Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Programme
A joint programme of the Ministry of Local Development (MLD) and
the German Technical Cooperation (GTZ)
Accrual Accounting
in the Nepalese Municipal Public Sector
December 2008
GTZ
IAS
ICAN
IFAC
IPSAS
IPSASB
IPT
KMC
LBFC
LGCDP
MC/PM
MLD
MuAN
OECD
RLC
udle
UDTC
WTO
Acknowledgments
Urban Development through Local Effort Programme (udle) would like to thank all organizations and institutions which
provided valuable information and inputs.
Contents
01. Executive Summary (p.1)
02. Cash Accounting vs. Accrual Accounting (p.2)
2.1.
Definition and comparison of the Cash Accounting System and the Accrual Accounting System (p.2)
2.2.
2.3.
2.4.
2.5.
2.6.
2.7.
3.2.
4.2.
Executive Summary
when they occur rather when money is actually exchanged. This effectively addresses the time difference between the
receipt and payment of goods and also makes future strategic planning and multiple years planning possible. For
example an accountant knows that in the fiscal year of 2008/2009 a certain total amount of tax is to be received even
though it is not yet paid by the tax payer. As a result the accountant would be able to track down the reason for arrears.
Transactions always affect two accounts in the accrual based accounting, the credits and debits side, which always
have to be matched and balanced. Therefore it is possible to show the source and application of funds which makes an
allocation of resources according to specific cost centres possible. For example a cost centre can be created for a bus
park by showing the revenues but also the matched expenses (e.g. operational and maintenance cost) of the bus park.
This would make the calculation of product costs possible. For example one could calculate an appropriate bus ticket
fee in order to cover all the expenses of the bus park. However, cost centres can also be established for individuals
(e.g. in tax management), projects, departments and so on.
The connection of the source and application of funds also makes performance based budgeting, reporting, auditing
and in general outcome orientation possible since one knows the crucial linkage between what was invested by whom
to achieve a certain outcome. For this reason accrual accounting has the potential to change the steering tools on
which cash accounting is based on towards performance and outcome orientation. For example accrual accounting
provides a mayor or executive officer with much more financial information which enables him to optimize the
budgeting process.
Another major characteristic of accrual accounting is the usage of depreciations and/or reserve allocation in order to
reflect the wear and tear of assets and future resource consumption. Depreciations are bookings, used to artificially
display the real happening devaluation of e.g. a street through usage. Reserve allocation is a connected tool to reserve
money for maintenance or reinvestment in order to address this devaluation. Through the income statement, where
total revenues are matched to expenses, the net resource consumption of e.g. a municipality is being displayed. The
income statement together with the balance statement of financial position displays the profit or deficit of a financial
period.
Accrual based accounting is the dominant private sector accounting system.
Overview 1: Cash Accounting vs. Accrual Accounting (Broader Overview available under
Athukorala & Reid, 2003, p.26-27)
Cash Accounting
Accrual Accounting
Time of booking
events only when cash is received or paid events when they occur
Management of Assets and
Resources
resources
Not possible
expenses
Cost and results accounting
4
Resource consumption and the wear
and tear of resources is displayed
transparency by not being able to tell relevant stakeholders like tax payers the source and application of specific
resources e.g. taxes. In the context of Nepalese Municipalities, most of the public properties are not accounted in the
books of accounts and inventories of such valuable public assets (land, public parks and other important historical
monuments) are ignored due to the application of cash accounting. A comprehensive strategic financial
management plan of municipal bodies is impossible to be developed and implemented on base of cash
accounting systems.
Still, the mentioned problems and difficulties are the reason why accrual accounting implementation in developing
countries requires a carefully planned, comprehensive and long term approach, including the necessary technical,
financial and political support and commitment by the relevant stakeholders. This is needed to overcome obstacles like
capacity constraints, corruption, manipulation, lack of resources, the lack of formal accounting regulations, policies,
fiscal rules, standards and manuals etc. (Athukorala & Reid, 2003, p.53-61; Boothe, 2007, p.195-199).
All in all just a few minor steps, starting with the booking of cash transactions based on an accrual accounting system
(this would include taxes, fees etc.), can improve the financial management of resource constraint local governments in
Nepal.
A Cash flow statement is essential because even a surplus in the balance statement is no guarantee that sufficient
resources for operational activities are available. Cash flows are inflows and outflows of cash and cash equivalents.
Receipts of cash (cash inflow) are booked according to the source of funds. Disbursements (cash outflow) are booked
according to the application of funds. On each side the values are separated according to operating, investing and
financing activities. These information allow to ensure operating activities of a municipality and also allow to decide on
future investment activities and liquidity needs.
Overview 2: The three most important dimensions of Accrual Accounting Financial Statements
Cash Flow
Statement
Balance
Statement
Income
Statement
Cash Receipts
Debits
Credits
Revenues
Disbursements
Floating
assets
Equity
capital
Expenses
capital
assets
Reserves
Liabilities
Debits
Credits
Liquidity
Fiscal Year
Outcome
All in all modified cash accounting would be a first step to match cash transactions related to an economic event to the
same fiscal year. For this reason the planning and operation of next years budget is not that much affected by the past
fiscal year arrears.
The modified accrual basis of accounting uses the same accounting framework as full accrual accounting.
