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Urban Development through Local Efforts

Programme
A joint programme of the Ministry of Local Development (MLD) and
the German Technical Cooperation (GTZ)

Accrual Accounting
in the Nepalese Municipal Public Sector

December 2008

Abbreviations and Acronyms


ADB

Asian Development Bank

GTZ

German Technical Cooperation

IAS

International Accounting Standards

ICAN

Institute of Chartered Accountants of Nepal

IFAC

International Federation of Accountants

IPSAS

International Public Sector Accounting Standard (of IFAC)

IPSASB

International Public Sector Accounting Standard Board

IPT

Integrated Property Tax

KMC

Kathmandu Metropolitan City

LBFC

Local Bodies Fiscal Commission

LGCDP

Local Governance and Community Development Program

MC/PM

Minimum Conditions and Performance Measures

MLD

Ministry of Local Development

MuAN

Municipality Association of Nepal

OECD

Organisation for Economic Co-operation and Development

RLC

Regional Learning Centre

udle

urban development through local efforts program

UDTC

Urban Development Training Centre

WTO

World Trade Organization

Acknowledgments
Urban Development through Local Effort Programme (udle) would like to thank all organizations and institutions which
provided valuable information and inputs.

Contents
01. Executive Summary (p.1)
02. Cash Accounting vs. Accrual Accounting (p.2)
2.1.

Definition and comparison of the Cash Accounting System and the Accrual Accounting System (p.2)

2.2.

Advantages and Disadvantages of Cash Accounting and Accrual Accounting (p.4)

2.3.

The dimensions of Accrual Accounting Financial Statements (p.7)

2.4.

In-Betweenism: Mixed Approaches of Cash and Accrual Accounting (p.8)

2.5.

Which accounting approach for which level of government? (p.9)

2.6.

International Public Sector Accounting Standards IPSAS (p.11)

2.7.

International Experiences on the Local Level (p.11)

03. Findings and observations in the Nepalese municipalities (p.14)


3.1.

Accrual accounting history and past udle experiences (p.14)

3.2.

Status Quo in the Nepalese municipalities regarding Accrual Accounting (p.18)

04. How to implement Accrual Accounting? (p.21)


4.1.

Recommendations and preconditions for the implementation of Accrual Accounting (p.21)


4.1.1. Technical accrual accounting recommendations and preconditions (p.21)
4.1.2. General accrual accounting recommendations and preconditions (p.25)

4.2.

Development of a macro and micro implementation plan (p.28)

05. Annex (p.30)


06. References (p.32)

Tables and Figures


Overview 1: Cash Accounting vs. Accrual Accounting (p.3)
Overview 2: The three most important dimensions of Accrual Accounting Financial Statements (p.8)
Overview 3: Worldwide efforts by local governments to implement accrual accounting (p.13)
Table 1: Municipality Types (p.18)
Table 2: Technical accrual accounting recommendations and preconditions (p.21)
Table 3: General accrual accounting recommendations and preconditions (p.25)
Table 4: Macro and Micro Level Strategy (p.29)
Annex 1: IPSAS List (p.30)
Annex 2: Macro level implementation plan (p.31)
Annex 3: Udle monitoring (p.31)

Executive Summary

01. Executive Summary


This report analyses the relative merits of cash based accounting and accrual based accounting systems and their
implications for current accounting reform efforts in the municipalities of Nepal. It is meant to inform interested
stakeholders about accrual accounting implementation preconditions and implementation scenarios drawing from
international as well as past udle (MLD-GTZ) experiences.
The first part of the report offers an in depth analysis of the system, characteristics, advantages and disadvantages of
cash accounting as well as accrual accounting for local governments. It provides information in how accrual accounting
can be adjusted for local governments needs, acknowledging the special situation for such attempts in developing
countries.
The second part of the report describes and analyses past udle activities in accrual accounting implementation and
reflects on todays current situation in the Nepalese municipalities concerning accrual accounting.
The third part displays, drawing from international and past udle experiences, recommendations and preconditions
when implementing accrual accounting in the municipalities of Nepal. Based on that, a macro as well as micro level
implementation strategy is being presented.
Drawing from the research and findings, this report recommends at least a modified accrual accounting to be adopted
by the municipalities of Nepal. However the author is very much aware of the different situations, experiences and
constraints in the municipalities. Therefore an incremental approach which starts first with a focus on accrual
accounting booked cash transactions in order to improve revenue management (e.g. for taxes) and expenditure
management is being suggested. Only if feasible for the municipality, asset management, meaning the valuation of
assets and strategic planning, should be implemented since it requires a higher skill level.
All in all municipalities in Nepal are at a critical phase of existence. With the abolishment of the Local Development Fee
by 2011 the local governments are under huge pressure to increase their own resources and to allocate them wisely
and effective. Accrual Accounting can be important to achieve this and is therefore a part of this broader municipal
finance reform. Ones implemented, accrual accounting will also affect current budgeting, reporting and auditing
principles since accounting is only one part of a public financial system.

