Navigating the Transition to IPSAS Accrual Accounting for Public Entities in Kenya

Background

International Public Sector Accounting Standards (IPSAS) serve as authoritative principles governing the accounting and reporting of economic transactions and events in the general-purpose financial statements of public sector entities. Issued by the International Public Sector Accounting Standards Board (IPSASB), these standards aim to enhance public sector financial reporting on a global scale. A significant milestone in this endeavour was the introduction of IPSAS 33 in 2015, which specifically addresses the first-time adoption of accrual basis IPSASs1 [1]. This standard grants transitional exemptions to public entities adopting accrual-based accounting for the first time, allowing sufficient time to establish reliable models for recognising and measuring assets and liabilities during the transition.

Early adopters, such as New Zealand and Australia, began implementing accrual-based public sector accounting in the late 1980s [2], well before the formalisation of IPSAS, providing early examples of best practices. Since then, many other countries have progressively aligned their accounting practices with IPSAS principles, supporting a global shift toward standardised public sector reporting.

In Kenya, the Public Sector Accounting Standards Board (PSASB) established under Sections 192 to 195 of the Public Finance Management (PFM) Act 2012, provides frameworks and formulates generally accepted accounting standards for the development and management of accounting and financial systems and internal audit procedures by public sector entities as spelt out under Section 194 of the PFM Act [3] . In 2014, the PSASB adopted the International Financial Reporting Standards (IFRS) and the International Public Sector Accounting Standards (IPSAS) for implementation by public sector entities in financial reporting. Since its adoption, Ministries, Departments & Agencies (MDAs), County Executives and County Assemblies have been applying the IPSAS Cash-based standard [4] . However, on 7 March 2024, the Cabinet approved the transition from a cash basis to an accrual basis of accounting with effect from 1 July 2024, following recommendations from the National Treasury and the PSASB. A Steering Committee appointed by the Cabinet Secretary for the National Treasury and Economic Planning, will guide the transition process, which is anticipated to take place over the next three years, with the inaugural accrual-based financial statements expected for the financial year ending 30 June 2025 [5].

Global Transitions to IPSAS Accrual Basis

In Africa, countries such as Tanzania and Nigeria have made substantial progress in transitioning towards IPSAS Accrual Accounting for efficient and effective use of public funds. Other countries that are in the process of adopting IPSAS Accrual accounting include Uganda, Rwanda, South Africa, Zambia and Ghana.

The Ugandan government is implementing a phased approach to accrual accounting [6], supported by enhanced financial management systems to facilitate planning, budgeting, asset acquisition, maintenance, disposal, and reporting. Rwanda has partially adopted IPSAS accrual and is operating on a modified accrual basis. To advance full migration, Rwanda's Ministry of Finance and Economic Planning developed an IPSAS implementation plan and strategy, mandating entities to transition in a phased manner over six years (2018-2024) [7 ]. Based on the 2020-2025 strategic plan from South Africa's Accounting Standards Board, all public sector entities are required to adopt accrual-based accounting standards in the period [8] . While South Africa's initial policy decision to shift to accrual accounting dates back to 1999, implementation lagged at the departmental level due to complexity and resource demands. The Zambia Institute of Chartered Accountants reports that the current use of cash-basis IPSAS in Zambia is expected to be replaced by the end of 2024 [9] , with the full adoption of accrual IPSAS. Ghana, meanwhile, initiated IPSAS accrual implementation in 2016, originally targeting a five-year roll-out [10]. However, the full transition from cash to accrual accounting is now rescheduled for completion by the end of 2024.

Figure 1 below highlights the level of adoption by different countries globally. About 30% of jurisdictions reported fully on an accrual basis, while 40% incorporated some elements of accrual in their financial reports. The remaining 30% of governments continued to report on a cash basis.

The International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance & Accountancy (CIPFA) projects that more jurisdictions will adopt accrual-based reporting in the near to medium term, with the number of countries expected to reach 83 by 2025 and 120 by 2030. Achieving this projection will, however, require sustained support from international and regional organisations and the accountancy profession, particularly through capacity development initiatives.

Rationale for Kenya's Transition

While the adoption of IPSAS Cash Basis achieved significant milestones such as standardising financial reporting across public sector entities, enhancing the understandability of financial information, improving audit opinions from the Auditor General, and strengthening transparency, certain gaps and limitations emerged. Key concerns related to cash basis accounting include the accumulation of pending bills managed outside the formal accounting system, restricted disclosures regarding the nature and extent of information, and the absence of capital asset and liability recognition in financial statements, hindering effective asset management. Furthermore, given that expenses were only recorded upon payment, expenditures for a given period could include costs for goods or services consumed in prior periods, thereby challenging the accounting principle of matching. The shift to accrual accounting is anticipated to resolve these challenges by recognising revenues and expenses as they are earned or incurred, irrespective of cash transactions. This approach will offer a more accurate representation of the government's financial position by mandating the recognition of assets, liabilities, revenues, and expenditures, thus providing critical data for informed decision-making. Moreover, the shift from cash to accrual accounting marks a significant milestone in Kenya's pursuit of aligning its financial reporting practices with international standards.