However, it is bound to a single fiscal period and therefore short term focused by merely recognizing economic
transactions as revenues if they are available or measurable to liquidate liabilities in the current fiscal period or soon
thereafter. Similarly, expenditures are only recognized if they are expected to draw on the currently spendable
revenues in the fiscal period rather than long term resources. Although modified accrual accounting recognizes the
total amounts in the different accounts on the debits and credits side, e.g. through receivables or payables, it only
operates with the measurable or spendable funds and values. This has the advantage that there are no big
expectations regarding the upcoming revenues since only the available funds matter. For example even though an
accountant knows receivables in tax he does not book them as revenue until they are actually received and spendable.
For this reason, long term revenues or long term expenses are excluded in modified accrual accounting. The same
holds true for assets that are of long term use. Under modified accrual accounting they are written off immediately
when acquired. Therefore no systematic asset management exists in modified accrual accounting. This is also the
reason why modified accrual accounting does not use the term expenses and uses merely expenditure instead.
Compared to the two mentioned forms of cash accounting, the modified accrual accounting has the advantage of being
able to link the source and the application of available or spendable funds as explained before. Therefore it recognizes
if payments have been used according to their purpose. Moreover it ensures fund availability and fund flows for
expenditure purposes. All in all modified accrual accounting is a good first step for incremental accrual accounting
implementation since it uses the same principles like full accrual accounting.
10
In order to reflect at least outstanding receivables (e.g. in tax management) and payables, the crucial linkage between
the source and application of funds, to create more transparency, accountability and responsiveness according to cost
centres (e.g. a bus park), some degree of accrual accounting seems necessary (Chu, 2008, p.9). The question is how
extensive this accrual accounting approach has to be in order to be appropriate and efficient for the national or subnational government level.
At the national level it is not a priority to implement a full fledged accrual accounting system since central government
normally does not own many assets or at least does not have to rely on them as much as the sub national level.
Moreover national government usually redistributes monetary values and funds only. Therefore the first step of reform
would be to improve the existing cash accounting system according to international cash accounting standards for the
public sector (e.g. the IPSASB Cash Standards) (IPSASB, 2008b; World Bank, 2007, p. 5). As a second step of reform
one can focus on the implementation of a modified accrual accounting system that dominantly focuses on revenues
that are available to liquidate expenditures. In other words monetary values and central government funds but with the
important difference, compared to cash accounting, of knowing the connection between the source and the application
of these funds. Besides that, one would also know receivables and payables. 1 As a result the central government
would be able to evaluate the outcome of their funding as well as revenue and expenditure arrears. Of course that
would also affect national budgeting, reporting and auditing in the long run.
At the municipal level a totally different picture appears since a municipality usually owns more capital assets (e.g.
roads, bridges but also transport service providers and other infrastructure) and floating assets. In addition it has to
deal with resource consumption, reserve allocation, critical debt levels etc. and the allocation of usually scare
resources in general. Therefore a sustainable asset and debt management is very crucial at a municipal level. In order
to achieve these aims, a full accrual accounting system for the municipality including its public companies (e.g.
transport providers and facilities) would be of major concern in the long run.
However, in order to consolidate accrual accounting implementation a modified accrual accounting should be the first
major step for municipalities towards full accrual accounting implementation since it uses the same accounting
framework and usually the same software. In developing countries it should be an option of choice if the municipalities
start with a modified or full accrual accounting according to their current status and capacity. Both accrual accounting
systems can enhance transparency by displaying what public goods have been produced with tax money, e.g.
Integrated Property Tax (IPT) in Nepal, or other taxes and fees.
However, a full financial overview including asset management is only possible with a full fledged accrual accounting.
The financial statements an accrual accounting can provide are an important basis to achieve credibility towards
stakeholders like donors, banks, foreign investors, tax payers or the general public. Moreover, these information are
useful for the management level of the municipality in order to improve the efficiency, effectiveness, feasibility,
sustainability and quality of their investments and their financial management in more general terms.
In this regard, Nepal has already conducted a study on the improvements of the existing government accounting system under the technical
support of ADB the outcomes and suggestions are under discussion.
11
12
2003, p.1). This applies to more developed as well as developing countries. Mostly the national level of government
benefits from the experiences made by the local governments (FEE, 2007, p.6).
OECD Countries
Within the OECD the majority of local governments use some sort of an accrual based accounting system. This is valid
for most local governments in Switzerland, the Netherlands, Sweden, Spain, Portugal, Finland, France, Great Britain,
Germany, Italy, USA, New Zealand, Australia, Canada and Iceland. Also relatively new OECD members like Poland
and Slovakia are in the process of accrual accounting implementations.
In Germany for example a comprehensive municipal reform to change to accrual accounting has started in 2003 on a
regional basis. During this reform process some of the sixteen federal regions made the change to accrual accounting
mandatory for their municipalities. Others approved the change to accrual accounting on a voluntary basis. The fastest
and broadest approach undertaken by a bigger federal region is being done by the state of North-Rhine Westphalia,
which made it mandatory for all municipalities to change to accrual accounting until the end of 2009. Besides that the
federal regions of Hamburg and Bremen already introduced accrual accounting around 2006.
All in all 11 out 16 federal regions made it mandatory for their municipalities to introduce accrual accounting until 2013
at the very latest. Five federal regions left the decision up to their municipalities whether they want to introduce accrual
accounting or go for the traditional cash accounting system or a modified accounting system (KPMG, 2008, p.1-3).
Besides these regulatory approaches there are a lot of towns and municipalities who introduced accrual accounting on
a voluntary basis.