Cash Accounting vs. Accrual Accounting

02. Cash Accounting vs. Accrual Accounting


2.1. Definition and comparison of the Cash Accounting System and the
Accrual Accounting System
Definition of Cash Accounting
The cash accounting system primarily focuses on the inflow and outflow of cash transactions within one period. That is
why it only knows two accounts in its pure form the cash inflow account (cash receipts) and the cash outflow account
(cash payments) and therefore can only produce cash flow statements that cover cash inflow, cash outflow as well as
opening and closing cash balances. Transactions are only recorded when the money for revenues actually is received
and on the other side expenditures are only recorded when they are actually paid. This is related to the development of
accounting systems in the past. In former times there was no major time difference between the receipt and payment
of a certain good, which is why it was not necessary to develop separate accounts in order to reflect this time gap
through receivables or payables or whatsoever. This has the effect that cash accounting is blind towards future
revenues or expenditures until they are recorded in the cash accounts. Besides that the cash accounting system does
not recognize the interlinkage between the source and the application of funds, since the sums normally simply
appear in the cash inflow or cash outflow account without a connection. Therefore one can not track down the linkage
between the money (e.g. taxes or fees) that was used to achieve a certain outcome (e.g. a new bridge). For the same
reason one can not connect received cash to the total cash to be received (e.g. in tax management). Furthermore the
cash accounting focuses only on cash and therefore doesnt reflect the status, value or wear and tear of assets and
resources and therefore has no incentive for planned, strategic maintenance or reinvestment. Thus it is possible that a
municipality lives from their asset substance e.g. a street by not acknowledging that assets are devaluing when being
used. Therefore maintenance of and reinvestments into assets are not specifically planned in cash accounting or cash
budgeting and because of this, necessary sudden maintenance or the reinvestment into an asset at risk (e.g. a bridge
with cracks) might not be affordable for municipalities in a current fiscal situation. Cash Accounting is the dominant
public sector accounting system.

Definition of Accrual Accounting


On top of the known cash transaction accounts from the cash based accounting system, the accrual accounting
system knows multiple accounts, like receivables, payables, asset accounts, depreciations to be made on assets.
Therefore it can provide a complete financial overview of e.g. a municipality.
It displays full financial information on all cash transactions, assets, resources, resource consumption, true costs,
arrears and current as well as future liabilities and revenues. Moreover it recognizes economic events and transactions

Cash Accounting vs. Accrual Accounting

when they occur rather when money is actually exchanged. This effectively addresses the time difference between the
receipt and payment of goods and also makes future strategic planning and multiple years planning possible. For
example an accountant knows that in the fiscal year of 2008/2009 a certain total amount of tax is to be received even
though it is not yet paid by the tax payer. As a result the accountant would be able to track down the reason for arrears.
Transactions always affect two accounts in the accrual based accounting, the credits and debits side, which always
have to be matched and balanced. Therefore it is possible to show the source and application of funds which makes an
allocation of resources according to specific cost centres possible. For example a cost centre can be created for a bus
park by showing the revenues but also the matched expenses (e.g. operational and maintenance cost) of the bus park.
This would make the calculation of product costs possible. For example one could calculate an appropriate bus ticket
fee in order to cover all the expenses of the bus park. However, cost centres can also be established for individuals
(e.g. in tax management), projects, departments and so on.
The connection of the source and application of funds also makes performance based budgeting, reporting, auditing
and in general outcome orientation possible since one knows the crucial linkage between what was invested by whom
to achieve a certain outcome. For this reason accrual accounting has the potential to change the steering tools on
which cash accounting is based on towards performance and outcome orientation. For example accrual accounting
provides a mayor or executive officer with much more financial information which enables him to optimize the
budgeting process.
Another major characteristic of accrual accounting is the usage of depreciations and/or reserve allocation in order to
reflect the wear and tear of assets and future resource consumption. Depreciations are bookings, used to artificially
display the real happening devaluation of e.g. a street through usage. Reserve allocation is a connected tool to reserve
money for maintenance or reinvestment in order to address this devaluation. Through the income statement, where
total revenues are matched to expenses, the net resource consumption of e.g. a municipality is being displayed. The
income statement together with the balance statement of financial position displays the profit or deficit of a financial
period.
Accrual based accounting is the dominant private sector accounting system.

Overview 1: Cash Accounting vs. Accrual Accounting (Broader Overview available under
Athukorala & Reid, 2003, p.26-27)
Cash Accounting

Accrual Accounting

Full knowledge of all payment flows Only cash transactions

Complete financial overview possible

Time of booking

Recognizes transactions and economic

Recognizes transactions and economic

events only when cash is received or paid events when they occur
Management of Assets and

No single accounts for assets and

Full knowledge on the value of

Resources

resources

resources and assets

Cash Accounting vs. Accrual Accounting


Depreciations, reserves, revenue,

Not possible

expenses
Cost and results accounting

4
Resource consumption and the wear
and tear of resources is displayed

No knowledge of costs by specific cost

Full knowledge of true costs by specific

centres or service products since the

cost centres and products

linkage between source and application


of funds is missing; no matching of
revenues and expenses

2.2. Advantages and Disadvantages of Cash Accounting and Accrual


Accounting
Advantages of Cash Accounting
Most of all cash based accounting is simple, cheap and objective in its operation and is therefore less knowledge
intensive (SAFA, 2006, p.3). It provides basic financial information about liquidity and solvency by producing cash
statements. In addition, this system fits easily to most government budget, reporting and auditing principles since these
are usually cash based until now.

