The National Treasury is banking on a new reporting method to 'significantly' reduce pending bills, offering a reprieve to State suppliers and contractors who have been hurt by delayed payments.
From this month, reporting by the national government will shift to accrual basis accounting from the cash-basis, which has been in place for the last nine years.
Accrual accounting is a financial accounting method that allows you to record revenue before receiving payment for goods or services sold and record expenses as they are incurred. In other words, the revenue earned, and expenses incurred are entered into your journal regardless of when money exchanges hands.
Cash basis of accounting, on the other hand, records revenue when the goods and services are actually paid for.
The Treasury plans to spend Sh3.15 billion over three years to transition from the cash basis accounting.
The accrual accounting method makes it mandatory for State agencies to capture payments and expenses when earned or incurred, or when a transaction occurs.
With the cash basis of accounting, revenue or expenses are recorded during the period in which actual cash is received or paid, a feature that has contributed to the build-up in pending bills.
The National Treasury Principal Secretary Chris Kiptoo said the accrual basis accounting will significantly minimise the issues of pending bills compared to the cash-based reporting framework.
“Currently, the National Government MDAs and County Governments do not recognise pending bills as payables in their balance sheet since they are on the cash basis of accounting. This means that all pending bills are maintained outside of IFMIS (Integrated Financial Management Information System) thus making them difficult to track and verify,” he said.
“Accrual accounting will enhance the management of pending bills as it will require pending bills at each reporting period to be recognised in the balance sheet in line with IPSAS 41. This will facilitate subsequent tracking of payments against the bills by the accounting officers and facilitate decisions on long outstanding bills,” the PS added.
Pending bills, or arrears, have continued to accumulate despite numerous circulars and directives issued by the National Treasury, leaving many State suppliers in financial straits.
By September last year, the national and county governments owed suppliers and contractors a total of Sh631.56 billion. State corporations were the biggest debtors at Sh509.37 billion, with the balance owed by county governments, ministries, departments, and agencies (MDAs).
The Pending Bills Verification Committee indicated that it had earlier cleared arrears valued at Sh110 billion as genuine, with Kiptoo saying the rest would be verified in the subsequent reports.
Dr Kiptoo, however, warned that accrual-based accounting on its own cannot end the pending bills menace.
He said there is a need to accompany the roll-out of the accrual basis with other reforms on financial discipline, adherence to procurement laws, issuance of guiding circulars and regulations, and enforcement of contractual obligations.
The National Treasury and the Public Sector Accounting Standards Board on August 8, 2014, approved adoption of the international financing reporting standards in which all State ministries, departments, constitutional and independent officers, agencies, and county government executives and assemblies were to shift to cash-based accounting standard for financial reporting.