Migration from cash accounting to accrual accounting based on International Public Sector Accounting Standards (IPSAS)
The Government of Zimbabwe, in a move aimed at strengthening Public Finance Management systems to achieve fiscal discipline, effective resource allocation, and effective service delivery recently launched the Migration to Accrual Based International Public Sector Accounting Standards implementation plan. International Public Sector Accounting Standards are issued by the International Public Sector Accounting Standards Board (IPSASB).
According to this plan, the Government targets to complete the implementation of IPSAS by 2025.The adoption of IPSAS will see the Government moving away from the cash basis of accounting which mainly focused on accounting and reporting on cash receipts and expenditures without giving full disclosures of amounts receivable or payable. The adoption of the accrual system based on IPSAS will see public sectors entities recording revenues as they are earned and recording expenditures as they are incurred.
Objective of IPSAS
IPSAS aims to improve the quality of general purpose financial reporting by public sector entities, leading to better informed assessments of the resource allocation decisions made by governments, thereby increasing transparency and accountability.
Entities to be affected by IPSAS
IPSAS are accounting standards for application by national governments, regional governments, local governments and related governmental entities. IPSAS are also widely used by intergovernmental organizations or institutions. Government business enterprises however do not apply IPSAS.
In Zimbabwe, a pilot project for the implementation of IPSAS will be launched and it will focus on the following Ministries:
• Finance and Economic Development;
• Local Government, Public Works and National Housing; and
• Information, Publicity and Broadcasting Services.
Two commissions, two parastatals and eight local authorities have also been identified for pilot projects.
Possible challenges in the implementation of IPSAS
• Lack of support and cooperation from employees and management who may be resistant to change.
• It systems that are currently being used in the public sector may not support the accrual basis of accounting.
• Knowledge and skills gaps may exist in the public sector which may point to the need to train people.
• Support from the political leadership may not be adequate.
• The legal framework available to govern the public sector may need to be revised to accommodate IPSAS.
• Policies and procedures may have to be redrafted to be consistent with the requirements of IPSAS.
• Challenges in dealing with opening balances when migrating from cash basis to accruals based in IPSAS.
• The transition from cash basis to IPSAS may require significant funding which may not be available.
Differences between the cash basis of accounting and the accrual basis of accounting based on IPSAS
Cash Basis of accounting not based on IPSAS Accrual basis based on IPSAS
1. Revenue is recorded when it has been received Revenue is recorded when it has been earned.
2. Expenses are recorded when they have been paid Expenses are recorded when they have been incurred.
3. Liabilities are not recorded in the financial statements Liabilities are recorded in the financial statements.
4. No need to account for assets earned such as s receivables There is need to account for assets earned such as receivables.
5. Does not use the matching principle Uses the matching principle where revenue and expenses relating to the same period are accounted for in that period regardless of whether cash has been received or paid.
6. No need for complex accounting estimates There is need for complex accounting estimates such as in the creation of provisions and allowances.
7. No need for complex accounting estimates There is need for complex accounting estimates such as in the creation of provisions and allowances.
8. There is lack of standardized approach to financial reporting. The approach to financial reporting is standardized as the standards being followed are internationally recognized.
9. Less information is provided to the users since there are no disclosures. IPSAS are based on the principle of disclosure which helps to provide more information to the users of financial statements.
Benefits of accrual accounting based on IPSAS
Benefits of PSAS Brief Explanation
1. Improved accountability and transparency IPSAS encourage improved disclosure in the financial statements. This gives the users of financial statements more information about the reporting entity’s financial affairs thereby helping to curb fraud and corruption.
2. Enhance decision making Reporting under IPSAS encourages an improvement in the quality of information made available to the decision makers. Financial reporting under IPSAS also allows for more information to be disclosed in the financial reports compared to the cash basis of accounting.
3. Improved efficiency The use of IPSAS promotes standardization of financial reporting which makes financial reporting and auditing more efficient.
4. Enhance comparability Entities will be able to compare their performance to those of similar entities around the world since the accounts prepared under IPSAS are standardized.
5. Attracts investment in the public sector IPSAS gives confidence to the inventors and they allow comparability which makes it easier for potential investors in the public sector to make informed decisions. Investment in the public sector will go a long way in improvement of welfare, job creation and societal improvement.
6. Attracts professionals into the public sector The use of IPSAS in the public sector leads to professionalization of financial reporting in the public sector which helps attract professional accountants in the sector. The attraction of professionals will ensure that the public sector has the required skills and talent that will help drive the success of the public sector.
7. Sound financial management IPSAS lead to a complete change in financial management practices and will lead to a culture of better financial management and internal reporting system.
8. Data consistency The use of IPSAS ensure that there is consistency in the manner in which data is produced and presented thereby making data analysis more meaningful.
List of IPSAS
• IPSAS 1, Presentation of Financial Statements
• IPSAS 2, Cash Flow Statements,
• IPSAS 3, Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies,
• IPSAS 4, The Effects of Changes in Foreign Exchange Rates
• IPSAS 5, Borrowing Costs,
• IPSAS 6, Consolidated Financial Statements and Accounting for Controlled Entities
• IPSAS 7, Accounting for Investments in Associates,
• IPSAS 8, Financial Reporting of Interests in Joint Ventures
• IPSAS 9, Revenue from Exchange Transactions,
• IPSAS 10, Financial Reporting in Hyperinflationary Economies,
• IPSAS 11, Construction Contracts,
• IPSAS 12, Inventories,
• IPSAS 13, Leases.
• IPSAS 14, Events After the Reporting Date.
• IPSAS 15, Financial Instruments: Disclosure and Presentation.
• IPSAS 16, Investment Property.
• IPSAS 17, Property, Plant and Equipment.
• IPSAS 18, Segment Reporting
• IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets.
• IPSAS 20, Related Party Disclosures
• IPSAS 21, Impairment of Non-Cash-Generating Assets
• IPSAS 22, Disclosure of Financial Information about the General Government Sector.
• IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers).
• IPSAS 24, Presentation of Budget Information in Financial Statements
• IPSAS 25, Employee Benefits
• IPSAS 26, Impairment of Cash-Generating Assets.
• IPSAS 27, Agriculture.
• IPSAS 28, Financial Instruments: Presentation.
• IPSAS 29, Financial Instruments: Recognition and Measurement.
• IPSAS 30, Financial Instruments: Disclosures.
• IPSAS 31, Intangible Assets.
• IPSAS 32, Service Concession Arrangements: Grantor.
• IPSAS 33, First-time Adoption of Accrual Basis IPSASs.
• IPSAS 34, Separate Financial Statements.
• IPSAS 35, Consolidated Financial Statements.
• IPSAS 36, Investments in Associates and Joint Ventures.
• IPSAS 37, Joint Arrangements.
• IPSAS 38, Disclosure of Interests in Other Entities.
• IPSAS 39, Employee Benefits. Replaces IPSAS 25 as of 1 January 2018.
• IPSAS 40, Public Sector Combinations
• IPSAS 41, Financial Instruments.
• IPSAS 42, Social Benefits