Disadvantages of Cash Accounting


However, cash accounting does not provide sufficient information about non monetary resources like assets,
receivables, payables, true costs, liability or revenue arrears and future liabilities (e.g. pensions) (World Bank,
2007, p. IX; SAFA, 2006, p.3). Another point is that even though it provides cash statements one cannot interpret the
source and application of funds on these statements (Athukorala & Reid, 2003, p.18). Therefore a municipal
government might recognize that a total amount of money was spend according to the budget plan but it can not
evaluate exactly for what purpose that money was used. During auditing the municipal government can therefore not
evaluate if the provided total amount of money was really necessary to achieve a certain planned outcome since the
direct booked linkage is missing. For these reasons it lacks outcome orientation. Moreover it cannot provide
information on resource consumption, meaning the wear and tear of assets, and therefore does not acknowledge
financially the devaluation and necessary maintenance when using a street, a car or a bridge. For this reason it has no
possibility to plan ahead strategically since maintenance, total amounts to be received from e.g. taxes or total
amounts to be paid (loan payments for instance) can not be displayed. Therefore no systematic asset management,
debt management and resource allocation according to cost centres is possible. As an aftermath it is possible that
municipalities with cash accounting live from their asset substance and suddenly need large unplanned
reinvestments into old infrastructure. Furthermore, other weaknesses are the lack of accountability and the lack of

Cash Accounting vs. Accrual Accounting

transparency by not being able to tell relevant stakeholders like tax payers the source and application of specific
resources e.g. taxes. In the context of Nepalese Municipalities, most of the public properties are not accounted in the
books of accounts and inventories of such valuable public assets (land, public parks and other important historical
monuments) are ignored due to the application of cash accounting. A comprehensive strategic financial
management plan of municipal bodies is impossible to be developed and implemented on base of cash
accounting systems.

Advantages of Accrual Accounting


Most of all accrual accounting allows displaying information on non-monetary resources, assets, true costs, future
liabilities, receivables, payables and therefore provides important knowledge for the development of a financial
strategy, a transparent, effective and efficient revenue and expenditure management as well as decision making
processes of a municipality.
Moreover, the financial statements and information produced according to accrual accounting provide local and central
government agencies, creditors, donors, foreign investors, rating agencies, tax payers and other stakeholders with
reliable information about the financial and economic situation of a municipality (SAFA, 2006, p.2).
Furthermore, it enhances transparency by disclosing current and future liabilities (e.g. outstanding
reinvestments into assets), resource consumption, true costs and the source and applications of funds
according to cost centres (IMF, 2007, p.6, p.17; Champoux, 2006, p.14-15).
Therefore it also provides the necessary information to hold the administration and different cost centres
accountable and responsive for their actions. This is especially important in Nepal since a well developed tax
culture does not exist. With accrual accounting it is possible to show the tax payers what was achieved with their
money.
Additionally, it also empowers cost centres, a slaughter house for instance, by giving them the freedom to self
manage their resources in an efficient way because they can see their expenses that are matched to their revenues.
For the reason that accrual accounting always affects the debtors and the credits side and that it recognizes economic
events when they occur, an accountant can draw a linkage between the taxes already received and the total amount of
taxes to be paid. On the other hand depreciations and the allocation of reserves for crucial assets and future liabilities
provide a sustainable accounting approach for debt management, strategic planning as well as asset
management including the maintenance of and reinvestment into assets. Accrual information also allows a proper
evaluation to be made on quality, feasibility, efficiency and effectiveness of investments (Athukorala & Reid,
2003, p.17, p.28). This is possible because accrual accounting can connect the source with the application of funds.
Therefore it allows a better allocation of scare resources in the long run. Furthermore that evaluation also provides
a municipality with important implications for budgeting, reporting and auditing.
Additionally, accrual accounting is also able to compare services and costs across organizations.

Cash Accounting vs. Accrual Accounting

Disadvantages of Accrual Accounting


Most of the criticism related to accrual accounting arises from the relative complexity of the system, compared to
cash accounting as well as high implementation costs (e.g. regarding the valuation of assets, training and
information technology) (Athukorala & Reid, 2003, p.24). As a result of that, the implementation of accrual accounting
is challenging especially for smaller municipalities. Without external support most of those municipalities are not able to
adopt accrual accounting caused by a limited number of human resources and adequately trained personnel as well as
low financial capabilities.
In addition criticism arises about the so called vague estimations about the values of the assets of a municipality, which
are used for depreciations and maintenance later on. However, wrong valuation will be recognized in accrual
accounting after some time, since an engineer will see if depreciation and connected reserve allocation for
maintenance and reinvestment are picturing the reality.
Moreover the operation of such a system is supposed to be more difficult, skill-intensive and expensive since it
requires additional education of human resources (HR) and, at some stage, the use of Information Technology (IT)
(Boothe, 2007, p.196; Athukorala & Reid, 2003, p.25; Wynne, 2003; Wynne, 2004, p.9-11). This certainly is correct but
one has also to take into account the long term benefits accrual accounting can provide in revenue mobilization
through tax management, asset management and debt management for instance. However, in some cases the
acknowledgement of receivables creates big expectations regarding the upcoming revenues, which are being rarely
achieved by the local governments in the short term. Some of the criticism holds especially true for developing
countries (IMF, 2007, p.17). Not only because of the mentioned difficulties which all countries experience, but also
because of problems like corruption, unclear property rights, capacity and resource constraints, informal economies,
informality etc. (Schick, 2006). These problems however will affect both cash accounting but also accrual accounting.

Still, the mentioned problems and difficulties are the reason why accrual accounting implementation in developing
countries requires a carefully planned, comprehensive and long term approach, including the necessary technical,
financial and political support and commitment by the relevant stakeholders. This is needed to overcome obstacles like
capacity constraints, corruption, manipulation, lack of resources, the lack of formal accounting regulations, policies,
fiscal rules, standards and manuals etc. (Athukorala & Reid, 2003, p.53-61; Boothe, 2007, p.195-199).
All in all just a few minor steps, starting with the booking of cash transactions based on an accrual accounting system
(this would include taxes, fees etc.), can improve the financial management of resource constraint local governments in
Nepal.