For further information on the mentioned countries see Athukorala & Reid, 2003, p.79-81; IPSASB, 2008c; FEE, 2007,
p.23-24; Grossi, 2006, p.4-5; IFAC, 2000, p.65; CESifo, 2007.
Accrual accounting is part of a broad financial management reform in the public sector in the above mentioned
countries. However, they differ on the implementation of some sort of performance budgeting, reporting and auditing
but the change in accounting usually had implications for these other components.
Non-OECD Countries
In the case of South Asia, a couple of countries implemented some sort of accrual accounting at local level or are in
the process of doing so.
In India for instance, some federal states including Tamil Nadu, Maharashtra, UP and Karnataka are using accrual
based accounting. The urban local bodies however are more speedily towards the implementation of accrual
accounting because of a decision by the Supreme Court of India in 2001 that forces all urban governments to
implement accrual accounting, e.g. Municipal Corporation of Delhi since 2003 (SAFA, 2006, p.7-8).
13
Malaysia introduced accrual accounting only on the local level (IFAC, 2000, p.65).
Similarly, Bangkok Metropolitan City of the Thailand, introduced an accrual accounting system in 2006.
The Fiji Islands recently purchased accrual accounting software and plan to move to accrual accounting in the medium
term (Athukorala & Reid, 2003, p.30; ADB, 2002, p. 33-34). The same holds for Sri Lanka, Indonesia, The Philippines,
China (ADB, 2002, p.33-34). However in these cases it is not sure if this also holds true for the local government level.
Singapore currently uses both types of accounting; cash based accounting and accrual based accounting (CPA
Australia, 2004).
According to a SAFA study from 2006 Bangladesh is on the way to move to an accrual based accounting system.
Other countries like Chile, UAE, Tanzania, Romania, Estonia, and Latvia implemented accrual accounting at least at
local level.
Russia, Azerbaijan, Barbados, Cayman Islands, Mongolia, South Africa, Israel, Jamaica and Slovenia etc. appear to be
in the process of accrual accounting implementation, but its not possible to assess on which level of government or
how far this process is on the way (IPSASB, 2008c; IFAC, 2006, p.65).
Furthermore The European Union pushes for accrual accounting implementation in new member states or prospective
member states.
Although this might look very promising, one has to be very careful when implementing accrual accounting systems in
developing countries since these usually face even greater problems when introducing this system compared to more
developed countries (see p.6).
Switzerland, the Netherlands, Sweden, Spain, Portugal, Finland, France, Great Britain,
Germany, Italy, USA, New Zealand, Australia, Canada and Iceland, Poland and Slovakia
Chile, UAE, Tanzania, Romania, Estonia, and Latvia, Malaysia, Singapore (both systems)
India, Fiji Islands, Sri Lanka, Indonesia, The Philippines, Russia, China, Azerbaijan,
Barbados, Cayman Islands, Mongolia, Bangladesh, South Africa, Israel, Jamaica and
Slovenia, Nepal
EU pushes for accrual accounting
14
Since 1960/1961 municipalities are using the current government accounting system which was developed with
the technical assistance of UNDP and USAID at that time 2 (see also World Bank, 2007, p.2; World Bank, 2003,
p.46).
Accrual accounting activities in Nepal did not begin until the restoration of democracy in 1990. However, efforts
did not start until the Asian Development Bank (ADB) first made the implementation of accrual accounting a
condition for Kathmandu Metropolitan City (KMC) for receiving loans. As a result KMC formed a taskforce for the
implementation of accrual accounting, developed a new chart of accounts and started further preparations for
accrual accounting implementation. These efforts were financed by the then existing Kathmandu Town
Development Project.
Ever since the starting point of this discourse in Nepal, accrual accounting was usually referred to as corporate
accounting system or CAS.
Beginning in 1992 the technical assistance to Nepalese municipalities in finance and management became one of
the areas of support, provided by the udle programme. Since then efforts focussed mainly on mobilizing municipal
resources, improving municipal financial management, supporting computer skills training, computerization, DOS
based cash accounting and tax software and the reforming of the accounting system (udle, 2006).
Starting in 1996 udle supported the introduction of accrual accounting with a sensitization workshop at the UDTC
in a joint effort with MuAN.
In August 1997 udle assisted in the preparation of an accrual accounting manual which was supported in a joint
effort with the Nepali Chartered Accountants.
In March 1998 another workshop, focussing on the merits of accrual accounting as well as the above mentioned
manual was conducted for municipal accountants.
In November 1998 a six days accrual accounting training at UDTC was conducted for the accounting staff of the
municipalities of Kathmandu, Lalitpur, Bhaktapur, Butwal, Dharan, Hetauda, Pokhara, Siddharthenagar,
Dhangadhi and Biratnagar. It was sponsored by the Kathmandu Town Development Project. After that a computer
accrual accounting training was conducted for the same municipal accountants.
In June 1999 Kathmandu itself organized a two weeks training in accrual accounting for its own accounting staff.
In October 1999 the MuAN presented an agenda stressing the implementation of accrual accounting. On that
meeting KMC also announced that it would implement accrual accounting in 2001. Therefore, accrual accounting
was well established on the municipal reform agenda in Nepal around 1999.
15
In December 1999 the government of Nepal passed the Local Self Governance Act. The separately annexed
financial administration specification of this act 3 leaves the municipalities the choice between the usage of cash
accounting and accrual accounting (Nepal Legislation, 1999c, p.16). However, in the same paragraph of this act
an added statement, called 1a, rejects this option of choice by stressing that all municipalities have to
introduce accrual based accounting within five years time and thereby making accrual accounting obligatory for
all municipal governments. Hence, it provides the necessary legal base for further udle activities.
