TOPIC THREE: BASES OF

PUBLIC
SECTOR ACCOUNTING
AND REPORTING
IBRAHIM YUSUF

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INTRODUCTION
• Tanzania has adopted the international public sector
accounting standards from 2013. By virtue of this fact, the
preparation of public sector financial statements will be
governed by IPSAS. This has given the country credibility
on reporting systems among users as the standards will
facilitate comparability between different years and against
other nations
• The framework for preparation of financial statements
under IPSASs recognizes two governmental accounting
systems which include cash basis of accounting and accrual
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basis of accounting.
INTERNATIONAL PUBLIC SECTOR
ACCOUNTING STANDARDS (IPSAS)
• International Public Sector Accounting Standards (IPSAS) are a set of accounting standards issued by
the IPSAS Board (IPSAS Board) for use by public sector entities. IPSAS are broadly based on
International Financial Reporting Standards (IFRS) issued by the International Accounting Standards
Board (IASB). In this regards public sector entities include national governments, regional governments,
local government and related government entities such as agencies boards, commission and enterprise.
• The use of IPSAS also ensures that financial statements are comparable for organisations that adopt
them. The application of the IPSAS gives bodies incorporated under public law greater significance
through comparability with general and internationally recognized regulations for submitting accounts.
This facilitates dealing financiers and simplifies communication with the general public. Though IPSAS
Board has no power to compel countries to adopt the IPSAS standard, the standards play a vital role in
the accounting of national public sector of various countries. Many countries, including Tanzania have
already introduced IPSAS to account for government accounts.
• When preparing general purpose financial statements on an international level, the standards and
framework applicable are the IAS / IFRS, in the case of private sector entities, and the International
Public Sector Accounting Standards (IPSAS), in the case of public sector entities. While the IPSAS are
IAS / IFRS changed to meet the requirements of public sector entities, the IPSAS state that where
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is no currently applicable IPSAS, the IAS / IFRS should be looked to for guidance on disclosure on
accounting events.
CASH BASIS OF ACCOUNTING – CASH IPSASS
• Cash basis means a basis of accounting under which a transaction and
other events are recognized when cash and cash equivalent is received
or paid.
• Under cash basis IPSAS the transactions and other events in the
accounting records are recognized in the financial statements only if
cash is received or paid.
• Under cash basis of accounting, expenses are recorded when expenses
are actually paid and revenue is recorded when cash is actually
received. The primary focus is on the amount of cash in the bank, and
the secondary focus is on making sure all bills are paid. Little effort is
made to match revenues to the time period in which they are earned, or
to match expenses to the time period in which they are incurred.
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• Under the cash basis of accounting movement of cash is used as the
basis of recognising income and expenses in the financial statements.
• Under the cash basis of accounting:
• An income is recognised once cash is received, irrespective
whether goods or services have been supplied or not.
• An expense is recognised once the payment is made, whether
benefit has been received or not.
• In other words, income is recognised as it is received in the
form of cash and expenditure is recognised as money is paid.
The treatment of capital is also same and is dependent on
receipt or payment of cash. Therefore purchase of fixed assets is
not treated as a capital expenditure items under cash basis of
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accounting. They are written off as revenue expenditure in the
years of purchase.
FINANCIAL STATEMENT UNDER
CASH BASIS IPSAS
• Under the cash basis, an entity should prepare and present general purpose financial
statements which include the following components:
(a) a statement of cash receipts and payments which:
(i) recognizes all cash receipts, cash payments and cash balances controlled by the
entity; and
(ii) separately identifies payments made by third parties on behalf of the entity
(b) accounting policies and explanatory notes; and
(c) when the entity makes publicly available it’s approved budget, a comparison of
budget and actual amounts either as a separate additional financial statement or as a
budget column in the statement of cash receipts and payments in accordance with
this Standard.
• When an entity elects to disclose information prepared on a different basis from
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cash basis of accounting as defined in this Standard such information should be
disclosed in the notes to the financial statements
ADVANTAGES OF CASH BASIS OF
ACCOUNTING
• The advantages of this basis include the following:
(a) It is simple to understand and eliminates the accrual entries at
the year-end.
(b) It eliminates existence of accruals and prepayments
(c) It permits easy identification of those who authorise payments
and collect revenue.
(d) It allows for comparison between the amount provided in the
budget and that actually spent.
(e) It saves time and is easy to operate.
(f) The cost of fixed assets is expensed off in the year7 of
purchase, resulting in fewer accounting entries
DISADVANTAGES OF CASH BASIS
• The disadvantages of this basis include the following:
(a) No depreciation is provided for fixed assets as the entire amount is
written off in the year of purchase.
(b) The financial statements will not give a true and fair picture as the
accrual principle has not been followed.
(c) As the cash basis does not give information regarding trade payables,
receivables and fixed assets, important decisions cannot be taken using cash
basis financial statements.
(d) The principle of matching concept is also violated using cash basis of
accounting.
(e) The financial statements will not give information regarding the
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liabilities as they are accounted only on settlement basis. Therefore the net
worth of the entity is difficult to estimate.
ACCRUAL BASIS OF ACCOUNTING –
ACCRUAL IPSASS
• Accrualaccounting requires transactions to be recognised as the underlying
economic events occur, regardless of the timing of the related cash receipts and
payments.
• Accrual basis means a basis of accounting under which transactions and other events
are recognised when they occur and not when cash and cash equivalent is received
or paid. Therefore the transactions and events in the accounting records and
recognised in the financial statements of the periods to which they relate.
• Applying the accrual basis of accounting revenues are recognised when income is
earned, and expenses are recognized when liabilities are incurred or resources
consumed. This is different from the cash-accounting basis of accounting under
which revenues and expenditures are recognised when cash is received and paid
respectively.
• Accrual basis of accounting under the public sector would involve recording 9