Cash Accounting vs. Accrual Accounting

2.3. The dimensions of Accrual Accounting Financial Statements


The dimensions of accrual accounting which are recommended by international standards consist of balance, income,
capital change and cash flow statements (IPSASB, 2008b; Grossi, 2006).

Balance Statement of Financial Position


The balance statement of financial position consists of the different values on the debits and credits side. The debit
side consists of floating assets and capital assets. The credits side consists of reserves and liabilities. On both sides
one can distinguish between current and non current values. Through the calculation of the difference between debits
and credits side, the equity capital can be displayed. Therefore one can see if the municipality has accumulated a
deficit or a surplus.

Income Statement (Operating Statement)


The income statement is a sub account of the equity capital account, showing on each side of the account the
revenues and expenses of a fiscal period separated according to operational and non operational activities as well as
ordinary activities and extraordinary items. On the one hand revenues are recorded according to their source and on
the other hand expenses are recorded according to their function, nature or use. The matching principle directly
connects expenses to specific items of revenue on the basis of cause and effect relationships. The result of a fiscal
year, the net income or net resource consumption, is calculated through the difference between revenues and
expenses. As a result, the profit or loss of a fiscal year can be displayed.

Statement of changes in net assets/equity


This statement records all adjustments in net assets which are for example due to necessary revaluation of assets,
past valuation errors or changing accounting policies.

Cash Flow Statement


The cash flow statement is being used for the documentation; supervision and steering of the cash flow and therefore
ensures the liquidity and solvency of a municipality. These information are prerequisites for the access to loans on the
capital market, e.g. if municipalities needed to cover expensive infrastructure investments partly by loan. Moreover this
knowledge about solvency is also a signal on the credit market that reduces the risk and uncertainty for lenders when
giving loans to municipalities.

Cash Accounting vs. Accrual Accounting

A Cash flow statement is essential because even a surplus in the balance statement is no guarantee that sufficient
resources for operational activities are available. Cash flows are inflows and outflows of cash and cash equivalents.
Receipts of cash (cash inflow) are booked according to the source of funds. Disbursements (cash outflow) are booked
according to the application of funds. On each side the values are separated according to operating, investing and
financing activities. These information allow to ensure operating activities of a municipality and also allow to decide on
future investment activities and liquidity needs.

Overview 2: The three most important dimensions of Accrual Accounting Financial Statements

Cash Flow
Statement

Balance
Statement

Income
Statement

Cash Receipts

Debits

Credits

Revenues

Disbursements

Floating
assets

Equity
capital

Expenses

capital
assets

Reserves
Liabilities

Debits

Credits

Liquidity

Fiscal Year
Outcome

2.4. In-Betweenism: Mixed Approaches of Cash and Accrual Accounting


When looking at accounting systems in the public sector usually mixed approaches rather than pure forms of cash
based accounting or accrual based accounting are in place. These mixed forms of accounting systems are in practise
at different government levels and countries.
In both systems differences arise on the one hand about the time of booking and on the other hand on the
preconditions for booking.
The modified cash basis of accounting recognizes transactions and events which belong to the previous fiscal year
and normally would be reflected in a cash inflow or outflow within the current fiscal year (Schiavo-Campo & Tommasi,
1999, p.3). The difference compared to the pure cash accounting system lies in the fact of leaving the books open for
cash transactions (mostly expenditures, sometimes also revenues) that are related to the previous fiscal year
throughout a complementary period during the next fiscal year. Therefore it recognizes cash transactions that belong
together and ensures a greater conformity within one fiscal year (Schiavo-Campo & Tommasi, 1999, p.3).

Cash Accounting vs. Accrual Accounting

All in all modified cash accounting would be a first step to match cash transactions related to an economic event to the
same fiscal year. For this reason the planning and operation of next years budget is not that much affected by the past
fiscal year arrears.
The modified accrual basis of accounting uses the same accounting framework as full accrual accounting.
However, it is bound to a single fiscal period and therefore short term focused by merely recognizing economic
transactions as revenues if they are available or measurable to liquidate liabilities in the current fiscal period or soon
thereafter. Similarly, expenditures are only recognized if they are expected to draw on the currently spendable
revenues in the fiscal period rather than long term resources. Although modified accrual accounting recognizes the
total amounts in the different accounts on the debits and credits side, e.g. through receivables or payables, it only
operates with the measurable or spendable funds and values. This has the advantage that there are no big
expectations regarding the upcoming revenues since only the available funds matter. For example even though an
accountant knows receivables in tax he does not book them as revenue until they are actually received and spendable.
For this reason, long term revenues or long term expenses are excluded in modified accrual accounting. The same
holds true for assets that are of long term use. Under modified accrual accounting they are written off immediately
when acquired. Therefore no systematic asset management exists in modified accrual accounting. This is also the
reason why modified accrual accounting does not use the term expenses and uses merely expenditure instead.

Compared to the two mentioned forms of cash accounting, the modified accrual accounting has the advantage of being
able to link the source and the application of available or spendable funds as explained before. Therefore it recognizes
if payments have been used according to their purpose. Moreover it ensures fund availability and fund flows for
expenditure purposes. All in all modified accrual accounting is a good first step for incremental accrual accounting
implementation since it uses the same principles like full accrual accounting.

