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On October 3, 2024, Kenya’s National Treasury officially announced the commencement of the transition from cash-basis accounting to the International Public Sector Accounting Standards (IPSAS) accrual basis. This marks a significant move in reforming public financial management, aimed at enhancing transparency, accountability, and providing a clearer financial picture of the government’s position.

Why the Transition?

For many years, the Kenyan government has used cash-basis accounting, a simpler method where financial transactions are recorded only when cash is exchanged. While effective for basic financial management, this system has limitations when it comes to capturing the full scope of government obligations, such as outstanding bills and liabilities. As Kenya’s economy has grown, so has the complexity of its finances. The National Treasury recognized the need for a more comprehensive accounting approach to better reflect the nation’s financial health.

Under accrual accounting, revenues and expenses are recognized when they are earned or incurred, irrespective of when cash is exchanged. This method offers a fuller picture of the government’s financial position, including its assets, liabilities, and overall financial health. This data is vital for making informed decisions, managing public resources more effectively, and ensuring long-term economic sustainability.

The Journey to Accrual Accounting

The transition was first recommended by the National Treasury and the Public Sector Accounting Standards Board (PSASB), and on March 7, 2024, it received approval from the Cabinet. The new framework was gazetted on August 30, 2024, marking the formal start of the process. A steering committee, chaired by the Principal Secretary of the National Treasury, has been appointed to oversee the transition. The process will unfold over the next three years, with the goal of having the first accrual-based financial statements ready for the fiscal year ending June 30, 2025.

This reform is not a stand-alone effort; it builds upon over a decade of public financial management enhancements. The groundwork for this transition was laid by the 2010 Constitution and the Public Financial Management (PFM) Act of 2012, which introduced the PSASB in 2014. Since then, Kenya’s Ministries, Departments, Agencies (MDAs), and County Governments have progressively improved their financial accounting practices, positioning them well for this shift.

What Does the Transition Involve?

The adoption of accrual basis accounting is a complex process that will require significant changes to current financial practices. Key areas of focus include:

• Asset and Liability Valuation: Accrual accounting requires precise recognition and valuation of government assets and liabilities, including public debt, pension liabilities, and pending bills.
• Enhancement of IFMIS: The Integrated Financial Management Information System (IFMIS) will be upgraded to support the new accounting standards.
• Capacity Building: Training and support will be provided to public sector personnel to ensure they are equipped to manage accrual-based financial reporting.
• Standard Chart of Accounts (SCOA): A revision of the existing SCOA will be necessary to accommodate accrual accounting entries.

Despite the challenges, the National Treasury is confident that the steering committee, together with key stakeholders, will successfully guide the transition.

What Does This Mean for Kenya?

By adopting accrual-based accounting, Kenya will align its public sector financial management with international best practices, providing more transparent and accurate financial reporting. This transition will:

• Improve the government’s ability to manage resources efficiently.
• Present a clearer picture of public finances, particularly concerning obligations like pension liabilities and public debt.
• Enhance decision-making through more reliable financial data.

Ultimately, this move is expected to strengthen Kenya’s economic management and accountability, contributing to sustainable growth.

Conclusion

Kenya’s transition to accrual basis accounting is a historic step toward greater fiscal transparency and responsibility. By providing a more accurate representation of the government’s financial position, this reform aligns with global standards and prepares Kenya for more robust and efficient financial management in the future.

The National Treasury, in partnership with both domestic and international stakeholders, remains committed to navigating this shift successfully, ensuring Kenya’s public finances are managed with greater openness, accountability, and foresight.