Service business

Adopt accrual accounting in the public service


Adopt accrual accounting in the public service

Each fiscal year, the Cabinet Secretary to the Treasury presents the fiscal policy statement to the National Assembly, outlining government revenue and expenditure.

The Treasury, in approving the budget estimates, also promulgates the Finance Bill and other bills necessary to implement the budget proposals. In the just-concluded budget speech, the minister, Ukur Yatani, tabled in the August House a budget of 3.63 trillion shillings that will allow public sector entities to receive their fair share from the treasury.

As it stands, national and county governments operate on a cash basis of accounting which recognizes income and expenditure as the money is received or paid.

This framework is limited because it does not take into account the assets and liabilities of the government, which are essential for sound decision-making. Implementing a roadmap to accrual accounting is a critical step in overcoming this challenge.

To address the weakness of cash accounting, public sector entities should adopt accrual accounting, a system that records revenue when earned and expenses when incurred rather than when payments are made. .

Accrual accounting creates the ability to recognize the value and manage public sector assets and liabilities.

The advantage of the accrual accounting framework is that revenues are compared to expenses incurred during a given financial period. Accrual accounting therefore presents an accurate picture of the situation of a given entity at a given time.

In Africa, countries like Tanzania and Nigeria have adopted International Public Sector Accounting Standards (IPSAS) accrual accounting for effective and efficient use of public funds, which is bearing fruit.

Adopting accrual accounting will improve the delivery of public services, leading to improved performance in a way that ensures value for money. The accrual-based framework improves budget transparency, accountability and credibility and guides the production of information useful for decision-making.

With the aim of improving the management of public sector liabilities, accrual accounting provides useful information that will allow any government to adopt decisions that support its objectives without imposing an unsustainable debt on future generations.

It will also create a budget mechanism with targets that take into account the impact of decision-making on the public sector balance sheet. Without it, there will be a strong temptation to shift costs outside the scope of budget targets—even when such a move would not be cost-effective.

Financial reports prepared on an accrual basis provide a more holistic view of any government’s financial position.

The additional information provided means that government decision-makers are better informed about the range of responsibilities and risks facing the public sector and can consider measures to mitigate these challenges. Adopting accrual accounting can solve these obstacles.

The mandate of the Public Sector Accounting Standards Board of Kenya, as enshrined in the Public Financial Management Act 2012, has set out a detailed roadmap for the transition to IPSAS accrual accounting for public sector entities.