After that regulation was conceded, udle concentrated its following efforts firstly on the development of an
accrual accounting system combined with appropriate software and secondly on an accrual accounting
implementation project plan:
1)
The proposed accrual accounting system recognized accounting heads for cash, bank, receivables
(including taxes, fees etc.), payables, fixed assets (vehicles, fire engines, furniture, electric equipment, office
apparatus etc.), floating assets (consumers goods, logistics, fuel etc.), revenues, expenses, loans, funds and
reserves. However, it did not include depreciations at that time. The valuation of land usually was based on
reports, prepared by the Land Revenue Office as well as suitable market price schemes. The valuation of
buildings was undertaken by engineers of the municipality or their wards4. Movable assets were valued
according to available documents provided by the municipalities or their wards. Problems appeared in the
valuation of receivables since usually no systematic records of taxes and fees existed back then. The same
holds true for assets. All in all the system was beyond modified accrual accounting but not a full fledged
accrual accounting system.
2)
The proposed implementation project plan stretched over six months and was implemented parallel with
the existing cash accounting system. It included:
o
a system conversion phase with experimental balances (focusing mainly on cash) and the identification
and valuation of assets as well as the identification of unrecorded liabilities and revenues,
a system reporting phase that included the creation of financial statements like a balance statement and
cash flow statement by udle,
a full implementation phase supervised by udle for manual accrual accounting practice and reporting
handled by the municipal staff, and finally
the computerization of the accrual accounting system with the udle self developed DOS based accrual
accounting software.
In the first fiscal year after implementation accrual accounting was to be done both manually and computerized. If the
computerized booking was correct only computer based accrual accounting was to be continued.
3
4
16
Udle then started to assist eight municipalities in the implementation of the described accrual based accounting
system (Dharan, Butwal, Dhangadhi, Nepalgunj, Pokhara, Hetauda, Banepa and Kathmandu) (Chhetri, 2002;
udle, 2006).
The first attempts of implementation on a piloting basis were made from January 1st of 2000 onwards in Dharan
and after this in Butwal starting the implementation on February 12th of 2000 onwards.
The accrual accounting system combined with the then newly developed software, supported by udle, was fully
introduced in the fiscal year of 2001 in Dharan, Butwal, Dhangadhi, Nepalgunj and Kathmandu. In the following
year Pokhara, Hetauda and Banepa followed. However, in the post implementation phase different problems
and obstacles led to the fact that only Dharan, Butwal and Kathmandu managed to continue accrual
accounting.
Although udle assisted in the long term implementation of accrual accounting in three municipalities and
achieved a general sensitization towards accrual accounting at municipal level, the first attempts to introduce
accrual accounting in selected municipalities had only limited success.
After this, udle reduced its efforts and support in accrual accounting until 2007. However since one year udle restarted
major efforts in accrual accounting implementation and is preparing a comprehensive implementation scenario. This
report is part of this process.
Lack of sufficient training on manual as well as computerized accrual accounting practise. A proper
general training before the implementation which would have made sure that the accounting staff both knows and
understands the concept of manual and computerized accrual accounting was missing. The same holds true for
the post implementation phase, where a long term, individual needs based refresher training as well as general
technical back up and support on demand for all municipalities was missing.
Lack of conceptual clarity by the municipalities and other important stakeholders what accrual accounting
actually is. This again indicates insufficient theoretical and practical information.
17
Lack of adequate human resources in the municipalities. Accrual accounting training will hardly be successful
if a general capacity constraint in terms of human resources exists. This indicates an insufficient education system
for public servants.
Problems in the valuation process of assets: the identification, documentation as well as valuation of capital
and floating assets were major obstacles in the process. Due to that the valuation was incomplete or even
completely failed.
Lack of sufficient integrated databases: the identification and documentation of tax and fee receivables mostly
failed, caused by weak tax revenue databases.
Lack of an appropriate software solution: The DOS based accrual accounting software that was provided with
the assistance of udle, appeared to be too complicated and not very user friendly. As an aftermath municipal staff
with already low IT skill levels had difficulties applying the software. Only those municipalities succeeded to
continue with the software which had at least one well trained IT expert within their accounting section that was
capable of updating the software himself (Butwal, Dharan and Kathmandu). In addition, the provided accounting
software could not be integrated with other existing software systems. The fact that the udle supported software
was mostly designed only by a single person had the disadvantage that every municipality heavily depended on
this one programmer since the existing municipal software education was not sufficient. Also due to that udle just
did not have the capacity to support all municipalities in accounting software practice and updates in the same
way.
Lack of a clear and strong udle commitment. Udle support was neither comprehensive enough, nor long term
focused. It did not focus sufficiently on the crucial post implementation period due to own capacity constraints and
a changed working focus. In addition, the technical, political and financial support udle gave was not equal
towards all municipalities which tried implementation.
Lack of political commitment by the government, some mayors and accounting staff.
Missing links between local and national accounting practise. At the end of the fiscal year the few
municipalities that actually are using accrual accounting can not send their accrual based accounting financial
statements to the central government. The Comptroller General Office of the Nepalese Government only accepts
cash accounting financial statements for auditing and is reluctant to adjust to current accrual accounting reforms.
This creates a lot of double work for the municipalities, which was also a reason why some municipalities did not
implement accrual accounting in the first place.
