An accounting standard is a common set of principles, standards, and procedures that define the basis of financial accounting policies and practices. There are many different accounting standards in use in the world which are applied to financial statements in order to provide a true and fair view of the firm’s financial position, and a standardized method of comparison with financial statements of other firms.
International Public Sector Accounting Standard (IPSAS) are a set of accounting standards issued by the international public sector accounting standards Board (IPSASB) which is an independent organ of international federation of Accountants (IFAC) for use by public sector entities around the world in the preparation of financial statements.
IPSAS aims to improve the quality of general financial reporting by public sectors entities, leading to better informed assessments of the resource allocation decisions made by the governments, thereby increasing transparency and accountability.
IPSAS BASIS OF ACCOUNTING AND REPORTING
IPSAS provides two basis of accounting to public entities, which includes
- Cash Basis of Accounting.
Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.
This basis of Accounting is guided by only one standard, which underlies the preparation of the primary financial statement which is
- The Statement of cash receipt and payment.
- Accrual Basis of Accounting.
Revenue is recorded when earned and expenses are recorded when consumed. There are 31 standards which guide the accrual basis of accounting. These basis underlies the preparation of financial statements which includes
- The statement of financial position (IPSAS 1)
- The statement of financial performance (IPSAS 1)
- The cash flow statement. (IPSAS 2)
- The statement of changes in net assets/equity (IPSAS 1)
- The notes to the financial statements, or annexe (IPSAS 1)
ADVANTAGES OF ACCRUAL BASIS OF ACCOUNTING AND REPORTING
The cash basis and accrual basis of accounting are two different methods used to record accounting transactions. The core underlying difference between the two methods is in the timing of transaction recording. When correctly aggregated over time, the results of the two methods are approximately the same.
Accrual basis of accounting and reporting, is required by the public sector and its adoption will be a panacea to problems bedeviling the public sector.
Accounting for public sector entities has never been an easy task all over the world. Greedy individuals who don’t understand that you don’t need the whole world to be comfortable on this earth, have taken advantage of the loopholes existing in the current cash based system to siphon money from the public sector.
Good accounting is an essential element of good governance thus the adoption of IPSAS accrual basis of accounting provides the opportunity for more efficient management of public finances with multiple benefits, including
- Greater transparency and accountability by disclosing all transactions conducted.
- Controlled single net cash account to enable monitoring of cash flow position.
- Well managed internal controls to safeguard government assets and liabilities.
- Well-kept government asset register to safeguard public assets and liabilities.
- Better allocation and release of public funds which will contribute to the amplification of employment.
- Reduction in cost of public goods and services which will be funded locally.
- Improved quality and amplification of credibility of public accounts.
- Increased economic competitiveness, indirectly favoring the private sector companies.
- Attainment of comparative advantage in the international market.
- Reduction of operating cost of the public administration and the government due to better planning.
- Lowering of government borrowing and therefore reduction in the corresponding costs.
ACCRUAL BASIS OF ACCOUNTING ON DEBT
Bad accounting practices in public sector can bring a country down, thus IPSAS accrual basis is the only internationally recognized public sector basis of accounting which is consistent with treatment of debt, IFRS and measurement rules practiced by developed countries governments.
Greece adopted IPSAS accrual basis of accounting and its debt burden significantly dropped, where at the end of 2013 it recorded a gross debt of 68% of GDP, before that its debt was commonly cited as being 175-180% of GDP which has since been acknowledged that the numbers were incorrect and indefensible because it was based on the face value of its debt. International Monetary Fund (IMF) uses accrual basis of accounting and not the face value of debt when conducting debt sustainability analyses thus more reasons for the use of accrual basis.
ADOPTION AND IMPLEMENTATION OF IPSAS IN KENYA
In Kenya, The Public Sector Accounting Standards Board (PSASB) sets financial accounting and internal audit standards for the Public Sector and it was established through the Public Finance Management Act (PFM) No. 18 of 24th July, 2012. The Board was gazetted by the Cabinet Secretary, National Treasury on 28th February, 2014 which is mandated to provide frameworks and set generally accepted standards for the development and management of accounting and financial systems by all state organs and public entities.
The Board adopted the financial reporting standards applicable to public sector entities effective dated 1st July 2014 through a treasury circular which were subsequently gazetted on the 8th of August 2014. These standards were adopted as follows:
- National Government and County Governments
They are required to use IPSAS cash basis of accounting.
- Semi Autonomous Government Agencies.
These are regulatory and other non commercial entities. They are required to apply IPSAS accrual basis of accounting.
- The state and county corporations (GBEs) Government Business Enterprises which carry out commercial activities are required to apply IFRS.
- The PSASB also adopted international professional practice framework (IPPF) for Internal Auditing standards.
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