2.5. Which accounting approach for which level of government?


Regarding accounting systems for the public sector one has to take into consideration that there is a functional
difference between the national and sub-national level of government. This difference is mainly due to the different
scope of their actions towards the citizens as well as their public goods and services they provide. That is why it is not
necessarily compulsory to use one accounting system throughout all administrative levels of government even though
an integrated approach of accounting would be very useful and easier to handle in terms of budgeting, reporting and
auditing.

Cash Accounting vs. Accrual Accounting

10

In order to reflect at least outstanding receivables (e.g. in tax management) and payables, the crucial linkage between
the source and application of funds, to create more transparency, accountability and responsiveness according to cost
centres (e.g. a bus park), some degree of accrual accounting seems necessary (Chu, 2008, p.9). The question is how
extensive this accrual accounting approach has to be in order to be appropriate and efficient for the national or subnational government level.
At the national level it is not a priority to implement a full fledged accrual accounting system since central government
normally does not own many assets or at least does not have to rely on them as much as the sub national level.
Moreover national government usually redistributes monetary values and funds only. Therefore the first step of reform
would be to improve the existing cash accounting system according to international cash accounting standards for the
public sector (e.g. the IPSASB Cash Standards) (IPSASB, 2008b; World Bank, 2007, p. 5). As a second step of reform
one can focus on the implementation of a modified accrual accounting system that dominantly focuses on revenues
that are available to liquidate expenditures. In other words monetary values and central government funds but with the
important difference, compared to cash accounting, of knowing the connection between the source and the application
of these funds. Besides that, one would also know receivables and payables. 1 As a result the central government
would be able to evaluate the outcome of their funding as well as revenue and expenditure arrears. Of course that
would also affect national budgeting, reporting and auditing in the long run.
At the municipal level a totally different picture appears since a municipality usually owns more capital assets (e.g.
roads, bridges but also transport service providers and other infrastructure) and floating assets. In addition it has to
deal with resource consumption, reserve allocation, critical debt levels etc. and the allocation of usually scare
resources in general. Therefore a sustainable asset and debt management is very crucial at a municipal level. In order
to achieve these aims, a full accrual accounting system for the municipality including its public companies (e.g.
transport providers and facilities) would be of major concern in the long run.
However, in order to consolidate accrual accounting implementation a modified accrual accounting should be the first
major step for municipalities towards full accrual accounting implementation since it uses the same accounting
framework and usually the same software. In developing countries it should be an option of choice if the municipalities
start with a modified or full accrual accounting according to their current status and capacity. Both accrual accounting
systems can enhance transparency by displaying what public goods have been produced with tax money, e.g.
Integrated Property Tax (IPT) in Nepal, or other taxes and fees.
However, a full financial overview including asset management is only possible with a full fledged accrual accounting.
The financial statements an accrual accounting can provide are an important basis to achieve credibility towards
stakeholders like donors, banks, foreign investors, tax payers or the general public. Moreover, these information are
useful for the management level of the municipality in order to improve the efficiency, effectiveness, feasibility,
sustainability and quality of their investments and their financial management in more general terms.
In this regard, Nepal has already conducted a study on the improvements of the existing government accounting system under the technical
support of ADB the outcomes and suggestions are under discussion.

Cash Accounting vs. Accrual Accounting

11

2.6. International Public Sector Accounting Standards IPSAS


Compared to the private sector there were only relatively few international recognized public sector accounting
standards. By introducing IPSAS, this scenario has changed over recent years and more and more countries are at
least orientating their reform efforts along the lines of these standards.
The International Public Sector Accounting Standards (IPSAS) were developed by the International Public Sector
Accounting Standards Board (IPSASB) which belongs to the International Federation of Accountants (IFAC).
The IPSAS are based on the International Accounting Standards (IAS) which IFAC developed for the standardization
of the international private sector accounting. The IPSASB exists since 1986 and [] focuses on the accounting and
financial reporting needs of national, regional and local governments, related governmental agencies, and the
constituencies they serve. It addresses these needs by issuing and promoting benchmark guidance and facilitating the
exchange of information among accountants and those who work in the public sector or rely on its work. (IPSASB,
2008).
The IPSASB works on the standardization, harmonization, comparability and transparency enhancement of
international public sector accounting. The standards reduce the risk produced by lacking accounting knowledge
and misstatements, foster guidance on accounting treatment and define minimum accounting requirements (IMF,
2007, p.7). Furthermore the usage of such a standard reduces financial risks and transaction costs for possible
lenders. As long as these standards are not part of the national regulation, they are only recommendations.
All in all the IPSASB produced 26 IPSAS for accrual accounting in the public sector addressing different accounting
topics e.g. financial statements, inventories etc. (IPSASB, 2008b; see also Annex 1 for all IPSAS, p.30). For instance
an accrual based financial statement along the lines of IPSAS requests a balance statement of financial position, an
income statement, a cash-flow statement and a statement on the changes in net assets/equity (IPSASB, 2008b).
In addition IPSASB published a guidance manual for the transition towards accrual accounting practise, which
can be of major technical help for ongoing accrual accounting activities in Nepal (IFAC, 2003). It also produced a
handbook of standards for cash based accounting practise, which can be of direct usage for the national
government level in Nepal (IPSASB, 2008b). On their homepage IFAC provides a list showing which countries
applied IPSAS as of July 2008, however this list is confusing because it is not clearly indicated if the
international standard for cash or accrual accounting is meant (IPSASB, 2008c). Very helpful is also the
published glossary on accounting terms as of 2006 (IFAC, 2006).

