Olivier Lautrette
Bernard Paris
Systems of social insurance spread over developed countries after the Second World War. New institutions were therefore created in order to organize the social security system at a national level. These organizations were empowered by law to collect funds and to administer benefits. The finance system consisting of funds independent from the state budget has been implemented in some countries of Western Europe; the Russian system is not very different from that of Western Europe.
The purpose of a social insurance system is to provide an alternative income to insureds who happened to lose temporarily or definitively their current income. The reasons for losing income and being covered by the social insurance are generally the following:
- Sickness and invalidity;
- Unemployment;
- Maternity (during a certain period before and after the birth);
- Retirement.
The financing of these benefits is usually based on contributions calculated on personal income. The most important source of contribution is salaries but could be completed by contribution calculated on other income or by direct taxes. As no cash was injected at the creation of these systems, their financing is based on a pay-as-you-go (PAYG) system, meaning that benefits paid in a period are financed by the contribution received during this period.
Social deficits [had] appeared with the recent economic crisis. Effectively, the rise in unemployment rate implies mechanically an equivalent rise in the amount of benefits paid to unemployed and a decrease in contribution received from salaries. The second common cause of deficit relates to the pensions funds for which the increase of average life expectancy and the consequences of the Second World War baby boom implied an increase of pension benefits.
These financing issues have led to challenge the relevancy of accounting methods for measuring the sustainability of Social Funds.
Historically, as social funds were under the umbrella of governments, the budgetary accounting system was used. Cash-basis accounting puts the emphasis on the budget execution so that financial statements reflect a surplus or a deficit as a difference between cash[ed]-in contributions and paid-out benefits.
In terms of budgetary accounting, each country has adopted a specific practice, usually linked to a set of national regulations and procedures. Recently the standards setters of International Accounting Principles (IAS) looked into this issue but public-sector IAS are far behind the IAS applied to the private sector.
However, two international milestones can be put forward as regards accounting standards applicable to Social Funds.
- Firstly, the Treaty of Maastricht introduced constraints in terms of public deficit for members of the European Union. The comparability of national deficits implied the enforcement of a common standard. By taking into account outstanding contributions from enterprises and unpaid benefits to the insureds at the year end as well as depreciation of assets when necessary, the EU standard leads to move from the cash basis accounting method to the accrued basis accounting method.
- Secondly, the International Federation of Accountants (IFAC) has set up a Public Sector Committee which addresses standard setting for public enterprises. IFAC standards are largely drawn from IAS standards and the objective is to account for commitments existing prior to the closing of the accounting period.
Therefore, the Treaty of Maastricht and IFAC tend toward accrual[s] accounting similar to the accounting principle adopted by the private sector. The main theoretical difference lies with the acceptance of «constructive obligation» as defined in IAS 37 «Provisions, contingent liabilities and contingent assets». Under this [standard] IAS, issued in September 1998, a liability is defined as «a present obligation arising from past event» and a provision should be recognized «when an enterprise has a present obligation, legal or constructive…». Under the definition given by the International Accounting Standards Committee (IASC), the recognition of liability corresponding to legal obligations is covered by the accounting practices ruled by the treaty of Maastricht. The constructive obligation is defined as «an obligation that derives from an enterprise’s action where:
- By an established pattern of best practice, published policies or a sufficiently specific current statement, the enterprise has indicated to other parties that it will accept certain responsibilities; and
- As a result, the enterprise has created a valid expectation on the part of those other parties that it will discharge those responsibilities.»
For instance, it seems that pensions would correspond to this sort of «constructive obligation». Nevertheless, no provision is provided in the accounts of most EU members’ pension funds for pensions to be served in the foreseeable future.
The enforcement of accounting standards or accounting framework should not only depend on the willpower for «globalization» or comparability in financial statements. Most important is that the standard or the set of standards meets the specificity of the national system of social insurance. A key issue in accounting is the recognition of liabilities. For Social Funds, it means that a benefit becomes an expenditure for the fund depending upon the legal conditions of providing benefits to the insured. As opposed to the funding system, the PAYG system allocates the flow of collected contribution to the payment of benefits. The PAYG system implies a strict match between income and expenditure. However, it must be remembered that this financial equilibrium was not always reached over the past years in Western Europe.
If national regulation stipulates that a social benefit is due only when corresponding monies are available, then cash basis system is well suited. This provision implies that a pensioner will never receives his pension if the Pension Fund runs into deficit.
On the other hand, under the accrual principle, unpaid benefits remain outstanding until future contributions are received or until transfer of cash by the State: In this case, the debt to the pensioner should be recorded as a liability.
Both options depend on social policy defined by the State.
The Russian Federation is presently experiencing a reform of the structure and the management of its social system. This reform should appear as an unique opportunity to review the relevancy of its accounting concepts. As has been done in EU countries, accounting reform for Social Funds must follow the evolution of the social policy of the Federation.
Messrs Lautrette and Paris are Financial Consultants. Olivier Lautrette can be contacted by tel. + 336 ( 11) 61 40 18, and Bernard Paris can be contacted by tel. + 334 ( 91) 76 01 02.