Gov’t aims to transition from cash to accrual accounting by June 2027

The National Treasury has issued a set of guidelines to all accounting officers in ministries, departments, and agencies, as well as those in constitutional commissions and independent offices, and county executives and their entities.

The guidelines aim to provide a roadmap on the transition from cash to accrual accounting. This follows a Cabinet decision that approved the transition earlier in 2024. 

The move is aimed at addressing perennial fiscal challenges, such as pending bills which bewilder the public sector.

The shift from cash to accrual accounting in government is set to happen in three phases, which are expected to conclude by June 2027.

The transition could be an acid test for accounting officers in key government entities, forcing them to expose their liabilities.

According to Stephen Obok, a professional standards subcommittee member at the Institute of Certified Public Accountants of Kenya (ICPAK), accrual accounting records transactions as they happen, regardless of whether the payment has been made or not, unlike cash accounting, which records transactions only when cash changes hands.  This, he says, will enhance accountability in the public sector.

“The best way to think about it is this; that when doing a budget for the coming year, I have pending bills that have not been paid, or obligations that have not been paid. I begin with those as obligations I have. I ask myself how much I need to spend in this particular year, so you have Ksh.3 billion in accruals of obligations. I need a budget for Ksh.2 billions more, then my budget for that year should be Ksh.5 billion to a combination of obligations that I have and what I'm going to spend,” said Obok.

This, he argues, will further reduce the ballooning pending bills in the country. According to the National Treasury guidelines, accounting officers are expected to establish a cash to accrual transition committee – to oversee and direct the transition process.

They’re also supposed to appoint an entity manager from serving staff to oversee the process. In the financial year 2024/25 the National Treasury expects accounting officers to take stock of financial assets and financial liabilities held by their entities. Prepare and present opening financial statement among others.

Obok further warns that the transition to accrual accounting will be costly to implement, noting that some State departments may be illiquid, owing to higher liabilities than assets.

However, he remains bullish that the benefits of accrual accounting far outweigh the cost.

“What that means is that those particular individuals heading those institutions will have a high level of scrutiny and evaluation from a performance perspective so that if your contract is to be extended you need to demonstrate improvement,” added Obok.

In the three-year road map running from July 1, 2024, to June 30, 2027, the transition is expected to happen in phases; where in 2023/2024, entities were expected to submit audited cash-based financial statements as well as the opening statement of financial position as of July 1, 2024. 

This is followed by the first transitional accrual financial statement, which includes financial assets and financial liabilities by year 1, financial year 2024/2025.

In the second year, financial year 2025/2026, the second transitional statements must include all financial assets/liabilities and inventories as a minimum, as well as non-financial assets/liabilities which may be added with disclosures. 

With the last phase in year 3 (financial year 2026/2027), all entities must submit fully compliant accrual financial statements, including all assets and liabilities, with no exceptions.