2.7. International Experiences on the Local Level


Worldwide it seems that the most progressive accrual accounting implementers are regional or local governments,
which are usually ahead of central government in terms of accrual accounting reform (FEE, 2007, p.6, p.23-24; FEE,

Cash Accounting vs. Accrual Accounting

12

2003, p.1). This applies to more developed as well as developing countries. Mostly the national level of government
benefits from the experiences made by the local governments (FEE, 2007, p.6).

OECD Countries
Within the OECD the majority of local governments use some sort of an accrual based accounting system. This is valid
for most local governments in Switzerland, the Netherlands, Sweden, Spain, Portugal, Finland, France, Great Britain,
Germany, Italy, USA, New Zealand, Australia, Canada and Iceland. Also relatively new OECD members like Poland
and Slovakia are in the process of accrual accounting implementations.
In Germany for example a comprehensive municipal reform to change to accrual accounting has started in 2003 on a
regional basis. During this reform process some of the sixteen federal regions made the change to accrual accounting
mandatory for their municipalities. Others approved the change to accrual accounting on a voluntary basis. The fastest
and broadest approach undertaken by a bigger federal region is being done by the state of North-Rhine Westphalia,
which made it mandatory for all municipalities to change to accrual accounting until the end of 2009. Besides that the
federal regions of Hamburg and Bremen already introduced accrual accounting around 2006.
All in all 11 out 16 federal regions made it mandatory for their municipalities to introduce accrual accounting until 2013
at the very latest. Five federal regions left the decision up to their municipalities whether they want to introduce accrual
accounting or go for the traditional cash accounting system or a modified accounting system (KPMG, 2008, p.1-3).
Besides these regulatory approaches there are a lot of towns and municipalities who introduced accrual accounting on
a voluntary basis.
For further information on the mentioned countries see Athukorala & Reid, 2003, p.79-81; IPSASB, 2008c; FEE, 2007,
p.23-24; Grossi, 2006, p.4-5; IFAC, 2000, p.65; CESifo, 2007.
Accrual accounting is part of a broad financial management reform in the public sector in the above mentioned
countries. However, they differ on the implementation of some sort of performance budgeting, reporting and auditing
but the change in accounting usually had implications for these other components.

Non-OECD Countries
In the case of South Asia, a couple of countries implemented some sort of accrual accounting at local level or are in
the process of doing so.
In India for instance, some federal states including Tamil Nadu, Maharashtra, UP and Karnataka are using accrual
based accounting. The urban local bodies however are more speedily towards the implementation of accrual
accounting because of a decision by the Supreme Court of India in 2001 that forces all urban governments to
implement accrual accounting, e.g. Municipal Corporation of Delhi since 2003 (SAFA, 2006, p.7-8).

Cash Accounting vs. Accrual Accounting

13

Malaysia introduced accrual accounting only on the local level (IFAC, 2000, p.65).
Similarly, Bangkok Metropolitan City of the Thailand, introduced an accrual accounting system in 2006.
The Fiji Islands recently purchased accrual accounting software and plan to move to accrual accounting in the medium
term (Athukorala & Reid, 2003, p.30; ADB, 2002, p. 33-34). The same holds for Sri Lanka, Indonesia, The Philippines,
China (ADB, 2002, p.33-34). However in these cases it is not sure if this also holds true for the local government level.
Singapore currently uses both types of accounting; cash based accounting and accrual based accounting (CPA
Australia, 2004).
According to a SAFA study from 2006 Bangladesh is on the way to move to an accrual based accounting system.
Other countries like Chile, UAE, Tanzania, Romania, Estonia, and Latvia implemented accrual accounting at least at
local level.
Russia, Azerbaijan, Barbados, Cayman Islands, Mongolia, South Africa, Israel, Jamaica and Slovenia etc. appear to be
in the process of accrual accounting implementation, but its not possible to assess on which level of government or
how far this process is on the way (IPSASB, 2008c; IFAC, 2006, p.65).
Furthermore The European Union pushes for accrual accounting implementation in new member states or prospective
member states.
Although this might look very promising, one has to be very careful when implementing accrual accounting systems in
developing countries since these usually face even greater problems when introducing this system compared to more
developed countries (see p.6).

Overview 3: Worldwide efforts by local governments to implement accrual accounting


OECD implemented

Switzerland, the Netherlands, Sweden, Spain, Portugal, Finland, France, Great Britain,
Germany, Italy, USA, New Zealand, Australia, Canada and Iceland, Poland and Slovakia

Non OECD implemented

Chile, UAE, Tanzania, Romania, Estonia, and Latvia, Malaysia, Singapore (both systems)

Non OECD in the process

India, Fiji Islands, Sri Lanka, Indonesia, The Philippines, Russia, China, Azerbaijan,
Barbados, Cayman Islands, Mongolia, Bangladesh, South Africa, Israel, Jamaica and
Slovenia, Nepal
EU pushes for accrual accounting

Findings and observations in the Nepalese municipalities

14

03. Findings and observations in the Nepalese municipalities


3.1. Accrual accounting history and past udle experiences

Since 1960/1961 municipalities are using the current government accounting system which was developed with
the technical assistance of UNDP and USAID at that time 2 (see also World Bank, 2007, p.2; World Bank, 2003,
p.46).