Availability of own resources for extra training. This holds especially true for KMC.
Political commitment and enthusiasm existing in the municipalities by all relevant stakeholders.
Availability of information about capital and floating assets as well as databases on revenues and expenses.
18
Characteristics
Type
Type I
These municipalities successfully implemented and use the accrual accounting system including
an accrual accounting software (Dharan, Butwal and Kathmandu Metropolitan City).
They differ on their accrual accounting software and current accrual accounting practise.
Dharan and Butwal are using self updated and self managed versions of the old udle supported
DOS based accrual accounting software. However this old software is not network based and can
not integrate the databases from existing tax revenue software and house numbering information
systems.
Both Butwal and Dharan are producing financial statements including a balance statement, an
income statement and a cash-flow statement. They are used to asset management including
depreciations and debt management.
Since the implementation of accrual accounting, Butwal was even able to reduce its debt level, to
avoid deficit spending, to ease accounting in general, to report more efficiently and to improve in
terms of transparency.
KMC uses an Oracle-network based accrual accounting software, recently provided by a private
software company. This software manages to integrate different software modules (including tax,
fee and citizenship software modules) and databases, functioning as an effective data interface.
The software system is very well established, user friendly and is now effectively in practise in
19
KMC. KMC is also in the process of decentralizing this software to its wards, making it easier for
citizens to access public services. The wards function as local accounting centres and only have
a limited budget. Through the network connection the wards and the central KMC administration
will be interlinked, making it easy for the central management to supervise the activities in the
wards. The software is also able to limit access to different accounting heads and vouchers
according to the job position of the public officer. The creation of cost centres according to
projects, taxes, fees, wards, specific individuals and so on is also possible. All in all this
integrated and modular software is easy adjustable to the needs and administrative status of any
municipality and would be a sound solution for all municipalities in Nepal.
KMC is well ahead of modified accrual accounting but is not practising asset management,
meaning depreciations, and reserve allocation etc. at the moment.
Type II
These municipalities have some experiences in accrual accounting implementation but failed in
the previous attempt for explained reasons (Dhangadhi, Nepalgunj, Pokhara, Hetauda and
Banepa).
Some of these municipalities also tried to implement accrual accounting manually but
discontinued after some time and returned to cash based accounting.
These municipalities all have at least partly computerized accounting and/or tax systems and
usually are eager to restart there accrual accounting implementations efforts.
Type III
These municipalities did not try to implement accrual accounting systems but have at least partly
computerized accounting systems and some information about what accrual accounting is (e.g.
Lalitpur, Bhaktapur).
Type IV
Some of these municipalities now feel prepared to join the accrual accounting reform process.
These municipalities are not computerized, have never tried to implement accrual accounting and
also do not have sufficient information about what accrual accounting actually is (many small
and remote municipalities etc.).
All in all the municipalities of Nepal are currently under a strong pressure for reform. They are still very much
dependent on the Local Development Fee (LDF), which is a national import tax, collected by the central government
and distributed to the municipalities. The LDF accounts for over 70 percent of the municipal tax revenues (udle, 2008).
However due to the upcoming membership of Nepal in the WTO the LDF will be abolished soon. This will leave the
municipalities with a huge revenue gap. The government has not yet decided how much money on which scheme will
be distributed to the municipalities in order to partly cover this gap in the future.
Whatsoever, the municipalities are very much under pressure to increase their own revenues through local taxes and
fees but also to find ways to efficiently allocate scare resources. The implementation of accrual accounting can be
of major help in achieving these aims (see again advantages on p.5).
20
Another current incentive to implement accrual accounting is its role in the new Minimum Conditions and Performance
Measures (MC/PM) system, which was developed by MLD/LBFC with technical support of udle. Within this system the
implementation of accrual accounting is supported through monetary incentives. The MC/PM system is a performance
based tool for the distribution of grants and funds honouring outstanding institutional capacity and service delivery
function. The municipalities must fulfil an increasing number of minimum conditions (MCs) in key institutional
improvement areas. The individual performance measures (PMs) allow the distribution of funds according to
outstanding performance. The use of accrual accounting systems is one of these performance indicators (PM). Future
LGCDP expanded block grant distribution to municipalities will be based on municipal MC/PM performance.
21
The different starting points and needs of the municipalities in the process have to be adequately addressed in all stages of future implementation and post implementation
phases (see Table 1, p.18).
Drawing on the findings of the study as well as international recommendations (Athukorala & Reid, 2003, p.56-62; Wynne, 2004, p.16-20; FEE, 2003, p.10-12; IMF, 2007, p.13-14;
IPSASB, 2003) this part of the report displays a possible way of implementing accrual accounting at the municipal level.
It will start with technical recommendations and preconditions for accrual accounting as well as general recommendations and preconditions for the implementation of accrual
accounting and will be concluded with a micro and macro level implementation strategy.
Who is supporting?
In order to guarantee an effective implementation the current legal framework has to be revised. Accrual accounting activities need to have an in
Udle (MLD-GTZ),,
tune and interconnected legal framework, including an adapted municipal and national budgeting, reporting and auditing (internal and external)
Comptroller General
system. 5
Office, Institute of
Concerning that issue one has to review possible linkages to performance or outcome based budgeting as well as reporting and auditing
Chartered Accountants,
LBFC, MuAN,
For further information on national level budgeting, accounting and auditing as well as international literature please refer to World Bank, 2007; World Bank 2003 and Shah, 2007.
