The Surplus/Profit Brouhaha of State Institutions including SOEs

First off, we need to understand that surplus is not the same as profit. Nonetheless, in our normal day today discourse people often use the two interchangeably. This is understandable considering Ghana’s financial literacy rate is around 30%.

Let’s understand the difference. Profit in the traditional sense of accounting is the difference between revenue and expenditure of profit making entities. This is often based on accrual method of accounting as stipulated in IFRS 18 of the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB)

Surplus on the other hand is often used to refer to the difference between revenues and expenses of nonprofits, and also the difference between cash receipts and cash expenses. In budgeting we often hear budget surplus and budget deficit, referring to a situation where the budgeted revenue exceeds budgeted expenditure and where budgeted expenditure exceeds budgeted revenue respectively. For nonprofits such as state institutions and agencies engaged in nonprofit activities, accounts are prepared based on IPSAS1 also issued by the International Public Sector Accounting Standards Board (IPSASB).

So are the 2 the same? The answer is no. You ask why? My answer is simple, because the 2 do not convey the same message and technically used differently.

For profit making institutions, a profit demonstrates growth potential, and a movement upwards in profit is an indication of improved financial performance. When businesses continually declare profits, it implies expanded customer base, increased revenue, and better margins which can be achieved by managing cost.

When nonprofits declare surplus what does this imply? This simply implies that they have not been able to fully utilize the resources allocated. The simplest question will then be why? Is it the case that there was an over allocation of resources, or underutilization of resources? It is also possible that there was prudent resource management leading to cost reductions. Therefore a surplus, in the face of efficient resource allocation can also be the result of cost efficiencies.

Does this call for celebration? The answer is both yes and no.

Profits are to be celebrated always, especially when profits move upwards, suggesting growth and efficiency. However, surpluses declares by nonprofits, must be properly investigated to understand the nuances of the result with the overall objective of the nonprofit in sight. Where surpluses are declared by a nonprofit while simultaneously achieving its objectives, this could be regarded as a significant achievement and worthy of celebration. However surpluses declared in the face of target shortfalls or non-achievement of objectives is a cause for concern.

Even profits declared by SOE need to be carefully evaluated to be able to make informed decisions. Bottom line is, we need to always go beyond the surface especially in evaluating public sector entities. As the saying goes, “The devil is in the details”. Need I add, the angel is in the details as well?