"We Didn’t Budget for It” — Does That Mean There Is No Liability?

“It was not budgeted” is not an accounting conclusion.

The absence of a budget may explain why a payment was not planned, but it does not by itself determine whether an expense or liability exists.

This distinction can easily be overlooked in public sector organisations, where budgeting is naturally a major part of financial management.

A department may not have received an allocation for a particular cost.

Management may not have expected the payment.

The expenditure may even require additional approval before cash can eventually be paid.

But none of those facts, by themselves, answer the accounting question:

At the reporting date, does the organisation already have an obligation arising from a past event?

That is a different question.

Budgeting and accounting serve different purposes

A budget is primarily about planning, allocation and authority to use resources.

Financial statements, on the other hand, report the entity's financial position and financial performance.

Under accrual accounting, expenses and liabilities are not recognised simply based on whether cash has been budgeted or paid.

The accounting treatment depends on the nature of the transaction and the recognition requirements of the relevant accounting standard.

This means two situations can exist:

• an organisation may have a budget allocation but no accounting liability yet; or
• an organisation may have an accounting liability even though no budget was provided for it.

Understanding that difference is important.

Having a budget does not create a liability

Consider a simple example.

An agency budgets RM500,000 for staff training next year.

At the reporting date:

• no training has taken place;
• no binding arrangement has created an obligation; and
• no relevant service has been received.

The existence of the RM500,000 budget does not by itself create an expense or liability.

The budget represents an intention or authority to spend.

It is not automatically an accounting transaction.

The opposite is also true

Now consider an employee benefit.

An organisation may have an obligation to employees arising from services they have already provided.

If the applicable accounting requirements say that the employee service creates an obligation, the absence of a specific budget allocation does not make that obligation disappear.

MPSAS 25, Employee Benefits, applies this basic principle by requiring employee benefits to be recognised as employees provide service in exchange for those benefits.

For accumulating compensated absences, the obligation arises as employees render service that increases their entitlement to future compensated absences.

In other words, the accounting follows the employee's service and entitlement — not the preparation of the budget.

Consider Gantian Cuti Rehat

Gantian Cuti Rehat, or GCR, provides a useful illustration.

Suppose employees accumulate qualifying leave entitlement over several years.

The organisation may eventually have to settle that entitlement in accordance with the applicable scheme.

From an accounting perspective, the key questions include:

• has past employee service created an obligation?
• has the employee's entitlement increased because of that service?
• can the obligation be measured reliably?
• what measurement requirements apply under MPSAS 25?

The question is not simply whether the organisation included a GCR allocation in its annual budget.

A missing budget may create a separate management issue.

It may affect funding plans.

It may require management to consider where future cash will come from.

But it does not, on its own, override the accounting requirements.

Why does the distinction matter?

Imagine an obligation of RM10 million exists at year-end.

If the organisation does not recognise it simply because the amount was not budgeted, the financial statements may show:

• liabilities that are too low;
• expenses that are too low; and
• net assets that are too high.

Management may then be looking at a financial position that does not fully reflect obligations already created by past events.

That defeats one of the purposes of accrual accounting.

Accrual financial statements are intended to show more than cash that has already moved.

They also show resources controlled by the entity and obligations that exist at the reporting date.

“No budget” may still be an important issue

None of this means the budget is irrelevant.

If a material liability exists but management has not planned how it will be funded, that may be an important financial management matter.

It may raise questions such as:

• Why was the obligation not included in the budgeting process?
• When is payment expected?
• How will the organisation fund the eventual settlement?
• Does the budgeting process capture obligations arising under accrual accounting?
• Are finance and budget teams using the same underlying information?

Those are valid questions.

But they should not be confused with the accounting recognition question.

Accounting determines whether an obligation exists. Budgeting determines how resources are planned and authorised.

They are related — but they are not the same thing.

A useful test

When someone says:

“We did not recognise it because we did not budget for it.”

a useful follow-up question is:

If the budget had included the amount, would that alone have created the liability?

Usually, the answer is no.

If that is the case, the reverse should also make sense:

The absence of a budget cannot, by itself, remove a liability that otherwise meets the accounting recognition requirements.

The accounting conclusion should therefore start with the underlying transaction and the relevant MPSAS requirements — not with the budget column.

The bigger issue

This distinction becomes especially important as public sector entities become more familiar with accrual accounting.

Under a cash-focused mindset, expenditure can appear closely connected to budget allocation and payment.

Accrual accounting requires a different way of thinking.

The first question is no longer:

“Did we budget for this?”

or even:

“Have we paid it?”

The better accounting question is:

“What has happened by the reporting date, and has that event created an asset, liability, revenue or expense?”

That shift in thinking is fundamental to accrual-based financial reporting.

Part 2 of this series will look more closely at why budgets and financial statements can legitimately show different numbers — and why that does not necessarily mean either one is wrong.

Sources & references

• JANM – MPSAS 25, Employee Benefits
• JANM – MPSAS 1, Presentation of Financial Statements
• JANM – Malaysian Public Sector Accounting Standards