Accrual accounting activities in Nepal did not begin until the restoration of democracy in 1990. However, efforts
did not start until the Asian Development Bank (ADB) first made the implementation of accrual accounting a
condition for Kathmandu Metropolitan City (KMC) for receiving loans. As a result KMC formed a taskforce for the
implementation of accrual accounting, developed a new chart of accounts and started further preparations for
accrual accounting implementation. These efforts were financed by the then existing Kathmandu Town
Development Project.

Ever since the starting point of this discourse in Nepal, accrual accounting was usually referred to as corporate
accounting system or CAS.

Beginning in 1992 the technical assistance to Nepalese municipalities in finance and management became one of
the areas of support, provided by the udle programme. Since then efforts focussed mainly on mobilizing municipal
resources, improving municipal financial management, supporting computer skills training, computerization, DOS
based cash accounting and tax software and the reforming of the accounting system (udle, 2006).

Starting in 1996 udle supported the introduction of accrual accounting with a sensitization workshop at the UDTC
in a joint effort with MuAN.

In August 1997 udle assisted in the preparation of an accrual accounting manual which was supported in a joint
effort with the Nepali Chartered Accountants.

In March 1998 another workshop, focussing on the merits of accrual accounting as well as the above mentioned
manual was conducted for municipal accountants.

In November 1998 a six days accrual accounting training at UDTC was conducted for the accounting staff of the
municipalities of Kathmandu, Lalitpur, Bhaktapur, Butwal, Dharan, Hetauda, Pokhara, Siddharthenagar,
Dhangadhi and Biratnagar. It was sponsored by the Kathmandu Town Development Project. After that a computer
accrual accounting training was conducted for the same municipal accountants.

In June 1999 Kathmandu itself organized a two weeks training in accrual accounting for its own accounting staff.

In October 1999 the MuAN presented an agenda stressing the implementation of accrual accounting. On that
meeting KMC also announced that it would implement accrual accounting in 2001. Therefore, accrual accounting
was well established on the municipal reform agenda in Nepal around 1999.

This was reported by different municipalities during the research.

Findings and observations in the Nepalese municipalities

15

In December 1999 the government of Nepal passed the Local Self Governance Act. The separately annexed
financial administration specification of this act 3 leaves the municipalities the choice between the usage of cash
accounting and accrual accounting (Nepal Legislation, 1999c, p.16). However, in the same paragraph of this act
an added statement, called 1a, rejects this option of choice by stressing that all municipalities have to
introduce accrual based accounting within five years time and thereby making accrual accounting obligatory for
all municipal governments. Hence, it provides the necessary legal base for further udle activities.

After that regulation was conceded, udle concentrated its following efforts firstly on the development of an
accrual accounting system combined with appropriate software and secondly on an accrual accounting
implementation project plan:
1)

The proposed accrual accounting system recognized accounting heads for cash, bank, receivables
(including taxes, fees etc.), payables, fixed assets (vehicles, fire engines, furniture, electric equipment, office
apparatus etc.), floating assets (consumers goods, logistics, fuel etc.), revenues, expenses, loans, funds and
reserves. However, it did not include depreciations at that time. The valuation of land usually was based on
reports, prepared by the Land Revenue Office as well as suitable market price schemes. The valuation of
buildings was undertaken by engineers of the municipality or their wards4. Movable assets were valued
according to available documents provided by the municipalities or their wards. Problems appeared in the
valuation of receivables since usually no systematic records of taxes and fees existed back then. The same
holds true for assets. All in all the system was beyond modified accrual accounting but not a full fledged
accrual accounting system.

2)

The proposed implementation project plan stretched over six months and was implemented parallel with
the existing cash accounting system. It included:
o

a system study on the existing accounting system,

a system conversion phase with experimental balances (focusing mainly on cash) and the identification
and valuation of assets as well as the identification of unrecorded liabilities and revenues,

a system running phase,

a system reporting phase that included the creation of financial statements like a balance statement and
cash flow statement by udle,

a full implementation phase supervised by udle for manual accrual accounting practice and reporting
handled by the municipal staff, and finally

the computerization of the accrual accounting system with the udle self developed DOS based accrual
accounting software.

In the first fiscal year after implementation accrual accounting was to be done both manually and computerized. If the
computerized booking was correct only computer based accrual accounting was to be continued.
3
4

The second edition as of 2005 was used for this report.


A ward in Nepal is a local political division. Nine wards make up a Village Development Committee (VDC).

Findings and observations in the Nepalese municipalities

16

Udle then started to assist eight municipalities in the implementation of the described accrual based accounting
system (Dharan, Butwal, Dhangadhi, Nepalgunj, Pokhara, Hetauda, Banepa and Kathmandu) (Chhetri, 2002;
udle, 2006).

The first attempts of implementation on a piloting basis were made from January 1st of 2000 onwards in Dharan
and after this in Butwal starting the implementation on February 12th of 2000 onwards.

The accrual accounting system combined with the then newly developed software, supported by udle, was fully
introduced in the fiscal year of 2001 in Dharan, Butwal, Dhangadhi, Nepalgunj and Kathmandu. In the following
year Pokhara, Hetauda and Banepa followed. However, in the post implementation phase different problems
and obstacles led to the fact that only Dharan, Butwal and Kathmandu managed to continue accrual
accounting.

Although udle assisted in the long term implementation of accrual accounting in three municipalities and
achieved a general sensitization towards accrual accounting at municipal level, the first attempts to introduce
accrual accounting in selected municipalities had only limited success.
After this, udle reduced its efforts and support in accrual accounting until 2007. However since one year udle restarted
major efforts in accrual accounting implementation and is preparing a comprehensive implementation scenario. This
report is part of this process.

