Kenya’s National Treasury has directed accounting officers to assess and value the stock of public inventories to be included in the government’s single balance sheet in the second year of the shift to accrual accounting.

The project, supported and supervised by the World Bank and the International Monetary Fund (IMF), seeks to establish the true picture of the government’s financial position on a quarterly and annual basis by identifying and valuing the assets and liabilities of the government.

National Treasury Principal Secretary Chris Kiptoo says valuation of public inventories forms a key component of the second phase of the government’s transition from cash-based to accrual accounting standards.

Dr Kiptoo, in a draft circular to all accounting officers in ministries, departments and agencies (MDAs), constitutional commissions and independent offices, county executives, county assemblies and other county government entities dated November 5, says historical cost should be used for the initial measurement of inventories and net realisable value for subsequent measurement.“The historical cost of inventories shall comprise all costs of purchase, cost of conversion, and other costs incurred in bringing the inventories to their present location and condition,” he says in the circular seen by TheEastAfrican.

Kenya has set a three-year (2024-2027) roadmap to fully shift its financial transactions to an accrual basis of accounting from the current cash-based system, with an aim of consolidating the government’s total assets and liabilities onto a single balance sheet that provides the government’s true financial position and helps save on the exorbitant cost of foreign loans.

By disclosing the assets and liabilities of the government in a balance sheet, the National Treasury says the policy shift will help bolster transparency in the management of public debt and pending bills and help the government negotiate for cheaper loans from foreign lenders to support budgetary operations.

According to the circular, all transitioning entities included financial assets and financial liabilities on their balance sheet in the 2024/2025 fiscal year, while in the 2025/2026 fiscal year transitioning entities will recognise inventories together with financial assets and financial liabilities in their balance sheet.

This means in the 2025/2026 fiscal year there will be one statement of financial position as at June 30, 2026 and a comparative year being the audited statement of financial position as at June 30, 2025.“Remember we are fully recognising financial assets, financial liabilities and inventories,” Dr Kiptoo says.

Others are Posta stamps, harvested agricultural produce, land or property held for sale, ammunition and military assets, stock of unissued currency, education/training materials and strategic stockpiles.

The inventories will initially be valued based on historical cost and net realisable value for subsequent measurement.

The new accounting plan was approved by the Cabinet in March 2024 and involves a shift of government operations from a cash-based system to an accrual system of accounting.

It seeks to paint a more comprehensive picture of the government’s financial position and provide full disclosures on public debt, whose legitimacy and usage of proceeds have become a matter of public concern.

Kenya’s cash accounting, which has been in force for the last 10 years, exclusively focuses on cash that has been received, meaning that only transactions where cash has been received are recorded in government books.

This is contrary to the accrual accounting system, which recognises revenues that have already been earned and expenses that have already been incurred, irrespective of actual cash movement.

Under the cash-based accounting system not all fixed assets and liabilities are recorded in government books and things like public debt liabilities and pending bills are not found in government books because of cash accounting.

Currently, pending bills, pension liabilities and public debt are not recorded in government books but in separate government registers, a move that has, for instance, made it difficult to relate public debt to particular projects, according to the National Treasury.

Under the cash accounting system a balance sheet cannot be prepared since there are no assets and liabilities.

The total project cost is estimated at KSh3.1 billion ($24.03 million) for both national and county governments, with most of the funds going towards valuation of the assets and enhancing ICT equipment and servers.

Within the three-year period (2024/2025 to 2026/2027) the National Treasury will focus on the identification and valuation of the government’s fixed assets, total overhaul of the Integrated Financial Management Information System (Ifmis) to a new version compatible with the accrual accounting system and conversion of the standard chart of accounts (government expenditure codes) from cash system to accrual system.

© Copyright 2022 Nation Media Group. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info).