transaction on the basis of their accrual and preparing financial statements using the
underlying assumption of accrual basis.
EXAMPLE 1
• Nachingwea city council had the following transactions
during the period ended 31 March 2013:
(i) Received Tshs10 million on 20 Feb 2013 from Korosho
Company for completing a project which will be completed
in two years’ time.
(ii) Paid Tanesco for electricity bill, a total of Tshs5.6
million on 15 March 2013 out of which Tshs800,000 relates
to electricity prepayment for the coming year, i.e. 2014.
• Required:
• Calculate how much should be treated as revenue or 10

expenses under both cash and accrual basis.

ANSWERS
• Cash basis
(i) Entire Tshs10 million will be recognised as revenue in the
year ended 31 March 2013.
(ii) Entire Tshs5.6 million will be recognised as expense in the
year ended 31 March 2013.
• Accrual basis
• (i) Tshs10 million will be recognised as revenue over a two year
period on the basis of percentage of completion of contract.
• (ii)Tshs4.8 million will be recognised for the year ended 31
March 2013 and Tshs800,000 will be shown as pre-payment.
Tshs800,000 will then be recognised as an expense for the 11year
ended 31 March 2014.
ANSWERS
• Cash basis
(i) Entire Tshs10 million will be recognised as revenue in the
year ended 31 March 2013.
(ii) Entire Tshs5.6 million will be recognised as expense in the
year ended 31 March 2013.
• Accrual basis
• (i) Tshs10 million will be recognised as revenue over a two year
period on the basis of percentage of completion of contract.
• (ii)Tshs4.8 million will be recognised for the year ended 31
March 2013 and Tshs800,000 will be shown as pre-payment.
Tshs800,000 will then be recognised as an expense for the 12year
ended 31 March 2014.
ADVANTAGES AND DISADVANTAGES
• Advantages of Accrual Basis
(a) It takes a realistic view of financial transactions as transactions are recorded
on an accrual basis.
(b) Financial statements reveal an accurate picture of the state of financial affairs
at the end of the period.
(c) It could be used for decision-making as all parameters for performance
appraisal are available.
(d) It is in line with the matching concept as all the expenses and income
pertaining to the period is recorded.
(e) It records fixed assets when they are purchased and makes allowances for the
diminution in the value of assets used to generate the revenue of the enterprise.
• Disadvantages of Accrual Basis
(a) It is difficult to understand, especially by the non-accountants. 13