Currently the Comptroller General Office does not accept accrual based financial statements for external auditing purposes. This indicates that
22
consultants
existing procedures between the local and central level of government are not matched and have to be revised.
A Nepal Public Accrual Accounting Standard should be developed according to IPSAS and the Nepal Accounting Standard (NAS).
Regulations must acknowledge the different starting points and experiences of the municipalities in accrual accounting (see p.18-19).
An efficient auditing and monitoring of the implementation process combined with selected support is essential for the success of the accrual
accounting implementation.
The term Corporate Accounting System or CAS should be revised since it implies that public and private accounting are identical, which
however is not the case.
Who is supporting?
Accrual accounting guidelines and manuals are supposed to close the gap between the developed public accrual accounting
Udle (MLD-GTZ),
regulations/standards and the practical implementation, transition period and operation (see also IPSASB, 2003 and IMF, 2007).
Comptroller General
Specific technical accrual accounting guidelines and manuals which address not only accrual accounting in general but also the transition or
implementation are necessary. This is an important lesson learnt since there needs to be more clarity on how to proceed during the
Chartered Accountants,
implementation process. Information must be provided on difficult issues like the valuation methods of specific asset types, inventory,
LBFC, MuAN, ,
depreciations, debt management, revenue management, opening balance sheet, closing balance sheet, and other financial statements.
consultants
The guidelines should use standardized methods for each accrual accounting component, e.g. in the valuation of certain asset types, since many
different methods will be misleading and would be an obstacle to achieve a certain quality standard of accrual accounting across Nepal.
Conceptual Clarity
During past reforms municipal staff was not sufficiently trained and informed about the characteristics, the meaning, the scope and the
Udle (MLD-GTZ),
Comptroller General
One has to ensure that the accounting staff is capable of using and understanding the manual accrual accounting practise. Only after that
Office, MuAN
Who is supporting?
Also in this case it is important to acknowledge the different starting points and needs of the municipalities before a possible accrual accounting
implementation
23
Who is supporting?
A detailed implementation plan with major project milestones from a macro (national) as well as micro (municipal) perspective is needed to clarify
Institute of Chartered
The micro level implementation plan needs to be flexible enough to be adjusted to the different situations and needs in the municipalities
Accountants, MuAN,
The macro level accrual accounting implementation plan displays the overall national perspective of accrual accounting implementation.
company, consultants
Both types need to include specified inputs, activities, milestones, project phases, timelines, objectives and outcomes.
These plans must be available for interested stakeholders in written and digital version to enhance the transparency of the process.
Who is supporting?
Central government agencies (e.g. Land revenue office) and the municipalities have to integrate their information on assets, receivables (e.g.
MLD, Central
tax), payables etc. into one database. This has to be done before accrual accounting software implementation. Otherwise a comprehensive
Government Agencies
If these information are not available, the municipalities should start the valuation of capital and floating assets according to the guidelines well in
advance.
In the end the obtained information and databases should be integrated into a ready available accrual accounting software.
municipalities
Chart of Accounts
Who is supporting?
Before accrual accounting implementation, a new standardized chart of accounts for public accrual accounting needs to be developed.
A chart of accounts organizes the different accounting heads based on specific number digits. That makes the classification and coding of
Comptroller General
transactions and events possible, so that they can be tracked down to specific cost centres (e.g. a bus park or individuals).
The digits should be similar to the private sector chart of accounts. That would facilitate the knowledge and staff exchange between the public
Chartered Accountants, a
The chart of accounts should allow the integration of current tax reform programs in Nepal (i.e. adding PAN to four to six digit account numbers
to track tax payments).
Inventory
Who is supporting?
24
The inventory is a major component when preparing the first opening balance sheet since it identifies the movable and immovable assets which
municipalities,
The first inventory should not be too extensive and be more focused on very valuable, crucial assets or assets at risk (e.g. transport facilities,
consultants
Who is supporting?
The valuation of assets is a major component of accrual accounting that should be treated carefully.
There are various valuation methods according to the type of asset. Land should be valuated according to an average standard price per square
municipalities,
meter. The valuation of municipal buildings, streets etc. should be carried out in a very conservative way, focussing mainly on replacement
consultants
values since the municipality usually does not want to sell their office buildings or streets. Movable assets like cars and trucks can be valued
according to their purchase price or to their current market value.
In the past the Land Revenue Office was responsible for land inventory and valuation. However, municipalities should take over these functions
in the future since it is their property.
All in all valuation of assets should be conservative and not to high since it is very crucial to set appropriate depreciations, reserve allocations
and reinvestment amounts.
In addition, it should not be allowed to revaluate assets every year and thereby manipulating the equity capital. Revaluation should only happen
in defined timeframes according to an accrual accounting regulation.
Depreciations
Who is supporting
Depreciations are essential for asset management and are displaying the wear and tear of assets or net resource consumption.
The reason for the devaluation of an asset can be the simple usage or a change in current market prices.
municipalities,
In order to depreciate, one needs to estimate how long an asset can be used. In order to keep it simple, one should then depreciate on a linear
consultants
basis per fiscal period. This should be done very realistically. It is of no use to set the usage time unrealistically high in order to be able to book a
lower depreciation per fiscal period. This will only lead to the fact that e.g. a street will be already completely devalued before the planned usage
time is achieved. Therefore the street will be in a very bad condition and the municipality has no available reserves to cover these unplanned
cots. However the usage time of an asset can be reviewed after some time to adjust the estimation, if required.
