmental level.

15.     The working assumption is that under resource budgeting departments will have a:

• Resource Budget representing the spending plans for a department’s programme measured in resource terms to reflect the full cost of its activities. It will include the departmental administration and programme expenditure on an accruals basis, together with capital charges.

• Capital Budget, identifying the department’s new capital (net of asset sales) within its programme.

• Financing Requirement for the department overall, reflecting the financing consequences of the resources consumed, derived by adjusting the resource budget from an accruals to cash basis and adding borrowing permissions.

16. The Resource Budget will consist of:

• Administration costs (accruals basis)
• + Capital Charges (depreciation and cost of capital)
• + Programme expenditure (accruals basis)
• = Resource Budget.

17. The Financing Requirement will consist of:

• Resource Budget
• + New capital spending
• - Capital charges
• +/- Changes in working capital
• = Cash Requirement
• + Borrowing permissions
• = Financing Requirement

18.     The expected benefits of RAB are:

• Better management information on costs and assets
• Better basis for deciding on the allocation of resources
• Better management of working capital
• An opportunity to focus more on outputs and outcomes
• More financially aware managers.

• More strategic approach to public expenditure
• Part of modernising government agenda
• Better basis on which to allocate resources.

• More and better focussed information
• A link to objectives and performance

• Better information on assets and their utilisation, etc
• Better use of resources, directly and through capital charging

19.     As an NDPB, PPARC is outside the DTI’s departmental boundary, but is required to follow Treasury and DTI instructions as regards accounting and budgeting. For budgeting, PPARC supplies the information for resource budgets to OST. For accounting, PPARC has been producing accrual accounts since its inception. There is some harmonisation taking place between the rules under which PPARC has been producing its accrual accounts and the Resource Accounting Manual. To this extent, therefore, resource accounting and budgeting broadly applies to PPARC.

20.     Any queries concerning the content or interpretation of this FM should be referred to Paul Blackford, Head of Planning & Budgeting, PPARC Finance Division, Swindon Office, tel: 01793 442062, e-mail: paul.blackford@pparc.ac.uk.

David Bennett
Paul Blackford
PPARC Finance Division, Swindon Office

Better Accounting for the Taxpayer’s Money: Resource Accounting and Budgeting in Government
TSO, July 1995, Cm2929

Resource Accounting Manual
TSO, April 1998

Resource Accounting and Budgeting: A Short Guide to the Finance Reforms
TSO, April 1999.

Last updated: 29 June 2001