Sri Lankan Railways : Cash vs Accrual Accounting

Editors Note:

In a conversation about our earlier piece on the Sri Lanka Railways on twitter, a question has been raised about the period of the accounts.  A twitter follower Nihal Ananda says that terming the final figures for losses for a particular year in the Sri Lanka Railways  reports as a loss for that period is misleading or wrong.  The data is directly from the SLR reports, which presents the data exactly as we have presented.  

Here is the response from the author of the piece,  Ravi Ratnasabapathy 

1. The SL Railways prepares accounts on a “cash” as opposed the more common “accrual” basis.

2. In essence, the difference between cash-basis and accrual-basis systems is a matter of timing.

In the accrual method revenue is recorded when billed and expenses are recorded when consumed. Under the cash basis revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.
 
For example under accrual accounting sales on credit would recognised immediately on being billed, but in the cash method, only when the actual cash is received. Similarly for expenses, material purchased on credit will be accounted under the accrual method as soon as they are purchased but under the cash method, they would only be accounted for only when paid.

The timing difference between the two methods occurs because revenue recognition is delayed under the cash basis until customer payments arrive at the entity. Similarly, the recognition of expenses under the cash basis can be delayed until such time as a supplier invoice is paid. 

3. It has been pointed out that the railway prepares accounts on a cash basis and that fuel expense in 2014 (Rs.9,751m) is high because of an amount of Rs.5,000m being paid for bills due the previous year, the implication being that the figures quoted in the previous article are incorrect.

As explained above, the substantial difference between cash and accrual accounting is only timing. As far as the fuel is concerned, it only means that fuel expenses in previous years would have been lower (because fuel though used, had not been paid for-resulting in lower deficits) and that in the current year higher (when the bills were actually paid, resulting in a higher deficit).

4. With the exception of fuel the major item of income (ticket sales) and expense (personnel expenses) do actually take place on a cash basis. The fuel is purchased on credit and the amounts charged in 2014 reflect the impact of past purchases which had not been paid for. 
5. Thus it is possible to adjust for some of these timing differences and prepare a pro-forma account that perhaps reflects the annual deficit more correctly, which we have done.
6. The performance reports of the railway do disclose the actual fuel consumed during the year (as opposed what was paid for). These figures are found under the line “Fuel Usage” in the table above. We have carried out an illustrative exercise substituting the figures of fuel consumed for the fuel paid and arrived at an adjusted deficit for the period which is shown above.

This adjustment strips out the distortions in the fuel payments caused by settling the backlog of payments in 2014 and ceteris paribus, presents a better picture of the annual deficit.

As is evident, the railway still shows a significant deficit. The timing differences simply move the deficit between the various financial period but do not cause it to disappear. These deficits eventually need to be paid for by taxpayers.