Railways may shift to accrual accounting from the current cash-flow mechanism

NEW DELHI: Railway minister Suresh Prabhu is bringing his experience as a chartered accountant to bear on an effort to spruce up the national transporter’s account books in order to make them transparent enough to attract more private investment. As part of the exercise, the cash-strapped railways is looking to move toward an accrual-based system of accounting from the current cash-flow mechanism.

The railways is tying up with the Institute of Chartered Accountants of India (ICAI) to implement the project in some smaller divisions as a pilot project. The new system will throw greater light on the organisation’s finances as it will also cover assets and liabilities. Currently, the railways hardly gets any private investment.

“Certainly, it would improve the investor sentiment towards railways as you are aligning your books to the globally accepted norms which would also lead to more transparency and accuracy,” former railway finance commissioner AV Poulose said.

The cash accounting system captures collective income and expenditure but not assets and liabilities.

Accrual-based accounting revenue is reported in the fiscal in which it is earned, irrespective of when it is actually received, and expenses are deducted when they are incurred, regardless of when they are paid.

“We’ll soon be signing a memorandum of understanding with the railways,” ICAI president Manoj Fadnis said. “We expect that the railways would start accrualbased accounting with some smaller divisions and will then gradually do it all zones. The transition at divisional level could take nine months.”

The railways will need to move gradually when it comes to adopting the new system, said a former finance commissioner who did not want to be named. “There has been a cautious and incremental approach even in countries such as the UK and Canada,” the person said.

A study commissioned by the Comptroller and Auditor General of India some years ago had concluded that the railway ministry could easily migrate to accrual accounting with minimal adjustments.

However, this could mean that the railways’ operating ratio, currently at an unhealthy 95%, could deteriorate further as the numbers better reflect reality. But Poulose said such a shift will be beneficial in the long run. “It will improve the financial statements of the railways,” he said.