By Owen Mavengere
IN a previous article on the relevance of accounting in a technologically advancing world I referenced measuring financial performance of an organisation.
I mentioned key concepts of accrual accounting and cash accounting. These are interesting concepts, which I want to touch on today and explain in layman terms.
However, right at the outset, I must put a disclaimer that this article is highly summarised and must not in any way be taken as a substitute of the actual textbook definitions, particularly by those still pursuing their education.
According to the conceptual framework (p1.17) from IFRS Foundation, “Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.
“This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period.”
In other words, a transaction is recorded as soon as it happens even if the payment has not yet occurred. This recording is done by both the provider and recipient of the goods or services with each party recording the respective entries which are usually a mirror of what the other party has recorded, assuming they both make use of accrual accounting.
According to Investopedia, “Cash accounting is an accounting method where payment receipts are recorded during the period in which they are received, and expenses are recorded in the period in which they are actually paid. In other words, revenues and expenses are recorded when cash is received and paid, respectively.”
In simpler terms only when something is actually paid for, does one then record the transaction. This is a very simple way of accounting and does not require any formal training. In fact, most people consciously or subconsciously carry out this form of accounting in our day to day lives.
Pros and cons of each
The advantages of cash accounting include its simplicity and the ability to be carried out by virtually anyone without the need for complex training.
The major drawback is that transactions are not recorded immediately simply because payment has not been made thus making it difficult to track the transactions.
It, therefore, means one cannot reliably measure the financial performance of the entity making use of cash accounting. Significant commitments are not shown until paid for, thus a lot of information is missed resulting in the inability to make any meaningful analysis or decision.
Accrual accounting, on the other hand, is slightly more complex and thus requires one to be conversant with accounting frameworks such as the International Financial Reporting Standards (IFRS), International Public Sector Accounting Standards (IPSAS) and IFRS for SMEs.
The local regulator, the Public Accountants and Auditors Board (PAAB) through Statutory Instrument 41 of 2019, Public Accountants and Auditors (Prescription of International Standards) Regulations adopted these frameworks and more.
These are international frameworks, therefore compliance would imply that accounts prepared can be analysed and compared at a global level.
The aforementioned instrument also highlights that, “In the case of any inconsistency between a local pronouncement issued by the Board through a notice in the Government Gazette and any international standard, the local pronouncement shall take precedence to the extent of the inconsistency.” In other words, the standards can essentially be domesticated if necessary.
The major advantage of accrual accounting is that it allows for better assessment of performance as no transactions are omitted from being recorded simply because cash has not yet been paid.
All the transactions are recorded when they occur and if there has been no payment, then the corresponding debtor or creditor (receivable or payable) is also shown.
Making use of accrual accounting gives useful information thus allowing for better analysis and decision-making as well as improving accountability and transparency.
For this section I want to split organisations into those with a profit motive, public institutions including governments and non-profit organisations.
Most ‘for-profit’ entities make use of accrual accounting using for example IFRS or the simplified IFRS for SMEs in order to benefit from the above stated advantages.
Non-profit organisations use varied approaches with some using combinations or hybrid frameworks. Currently, there is an on-going project by Humentum and Chartered Institute of Public Finance and Accountancy (CIPFA) to come up with a framework specifically suited for these non-profit organisations.
Lastly, some public entities and most governments predominantly make use of the cash basis or a mixture of cash and accrual bases.
Most individuals have an interest in what the governments in their own nations are doing, particularly here in Zimbabwe where trust in my view is lacking.
Public perceptions, some justified and some being speculation, are a major concern in the trust deficit currently within the nation when it comes to accounting and ultimately accountability.
As a result, I will now shift the focus of the article to then consider what the governments of the world and that of Zimbabwe are doing and how they account for their activities.
Governments and public sector
According to the International Federation of Accountants (IFAC) and CIPFA International Public Sector Financial Accountability Index status report which looked at 165 jurisdictions, only two African jurisdictions make use of accrual accounting as of 2020.
Asia fares better with seven while Latin America and the Caribbean has nine. European countries are also not an exception as some have not fully adopted accrual accounting with a roadmap currently adopted to increase accrual adoption.
The Zimbabwe case
The Ministry of Finance and Economic Development took the decision to migrate Zimbabwe to accrual reporting by 2026. This will be done using IPSAS standards from IFAC’s IPSAS Board.
These are the same standards that as highlighted above, were adopted officially by PAAB in 2019. This is a bold move, which will see Zimbabwe’s financial reporting improve significantly.
The increased accountability and transparency will hopefully see better decision-making. The government is going through their National IPSAS Framework Implementation Project, which has already seen some ministries being selected as pilot departments to trial the accrual accounting framework.
Professional Accountancy Organisations (PAOs), such as Institute of Chartered Accountants of Zimbabwe (Icaz), have thrown in their support by offering training courses on IPSAS or actually creating special designations specifically meant for the public sector professionals. The adoption of accrual accounting by the government is expected to improve accountability, transparency and decision-making.
- Mavengere is the technical manager at the Icaz, which is the largest and longest standing PAO in Zimbabwe, having been established on January 11, 1918, and is a body corporate incorporated under the Chartered Accountants Act (Chapter 27:02). Icaz provides leadership on the development, promotion and improvement of the accountancy profession focusing in the areas of accounting education, assurance, good governance practices and leadership and organisational excellence. — firstname.lastname@example.org or Twitter: @OwenMavengere.