ACCRUAL IPSAS AS THE GOLD STANDARD

Accrual-based IPSAS is meant to ensure complete, honest, and transparent accounting in the public sector. It provides for mandatory initial measurement and recognition of all noncurrent assets, as well as their subsequent measurements. Unlike the Cash-based financial statements, Accrual-based IPSAS financial statements allow you to see the position of not only the Income and Expenditure, but also the Assets and Liabilities.

Every reasonable question about an entity’s financial status or health can be answered by looking at its financial statements, which flow directly from the double-entry bookkeeping principle. This is a clear and pleasant departure from cash-based accounting, where only payments and receipts are shown on the face of the financial statements.

Nigeria spent about three years preparing for the take-off of the accrual-based IPSAS in 2016. It is reasonable to have expected this preparation to include changing accounting procedures and documentation from cash- to accrual-based procedures. Although the Office of the Accountant-General of the Federation had released an Accounting Manual for implementing accrual IPSAS, most public sector entities are still stuck with their cash-based accounting method due to the lack of training to align the old procedures with the new ones and the lack of executive will to enforce compliance.

Due to these lapses, financial transactions comprise Journal entries for Receipts and Payments only, even where accounting software is used. Many State and Local governments have contracted out the task of preparing financial statements and budget reports to accounting firms due to the absence of an automated system to generate reliable financial statements. Often, these reports are prepared in arrears due to the lack of proper tools for real-time data capture and collation.

Practical Implementation Procedures for an Accrual-Based Accounting System

Successful implementation of the transition from cash-based accounting to an accrual-based accounting system requires a change in methods and procedures. The accounting manual and procedures must be redesigned based on the bookkeeping workflow of accrual accounting.

Cash-based accounting is an incomplete bookkeeping method. You recognise the expense when cash is paid and recognise sales when cash is received. The only documentation required for such transactions is Payment and Receipt vouchers. These two documents provide input data for recognising expenditure and revenue for cash-based accounting in a computer-based system. Accrual-based accounting demands the recognition of expense when the expense is incurred—independent of when the payment is made—while sale is recognised when the goods or services are delivered—not necessarily when the cash is received. A complete transaction involving purchase or sales under the accrual accounting method is a two-stage process:.

1. Recognition of expense (or revenue) and creditors and other liabilities.
2. Cash Payment or Receipt.

Each of these two stages requires separate documentation as follows:

• Purchases (and Sales) Invoice Vouchers—when the expense is incurred, or the sale is made. This document should state the vendor’s price, value-added tax, discount, or other rebates. If possible, provision should be made for the relevant segment codes in the chart of accounts.
• Payment (and Receipt) Voucher—to enable/acknowledge the payment or receipt. This document should show the gross amount on the vendor’s invoice and the net amount payable after the following deductions (which must also appear on the document): Value-added tax, Withholding Tax, and Stamp Duty.

Payment and Receipt Vouchers are what the public sector is familiar with because of the cash accounting culture. However, under accrual accounting, Purchases and Sales Vouchers are mandatory parts of the accounting process, due to the need to recognise expenses or sales (on an accrual basis), independent of Payment or Receipt.

“Capital Expenditure” as a Misnomer Under Accrual IPSAS

The challenge of transitioning from cash-based accounting to Accrual IPSAS is more acute with Non-current Assets. The classification of expenses into Recurrent and Capital Expenditures is a common and accepted practice under Cash-based IPSAS accounting. However, under Accrual IPSAS, “Capital Expenditure” is classified as Noncurrent Assets.

Under the International Financial Reporting Standards (IFRS), there is no classification known as “Capital Expenditure.” What is called “Capital Expenditure” in the public sector is not an expenditure—it is the total cost incurred for acquiring an asset. With accrual IPSAS accounting, the credit side of this cost goes to Cash, while the debit side goes to Non-current Assets. Therefore, Capital Expenditure, popularly known as Capex, which is a feature of cash-based public sector accounting, is a misnomer under Accrual-IPSAS and IFRS.

In Nigeria’s Accrual IPSAS National Chart of Accounts, all the items that used to be under Capital Expenditure (Code 23) in the Cash-based National Chart of Accounts have been moved to Non-current Assets (Code 32) under Assets. Although the Capital Expenditure sub-account is still retained in the Accrual IPSAS National Chart of Accounts, there is only one line item, R&D EXPENSE, under it.

To compensate for the reporting challenge that might arise from the elimination of the CAPITAL EXPENDITURE as an Expenditure account subclass, the CASH AND BANK BALANCES accounts class has been segregated to enable the classification and recognition of payments for Non-current Assets in the Cashbook, for different categories of assets, in a format similar to Capital Expenditure. Under CASH AND BANK BALANCES, you will find the following set of accounts:

• 31020101 — CASH BALANCE: CAPITAL
• 31020102 — CASH BALANCE: PERSONNEL
• 31020103 — CASH BALANCE: OVERHEAD
• Etc.

With this classification, it is still possible to account for capital expenditure (as an asset and not as expenditure) based on cash outflows. However, details of each capital item are confined to the Non-current Asset register. In terms of financial reporting, what this means is that if you want to know what has been spent on Capital, all that is required is to look at the credit side ofCASH BALANCE: CAPITAL. This could serve as the Capital Expenditure report.

Accounting for Capital Expenditure under cash-based IPSAS involves the following accounting entries:

• Debit Expense
• Credit Cash

However, under accrual IPSAS, the accounting entries are as follows:

• Debit Noncurrent Asset (Dr.)
• Credit Cash Balance: Capital (Cr.)

This translates to decreasing one asset (Cash) and increasing another asset. This means that, in the financial statements, the initial values of each asset will appear on the credit side of the Cash Book, while the Carrying Value or Subsequent Value (also known as the Net Book Value) can be computed by subtracting total depreciation on the asset from the debit side of Non-current Assets.

The challenge of transitioning from Capital Expenditure to Non-current Assets is made complicated because the Federal Budgets are still being prepared on a Cash basis, using codes under Capital Expenditure in the old Cash-based National Chart of Accounts. There is no one-to-one correspondence between the Capital Expenditure accounts from the old chart of accounts (used for budgeting) and the Non-current Assets accounts in the new Accrual IPSAS chart of accounts.

Professional judgement will be required for mapping budget estimates into Non-current Assets accounts for budgeting and reporting. Resolving the challenges this disparity poses will require synergy between the Office of the Accountant-General of the Federation and the Budget Office.

ExpressBook PSA IPSAS-Compliant accounting software comes with a comprehensive Fixed Asset module, integrated with the National Chart of Accounts, to enable uniform Classification and uniform application of Measurement policies. It provides for initial and subsequent measurements based on either Cost (Depreciation) or the Revaluation method, with various report options.

I will examine other important topics on accrual IPSAS accounting under the Treasury Single Account (TSA) of the Federal Government of Nigeria in my subsequent posts.