Indian Railways has successfully transitioned to an accrual-based accounting system, marking a significant step towards improving financial transparency and accountability. The move, which is now operational across all 26 zones of Indian Railways for the financial year 2023-24, is expected to bring greater financial clarity and improve resource mobilisation opportunities, especially from multilateral agencies and green financing.
What is Accrual-Based Accounting?
Accrual-based accounting differs from cash-based accounting by recognising revenue and expenses when they occur, rather than when cash transactions are made. This method allows for a more accurate representation of financial performance, as it includes liabilities, assets, and revenues that are incurred but not yet realised. The shift to this system places Indian Railways on par with government entities in developed economies, which have already adopted accrual accounting for greater fiscal transparency.
The transition to accrual accounting has been in the works since 2014, when Indian Railways began preparations to introduce Accrual-Based Financial Statements. The Institute of Chartered Accountants of India (ICAI) and its Accounting Research Foundation (ICAI ARF) have played pivotal roles in supporting these reforms. According to ICAI President Ranjeet Kumar Agarwal, the adoption of accrual accounting will significantly simplify raising funds from international financing bodies like the World Bank, as well as boost green financing efforts due to improved accounting practices.
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“This move will also inspire other government organisations to adopt similar practices, recognising the significant benefits of accrual accounting,” Agarwal said.
Impact on Financial Transparency and ESG Goals
One of the key benefits of the transition is the enhanced financial transparency it brings to Indian Railways. By implementing a more comprehensive system, the organisation can better manage its budget, track assets, and liabilities, and make more informed financial decisions.
Furthermore, the new system aligns with the Indian Railways’ efforts to achieve Environmental, Social, and Governance (ESG) goals. For the first time, environmental sustainability initiatives have been included in the accrual-based financial statements for the year 2022-23. This marks a milestone in the organization’s focus on sustainability and accountability in its financial operations.
ICAI ARF’s Role in Reforming Indian Railways
The ICAI ARF developed a Transaction-Based Accrual Accounting System that facilitated the transition and the preparation of financial statements for FY2023-24. Nirupama Kumar, Chief Administrative Officer (Accounting Reforms) at Indian Railways, praised the ICAI ARF’s contribution, calling the reform “a milestone in the history of the Government of India.” Indian Railways is now the first ministry to adopt accrual-based accounting at an organisational level, setting an example for other government sectors.
While the accrual accounting system is a significant step, ICAI President Agarwal suggested that Indian Railways consider implementing physical verification of assets to complement these accounting reforms. This would provide an additional layer of verification and accountability, ensuring that the financial records reflect the true status of the organisation’s physical assets.
The transition to accrual-based accounting is a landmark achievement for Indian Railways, positioning the organisation to enhance its financial management, attract global investments, and support sustainability efforts. This reform not only aligns Indian Railways with global best practices but also sets a precedent for other government organisations to follow in adopting more transparent and accountable financial practices.