Roadmap for Transition to IPSAS Accrual for Public Sector Entities in Kenya

Following the Cabinet approval in March 2024, the National Treasury announced the commencement of the transition from cash-based to accrual-based accounting. Subsequently, the Public Sector Accounting Standards Board (PSASB) released comprehensive transition guidelines detailing procedural requirements, disclosure expectations, and the framework for financial reporting during the initial reporting year. Entities may elect to adopt accrual accounting either in full or through a phased approach, with the path taken depending on the entity's complexity, size, and operational scope. Under IPSAS 33, First-Time Adoption of Accrual IPSAS, entities that fully transition at once will prepare their first IPSAS-compliant financial statements as of 30 June 2025. For entities opting for a phased transition, initial financial statements will be classified as transitional IPSAS financial statements, lacking full accrual elements until FY 2026/2027. This phased approach enables entities to systematically gather information on non-current assets throughout the transition period.

The table below illustrates a phased approach for transitioning from cash-based to accrual-based accounting, with the objective that entities will achieve full transition by FY 2025/2026. Nonetheless, entities opting for an earlier full transition, prior to Year 3 (FY 2025/2026), may do so as indicated in the table:

Resource Requirements for IPSAS Accrual Accounting Transition in Kenya's Public Sector

With the adoption of accrual accounting, building internal capacity requires an expanded pool of professional accountants, which can be achieved through targeted training for government personnel and agencies. This underscores the need for public entities to develop and invest in dedicated training programs to enhance knowledge acquisition, rather than relying solely on external talent supply. In addition, implementing IPSAS accrual accounting will require substantial financial investment for staff training, software and systems installation, and consultancy services, expenses that could impede a smooth transition if not adequately addressed. Therefore, the Government of Kenya and all public sector entities should commit resources to support this process through funding and capacity-building initiatives. Full IPSAS adoption will also necessitate either implementing new systems or upgrading existing ones, which may introduce potential delays. However, investing in the right systems and support from strategic learning partners is expected to facilitate a seamless transition, minimise errors, support standards compliance, monitor progress, and improve the timeliness of report generation.

Benefits and Expected Outcomes

The transition to IPSAS accrual accounting is anticipated to strengthen the credibility of Kenya's government finances by enabling international comparability, allowing jurisdictions to benchmark financial performance against global peers. Adopting IPSAS accrual standards will also ensure alignment with global best practices, thereby increasing the reliability of financial information for stakeholders and investors. Furthermore, we expect the adoption of accrual accounting to improve the management of pending bills with full recognition on the balance sheet, which facilitates more efficient tracking of payments against outstanding obligations. This approach also supports effective planning for future funding needs related to existing liabilities. The shift to accrual accounting is anticipated to enhance recognition of internally generated revenue, particularly at the sub-national level, through the adoption of IPSAS 9 and 23, which address revenue recognition for exchange and non-exchange transactions, respectively. Enhanced asset management is another key benefit, as accrual accounting provides comprehensive records of assets and liabilities. The consistent production of accrual-based accounts will also promote greater accessibility and comparability between public and private sector accounts. Moreover, accrual accounting's long-term financial perspective bolsters balance sheet management, providing governments with the flexibility to respond to emerging pressures and absorb fiscal shocks.

Conclusion

As Kenya transitions from IPSAS Cash to IPSAS Accrual accounting, enhanced accounting practices will facilitate more comprehensive financial reporting, providing a holistic picture of the country's financial performance. We expect the increased availability of reliable financial information to support more informed decision-making, ultimately strengthening public financial management. To successfully implement this transition, however, government leaders and decision-makers must demonstrate political will by investing substantially in information technology (IT) infrastructure, staff development and openness to training. Furthermore, both internal and external auditors will be pivotal in assessing internal controls, auditing IT systems, and conducting regular evaluations and post-implementation reviews to ensure compliance with IPSAS standards while identifying areas for improvement.

[1] https://www.ipsasb.org/news-events/2015-01/ipsasb-publishes-standard-first-time-adoption-accrual-basis-ipsass
[2] https://blog-pfm.imf.org/en/pfmblog/2018/12/adoption-of-accrual-accounting-accelerates
[3]https://psasb.go.ke/transition-documents/
[4] https://psasb.go.ke/transition-documents/
[5] PSASB, Guidelines on Transition from Cash to Accrual Accounting by Ministries, Departments, Agencies (MDAs) And County Governments in Kenya
[6] https://www.finance.go.ug/sites/default/files/reports/Financial%20Reporting%20guidelines%202024.pdf