(b) It involves lot of year-end entries for recording accruals

WHAT ARE ACCOUNTING STANDARDS?
• An accounting standard is a guideline for financial accounting, i.e. how a
firm prepares and presents its business income and expense, as well as its
assets and liabilities.
• In other words, accounting standards prescribe accounting principles to be
applied in preparation of the financial statements. Generally, a principle is a
fundamental truth that is always accepted. However in accounting,
principles relate to an accepted guidance or method. If there is no
uniformity in the principles followed by different organisations in
preparation of financial statements, nobody will be in a position to interpret
the financial statements and draw any conclusions. To overcome this
difficulty, certain standard principles for preparation of financial statements
are given. In accounting terminology we use the words “International
Public Accounting Standards”, “International Accounting Standards (IAS),
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International Financial Reporting Standards (IFRS) or Generally Accepted
Accounting Practices (GAAP)” instead of ‘Principles’.
IPSAS
• The International Public Sector Accounting Standards Board (IPSASB) of the
International Federation of Accountants focuses on the accounting, auditing, and
financial reporting needs of national, regional, and local governments, related
governmental entities, and the constituencies they serve.
• IPSASB has currently issued 32 accrual-based standards and one comprehensive
cash-based standard on accounting for public sector entities. All standards are
principally published in English. The IPSAS aim to improve the quality and
transparency of public sector financial reporting as well to enhance governments'
financial management capabilities.
• The IPSASB is developing standards based on the IFRS/IAS issued by the IASB.
IPSAS are modelled around the International Financial Reporting Standards
(IFRS.) The use of IPSAS also ensures that financial statements are comparable for
organisations that adopt them. The application of the IPSAS gives bodies
incorporated under public law greater significance through comparability with
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general and internationally recognised regulations for submitting accounts. This
facilitates dealing financiers and simplifies communication with the general public
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ACCOUNTING MODELS
• Accounting models are a set of basic assumptions,
concepts, principles and procedures that determine the
methods of recognizing, recording, measuring and
reporting of the entity’s financial information
• There are various models of accounting under which
the financial statements can be prepared. Some of the
popular models of accounting include:
• Cash basis Accounting
• Accrual basis accounting 18

• Commitment basis accounting

COMMITMENT ACCOUNTING
• Government accounting is different from private sector accounting. The private
sector focuses primarily on the bottom-line which is profit, unlike public sector
where the bottom line is a budget framed for an activity. The budget represents the
legal embodiment of government policy.
• Commitment accounting is the process of earmarking or setting aside funds in
response to a purchase requisition. These funds remain committed (encumbered)
until the purchased good or service is paid for, after its receipt, thereby converting
the encumbrance into expenditure.
• Under the commitment basis of accounting, expected expenditures recorded in the
accounting system as commitments. Authorized expenditure (budget) is reduced by
commitments which have not been liquidated (i.e. not been followed by a cash
payment). However, when the cash payment occurs, the sum committed is
extinguished
• The available budget for spending is often referred to as the “free balance” where:
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• Free balance = budget – (commitments + obligations + actuals)

IMPORTANCE AND APPLICABILITY OF
COMMITMENT ACCOUNTING IN PUBLIC SECTOR
• Where the financial system cannot generate the accrual, an accounting system on basis of
commitments is more useful. This might mean that the budgetary control report will include
additional columns to show the value of budget committed by the budget holder.
• Commitment accounting is seen as an aid to financial control, as once charged on budget
provision; it updates the available resource on the budget line. The comparison of spending
plus the committed budget with the available budget is more meaningful and the remainder
budget for the year can easily be determined.
• Helps in planning for the future costs.
• Predicting budget variances to speed up or slow down spending to meet government
objectives.
• Adjustment made on expenditure when commitment has been done does not affect the final
accounts.
• It is in alignment with the accounting matching principle.
• It takes the realistic view of the financial transactions and ensures that the funds are available
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for any expenditure which is planned