The Cabinet last year approved a major shift in Kenya’s financial management system, transitioning from cash accounting to accrual accounting by national government ministries, departments and agencies, and county governments.
Traditionally, Kenya has used cash accounting, which records transactions only when money is received or paid. While simple and straightforward, this method has significant limitations.
It does not recognise revenues and financial obligations until cash is received or paid, contributing to incomplete financial records. Cash accounting also limits the quality of decisions made by the users of cash-based financial statements.
In contrast, accrual accounting records economic events when they occur, regardless of when cash is exchanged. This means that the government will now account for all revenues when earned and expenses when incurred rather than when cash is exchanged. The government will also recognise assets and liabilities arising from such transactions.
The transition to accrual accounting is part of broader public sector reforms aimed at improving transparency, accountability, and financial sustainability.
But what does this mean for the citizens of Kenya? Why is the government making this move, and how will it impact service delivery, public accountability, and public finance management?
Accrual accounting requires governments and entities to recognise assets in their financial statements. Such assets include land, buildings, motor vehicles, ICT equipment, infrastructure assets (roads, railways, bridges), furniture and fittings, and intangible assets, among others.
This recognition not only safeguards assets against pilferage and loss but also facilitates management of the assets through planning for acquisition, disposal, maintenance, and risk management.
Countries that adopt accrual accounting often see improved credit ratings and investor confidence. This can lead to better access to financial markets and lower borrowing costs for government projects.
By recognising liabilities such as pensions, public debt, and account payables (commonly known as pending bills in Kenya), accrual accounting contributes to the understanding of users of financial statements on the country’s financial health and also allows policymakers to make quality long-term financial decisions that promote financial sustainability.
With regard to pending bills in Kenya, accountability will be promoted by ensuring that they are settled in a timely manner and that the decision-makers and oversight bodies have an opportunity to ensure query and require action when such settlement is delayed.
Transparency in financial reporting promotes the understanding of financial information by the citizens (who are the taxpayers), giving them an opportunity for informed public scrutiny. This has the potential to reduce opportunities for financial mismanagement and corruption.
Accrual accounting promotes a long-term view of the government’s operations, as opposed to cash accounting. This view promotes better-informed cash budgets and sustainable funding of government projects while allocating resources to key priorities.
Accrual accounting has the potential to improve governance, internal controls, and risk management within government and in public sector entities.
For example, recognition of motor vehicles in the books of accounts has the potential to ensure that entities ensure that they exist and are in good working condition, that ownership documents are safeguarded, that they are managed and the persons responsible are held to account, that future purchases are pegged on the existing assets and sound allocation of resources and that disposal of such assets is based on their condition and usage.
The overall view of a government or an entity’s performance and position provides an opportunity for a strategic view of its operations and promotes the improvement of internal controls, governance, and risk management, further enhancing accountability.
Kenya is not alone in this transition. Many countries, including the United Kingdom, Canada, Australia, New Zealand, and Tanzania, have adopted accrual accounting to enhance financial management.
According to the International Public Sector Financial Accountability Index, over 120 jurisdictions worldwide are expected to apply accrual accounting by 2030 compared to 49 jurisdictions in 2020.
While the benefits are clear, implementing accrual accounting is not without challenges. Some of the key obstacles include: one, capacity building. Public sector accountants require extensive training to understand and implement the new system effectively.
Two, System Upgrades. Government financial management systems, such as IFMIS, must be reconfigured and updated to accommodate accrual accounting principles which comes at a significant cost.
Three, Change Management. Shifting from cash to an accrual-based approach will require a change in mindset and behavior across the government.
Four, identification and valuation of assets and liabilities also poses a challenge where such information is difficult to retrieve or is unavailable.
To address these challenges, PSASB and the National Treasury have developed a comprehensive roadmap that provides for a phased implementation strategy over the three-year transition period.
Stakeholder engagement and training programs have also been lined up over the transition period. Additionally, this reform on the transition from cash to accrual accounting has given the government an opportunity to re-engineer its financial reporting system, incorporating other aspects of reporting with a view to long-term sustainability and accountability.
This transition will ultimately lead to better governance, improved service delivery, and more responsible public financial management for you as a Kenyan citizen.
It is geared to promote the principles of public finance as envisioned in Article 201 of the constitution. These principles include openness and accountability, equitable sharing of resources, tax burden, public participation in public finance matters, equitable sharing of debt burden between current and future generations, responsible use of public resources, and clarity in fiscal reporting.
Moreover, with greater transparency, citizens will have more opportunities to hold their leaders accountable for the use of public resources. The move aligns with Kenya’s Vision 2030 goals of improving governance and public sector efficiency.
Adopting accrual accounting marks a significant milestone in Kenya’s financial reform journey. The transition is envisioned to take 3- years to fully implement.
Its long-term benefits far outweigh the initial challenge, with the ultimate outcome being improved governance, enhanced public trust, and sustainable economic growth.
The writer is the CEO of Public Sector Accounting Standards Board (PSASB).
