4.1 Understanding the Two Bases

CASH BASIS ACCOUNTING

Definition: Transactions are recorded only when cash is received or paid.

Characteristics:

• Records cash receipts (taxes, grants received)
• Records cash payments (salaries paid, goods purchased)
• Does NOT record obligations until paid
• Does NOT record assets acquired (except cash)

Financial Statement Produced:

• Statement of Cash Receipts and Payments

What’s Missing:

• Unpaid supplier bills (pending bills)
• Value of the road constructed
• Money owed by taxpayers
• Long-term loan obligations

ACCRUAL BASIS ACCOUNTING

Definition: Revenues and expenses are recorded when earned or incurred, regardless of cash movement.

Characteristics:

• Records revenue when earned (even if cash not yet received)
• Records expenses when incurred (even if not yet paid)
• Shows ALL assets (cash, buildings, equipment, receivables)
• Shows ALL liabilities (loans, pending bills, pension obligations)

Financial Statements Produced:

• Statement of Financial Position (full balance sheet)
• Statement of Financial Performance (comprehensive income/expenditure)
• Cash Flow Statement
• Budget comparison
• Notes with full disclosures

4.2 Comparison Table

Aspect	Cash Basis	Accrual Basis
Recognition	When cash received/paid	When earned/incurred
Assets shown	Cash only	All assets (cash, PPE, receivables, inventory)
Liabilities shown	Limited disclosure	All liabilities (loans, payables, provisions)
Complexity	Simple, easy to maintain	Complex, requires skilled accountants
Information quality	Incomplete picture	Comprehensive financial position
Budget focus	Strong focus on cash control	Shows both budget and economic reality
Pending bills	Not shown until paid	Recognized as liability
Assets depreciation	Not recorded	Systematic depreciation over useful life
Best for	Small entities, budget compliance	Large governments, long-term planning

4.3 Global Trends Toward Accrual Accounting

Why the World is Moving to Accrual

1. Better Transparency

Accrual accounting reveals:

• True cost of government services
• Full extent of assets and liabilities
• Long-term fiscal sustainability

International Evidence:

• 75% of OECD countries had adopted accrual accounting by 2017
• New Zealand, Australia, UK, Canada were early adopters (1990s-2000s)
• Developing countries increasingly adopting with IMF/World Bank support

2. Improved Decision-Making

Example – New Zealand (accrual since 1994):

• Government can see total cost of providing healthcare including equipment depreciation, not just cash spent
• Better investment decisions knowing full asset base
• Reduced hidden liabilities

3. Enhanced Accountability

Example – UK (accrual since 2000s):

• Parliament sees full government balance sheet
• Public debt more transparent
• Pension obligations clearly disclosed

4. International Comparability

Countries using IPSAS accrual basis can compare:

• Debt-to-GDP ratios accurately
• Asset management efficiency
• Fiscal sustainability indicators

Global Adoption Statistics

According to IFAC/CIPFA 2021 Status Report:

Year	Full Accrual	Partial Accrual	Cash Basis
2018	39 jurisdictions	68 jurisdictions	58 jurisdictions
2020	49 jurisdictions	72 jurisdictions	44 jurisdictions
2025 (forecast)	83 jurisdictions	52 jurisdictions	30 jurisdictions

Trend: Steady movement from cash → partial accrual → full accrual

4.4 Kenya’s Journey: From Cash to Accrual

Historical Position (Pre-2012)

• Pure cash basis accounting
• Focus on budget compliance
• Limited asset and liability disclosure
• Based on old Government Financial Regulations

Reform Phase 1: Adoption of Cash Basis IPSAS (2014-2024)

What Changed:

• Constitution 2010 and PFM Act 2012 created foundation
• PSASB established and adopted Cash Basis IPSAS
• Standardized financial statement formats
• Better budget comparison disclosure
• Some accrual-like notes (outstanding loans, pending bills)

Current Practice:

• National government ministries: Accrual Basis IPSAS
• County governments: Accrual Basis IPSAS
• State corporations: Many on accrual (IPSAS or IFRS)

MAJOR ANNOUNCEMENT: Kenya’s Accrual Transition (2024-2027)

Effective July 1, 2024, Kenya commenced a 3-year transition to full accrual accounting for the public sector.

Official Timeline:

Financial Year	Status	Requirements
2024/25 (Year 1)	Transition begins	Opening accrual balances, parallel reporting
2025/26 (Year 2)	Transition continues	Full implementation preparation
2026/27 (Year 3)	Transition completes	Full accrual by June 30, 2027

What This Means:

1. By June 30, 2027: All national and county government financial statements will be prepared on full accrual basisR
2. During 2024-2027:
   • Entities must establish complete asset registers
   • Value all property, plant, and equipment
   • Recognize all liabilities (including pensions, pending bills)
   • Implement accrual accounting systems
   • Train staff on accrual IPSAS
3. First Full Accrual Statements: Expected for FY 2026/27 (covering July 2026 – June 2027)

Implementation Requirements

1. Asset Recognition (IPSAS 17)

• Challenge: Kenya has thousands of public buildings, roads, hospitals never formally valued
• Requirement: Conduct physical verification and valuation
• Example: Ministry of Education must value all 30,000+ public schools

2. Liability Recognition

• Pending Bills: Must be formally recognized (estimated at over Ksh 500 billion nationally)
• Pension Obligations: Actuarial valuation required
• Example: County governments must recognize all unpaid supplier invoices

3. System Upgrades

• IFMIS Enhancement: Integrated Financial Management Information System must support accrual
• Training: Over 10,000 public sector accountants need accrual training

4. Opening Balances (IPSAS 33)

• First-Time Adoption: Special standard for transition
• Requirement: Establish opening Statement of Financial Position as at July 1, 2024

Expected Benefits for Kenya

1. Transparency

• Citizens will see Kenya’s full balance sheet
• All pending bills visible
• True debt burden clear

2. Better Management

• Depreciation encourages asset maintenance
• Full costing of programs
• Informed policy decisions

3. International Credibility

• Easier for investors to assess Kenya
• Comparability with other countries
• Meets IMF/World Bank expectations

Challenges in Transition

1. Capacity Constraints
   • Limited number of trained accrual accountants
   • PSASB providing extensive training programs
2. Valuation Difficulties
   • How to value old infrastructure?
   • Heritage assets (museums, historical sites)
   • Solution: IPSAS allows various approaches, including deemed cost
3. Data Collection
   • Asset registers incomplete
   • Some records missing
   • Solution: Physical verification campaigns underway
4. System Limitations
   • IFMIS designed for cash accounting
   • Upgrades required
   • Solution: Phased system enhancement
5. Cost of Transition
   • Hiring valuers
   • Training personnel
   • System upgrades
   • Estimated: Several billion shillings