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As a proposal for sustainable asset management, maintenance costs and reserve allocation for reinvestment into the asset should be connected
to the depreciation. This could be done by using a certain percentage of the booked depreciation as an estimated lump sum for maintenance
costs and reserve allocation. That way, investments might get more costly on the first glimpse but with proper planned maintenance one can
extent the usage time of an asset and, when devalued, even replace it through available reserves.
Depreciations and reserve allocation should be compulsory for crucial assets according to the individual capacity of the municipality.
Who is supporting?
It is a major and difficult task to coordinate and steer a nationwide municipal accrual accounting implementation.
Udle (MLD-GTZ),
A possible approach could be to decentralize the coordination process by empowering regionally based coordinators in the five development
Regional Coordinators,
regions (according to the Regional Learning Centres) to facilitate the implementation process. This coordinator needs to have sufficient
Regional Learning
knowledge in manual as well as computerized accrual accounting. The coordinator would be the contact person for the municipalities in the
Centres, UDTC
The Regional Learning Centres (RLCs in Dhanagadhi, Nepalgunj, Butwal, Hetauda, Dharan) could play a more active role in the facilitation of a
decentralized knowledge transfer among the municipalities in the development regions. One needs to revise if the RLCs can accomplish these
aims at the moment.
The efforts of the regional based coordinator and the RLC would provide a knowledge transfer platform within a development region.
The UDTC could be a knowledge transfer platform at the national level. One needs to revise if the UDTC currently can accomplish such a task.
Udle would primarily monitor, evaluate and control the implementation process from a macro perspective according to the implementation plan.
Secondly udle would provide technical back up on demand. Activities would be reported by the regional coordinators, the RLCs and UDTC to
udle.
Please have a look at Annex 3 and Annex 4 (p.31) to get a better impression of this implementation approach.
26
Who is supporting?
A comprehensive training and general education has to ensure that adequate human resources are available for an accrual accounting
Udle (MLD-GTZ),
implementation. These efforts also have to take the different starting points in the municipalities into account (see Table 1, p.18). This report
Institute of Chartered
1)
2)
Firstly, there should be a general training. The aim of the general training is that everybody understands the concept of manual accrual
reliable, high-level
accounting and related topics. Each course lasts 5 days and ends with final examination. For the successful participation of a course a
training institution,
certificate should be provided in cooperation with or by the Chartered Accountants of Nepal. That would be a sufficient incentive for course
participants since they have an official document that enhances their careers. The structure of the general education is as follows:
education facilities, a
a)
b)
Expenditure Administration
c)
Debt Management
d)
Asset Management (with special focus on inventory, valuation and management of municipal assets)
e)
Revenue Administration (with special focus on municipal revenue titles like taxes)
Secondly, only after successfully finishing the general training, an accrual accounting software training should be conducted. This software
training lasts 14 days and should be facilitated by the same private software company that also provides the accrual accounting software.
The concept is as follows:
3)
a)
First week the functions and possibilities of the software and its modules are presented.
b)
Second week is aimed to use the knowledge gained in exercises, ideally based on case studies from municipalities.
Thirdly, there should be further needs based training on demand and refresher trainings. Knowledge transfer between municipalities
should also be enhanced in this training category.
4) Fourthly, a mid-career degree to improve the general municipal finance capacity should be established. This degree has the aim to ensure
long term, sustainable public sector education and should not only focus on accrual accounting but also on all other important municipal
public finance and management issues (e.g. revenue and tax management). The degree could be financed to a certain level by the central
government, the municipalities and through a donor basket fund.
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Who is supporting
The is a need for a user friendly, network based, integrated and modular accrual accounting software that integrates other existing software and
Joint software
databases for accounting, tax management, fees etc. As a result receivables or payables would be much better documented and transactions
development
programmed by a private
The software needs to be easily adjustable according to the status of the municipality (a basic, standard and sophisticated versions must be
software company
available). Please see again Table 1, p.18 for the different municipality types.
However it is in the interest of all to prevent the chaos of many different software types and software languages. Therefore the property rights of
such software should be in public hands. This would also allow the cheap distribution to small and remote municipalities. The private software
company would earn its revenue through the software training, on demand services and technical back up.
Who supports?
As explained before on p. 6 accrual accounting implementation involves high fixed costs at the beginning and during the implementation phase
(training costs, consultant costs, software costs etc.). The financial resources should be provided by donors, central government funds and
community, MC/PM,
municipalities together.
LGCDP, municipalities
Another way to give monetary incentives for accrual accounting implementation is the mentioned MC/PM system (see p.19). Besides simply
supporting accrual accounting implementation with this tool, one could that way also promote specific aspects of accrual accounting. An example
would be the usage of performance targets for a proper asset management or a low debt level.
Political Commitment
Accrual accounting implementation needs the acceptance and support of all relevant stakeholders since this will ease the process significantly.
Udle (MLD-GTZ),
Therefore it is crucial to communicate the benefits of accrual accounting to local and central political parties, local and central government,
Municipalities and
political associations, civil servants, mayors and other relevant stakeholders (for advantages see p.5).
Mayors
Communication
Who is supporting
Who is supporting?
A significant emphasis should be placed in communicating necessary information about the purpose and objectives of the reform process. A
wider group should be addressed by these information, including the general public (e.g. tax payers), journalists, the scientific public finance
LBFC, Institute of
28
Chartered Accountants,
the municipalities and
mayors
Who is supporting?
Accrual accounting implementation should be understood as part of a broad based public finance reform since it will affect municipal and national
budgeting, reporting and auditing procedures in the long term as well. Moreover accrual accounting implementation should be interlinked to other
municipalities
municipal finance reforms (own resource mobilization, revenue management, expenditure management etc.). In this context one has to revise
feasible ways to integrate reform efforts e.g. in training.
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Milestones:
Milestones
1)
1)
2)
2)
3)
3)
4)
4)
5)
5)
implementation phase)
6)
6)
Software Development
7)
Budgeting
7)
8)
8)
9)
9)
Annex
05. Annex
Annex 1
IPSAS List
IPSAS 1 - Presentation of Financial Statements
IPSAS 2 - Cash Flow Statements
IPSAS 3 - Accounting Policies, Changes in Accounting Estimates and Errors
IPSAS 4 - The Effects of Changes in Foreign Exchange Rates
IPSAS 5 - Borrowing Costs
IPSAS 6 - Consolidated Financial Statements and Accounting for Controlled Entities
IPSAS 7 - Accounting for Investments in Associates
IPSAS 8 - Interests in Joint Ventures
IPSAS 9 - Revenue from Exchange Transactions
IPSAS 10 - Financial Reporting in Hyperinflationary Economies
IPSAS 11 - Construction Contracts
IPSAS 12 - Inventories
IPSAS 13 - Leases
IPSAS 14 - Events after the Reporting Date
IPSAS 15 - Financial Instruments: Disclosure and Presentation
IPSAS 16 - Investment Property
IPSAS 17 - Property, Plant and Equipment
IPSAS 18 - Segment Reporting
IPSAS 19 - Provisions, Contingent Liabilities and Contingent Assets
IPSAS 20 - Related Party Disclosures
IPSAS 21 - Impairment of Non-Cash generating Assets
IPSAS 22 - Disclosure of Financial Information about the General Government Sector
IPSAS 23 - Revenue from Non-Exchange Transactions (Taxes and Transfers)
IPSAS 24 - Presentation of Budget Information in Financial Statements
IPSAS 25 - Employee Benefits
IPSAS 26 - Impairment of Cash-Generating Assets
Cash Basis IPSAS: Financial Reporting under the Cash Basis of Accounting
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Annex
31
Annex 2
Legal Framework
Learning
Impact
Evaluation
&
Post implementation
support
Regional Monitoring
by Coordinators
Chart of accounts,
Guidelines and
Manuals
Software
Development
Piloting
&
Implementation
Training
&
Education
Annex 3
Regional Coordinator
UDTC
References
32
06. References
ADB (2002). Diagnostic Study of Accounting and Auditing Practices in Selected Developing Member Countries. Link:
http://www.adb.org/Documents/Books/Diagnostic_Study_Accounting_Auditing/Selected_DMCs/default.asp#c
ontents (Last Review on: 25.08.2008).
Athukorala, S. & Reid, B. (2003). Accrual Budgeting and Accounting in Government and its Relevance for Developing
Member Countries. Asian Development Bank. Link:
http://www.adb.org/Documents/Reports/Accrual_Budgeting_Accounting/Accrual_Budgeting_Accounting.pdf
(Last review on: 11.08.2008).
Boothe, Paul (2007). Accrual Accounting in the Public Sector: Lessons for Developing Countries. In Shah, Anwar (Ed.).
(2007). Budgeting and Budgetary Institutions. (pp. 179-201).Link:
http://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdf (Last review
on: 11.08.2008).
CESifo (2007). Accrual Accounting in the Public Sector. Link: http://www.cesifogroup.de/pls/guestci/download/CESifo%20DICE%20Report%202007/CESifo%20DICE%20Report%203/200
7%20/dicereport307-db1.pdf (Last review on: 25.08.2008).
Champoux, Mark (2006). Accrual Accounting in New Zealand and Australia: Issues and Solutions. Link:
http://www.law.harvard.edu/faculty/hjackson/NewZealand_Australia_27.pdf (Last Review on: 22.08.2008).
Chhetri, Ram B. (2002). Local Government Finance.
Chu, Teh Ben (2008). Accrual Accounting in the Public Sector. In ACCA (2008). International Public Sector Bulletin:
11. (p.9). Link:
http://www.accaglobal.com/pubs/publicinterest/activities/library/public_sector/ipsb/archive/2008/11/tech_ips_
011.pdf (Last review on: 22.08.2008)
CPA Australia (2004). Singapore reform. Link: http://www.cpaaustralia.com.au/cps/rde/xchg/SID-3F57FECA6FB905F0/cpa/hs.xsl/724_4339_ENA_HTML.htm (Last review on: 25.08.2008).
Diamond, Jack (2002). Performance Budgeting Is Accrual Accounting Required?. IMF Working Paper 02/240. Link:
http://www.imf.org/external/pubs/ft/wp/2002/wp02240.pdf (Last review on: 11.08.2008).
Diamond, Jack & Khemani, Pokar (2005). Introducing Financial Management Information Systems in Developing
Countries. IMF Working Paper 05/196. Link:
http://www.imf.org/external/pubs/ft/wp/2002/wp02240.pdf (Last review on: 11.08.2008).
FEE (2003). The Adoption of Accrual Accounting and Budgeting by Governments (Central, Federal, Regional and
Local). Link:
http://www.fee.be/fileupload/upload/Adoption%20of%20accrual%20accounting%20and%20budgeting%20by
%20governments%20030716%20WEB1532005161540.pdf (Last review on: 22.08.2008).
References
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References
34