Analysis and lessons learnt


It is obvious that only those municipalities which received either strong technical support from udle (Dharan and
Butwal) or had accrual accounting on the agenda since a relatively long time (Kathmandu Metropolitan City)
succeeded to continue accrual accounting practice. Only KMC had enough resources to organize and finance extra
accrual accounting training for their staff when udle support was not sufficient anymore, especially in the post
implementation phase.
Major reported obstacles for the successful implementation in the municipalities were:

Lack of sufficient training on manual as well as computerized accrual accounting practise. A proper
general training before the implementation which would have made sure that the accounting staff both knows and
understands the concept of manual and computerized accrual accounting was missing. The same holds true for
the post implementation phase, where a long term, individual needs based refresher training as well as general
technical back up and support on demand for all municipalities was missing.

Lack of conceptual clarity by the municipalities and other important stakeholders what accrual accounting
actually is. This again indicates insufficient theoretical and practical information.

Findings and observations in the Nepalese municipalities

17

Lack of adequate human resources in the municipalities. Accrual accounting training will hardly be successful
if a general capacity constraint in terms of human resources exists. This indicates an insufficient education system
for public servants.

Problems in the valuation process of assets: the identification, documentation as well as valuation of capital
and floating assets were major obstacles in the process. Due to that the valuation was incomplete or even
completely failed.

Lack of sufficient integrated databases: the identification and documentation of tax and fee receivables mostly
failed, caused by weak tax revenue databases.

Lack of an appropriate software solution: The DOS based accrual accounting software that was provided with
the assistance of udle, appeared to be too complicated and not very user friendly. As an aftermath municipal staff
with already low IT skill levels had difficulties applying the software. Only those municipalities succeeded to
continue with the software which had at least one well trained IT expert within their accounting section that was
capable of updating the software himself (Butwal, Dharan and Kathmandu). In addition, the provided accounting
software could not be integrated with other existing software systems. The fact that the udle supported software
was mostly designed only by a single person had the disadvantage that every municipality heavily depended on
this one programmer since the existing municipal software education was not sufficient. Also due to that udle just
did not have the capacity to support all municipalities in accounting software practice and updates in the same
way.

Lack of a clear and strong udle commitment. Udle support was neither comprehensive enough, nor long term
focused. It did not focus sufficiently on the crucial post implementation period due to own capacity constraints and
a changed working focus. In addition, the technical, political and financial support udle gave was not equal
towards all municipalities which tried implementation.

Lack of political commitment by the government, some mayors and accounting staff.

Missing links between local and national accounting practise. At the end of the fiscal year the few
municipalities that actually are using accrual accounting can not send their accrual based accounting financial
statements to the central government. The Comptroller General Office of the Nepalese Government only accepts
cash accounting financial statements for auditing and is reluctant to adjust to current accrual accounting reforms.
This creates a lot of double work for the municipalities, which was also a reason why some municipalities did not
implement accrual accounting in the first place.

Major reported facilitators of the process were:

Strong udle support (in the case of Dharan and Butwal).

Availability of well trained accountants and IT experts (Dharan, Butwal, KMC).

Availability of own resources for extra training. This holds especially true for KMC.

General administrative capacity in public finance.

Political commitment and enthusiasm existing in the municipalities by all relevant stakeholders.

Findings and observations in the Nepalese municipalities

Existing experience in accounting software.

Availability of information about capital and floating assets as well as databases on revenues and expenses.

18

3.2. Status Quo in the Nepalese municipalities regarding Accrual Accounting


Regarding the accounting systems of local governments in Nepal there are currently very different experience levels
throughout the country. The following type assessment is based on the current status of the accounting system as well
as the accounting software in the municipalities. The type assessment can be of major help during the preparation
of a nationwide, flexible accrual accounting implementation strategy that wants to take into account individual
municipal needs and starting points. These capacity differences will affect the type of accrual accounting that will be
implemented, the type of manual and computerized training that is necessary, the extent of the accrual accounting
software that will be provided and the amount of financial support that is needed. Possibly even a pre education and
computerization will be necessary.

Table 1: Municipality Types


Municipality

Characteristics

Type
Type I

These municipalities successfully implemented and use the accrual accounting system including
an accrual accounting software (Dharan, Butwal and Kathmandu Metropolitan City).

They differ on their accrual accounting software and current accrual accounting practise.

Dharan and Butwal are using self updated and self managed versions of the old udle supported
DOS based accrual accounting software. However this old software is not network based and can
not integrate the databases from existing tax revenue software and house numbering information
systems.

Both Butwal and Dharan are producing financial statements including a balance statement, an
income statement and a cash-flow statement. They are used to asset management including
depreciations and debt management.

Since the implementation of accrual accounting, Butwal was even able to reduce its debt level, to
avoid deficit spending, to ease accounting in general, to report more efficiently and to improve in
terms of transparency.

KMC uses an Oracle-network based accrual accounting software, recently provided by a private
software company. This software manages to integrate different software modules (including tax,
fee and citizenship software modules) and databases, functioning as an effective data interface.
The software system is very well established, user friendly and is now effectively in practise in

Findings and observations in the Nepalese municipalities

19

KMC. KMC is also in the process of decentralizing this software to its wards, making it easier for
citizens to access public services. The wards function as local accounting centres and only have
a limited budget. Through the network connection the wards and the central KMC administration
will be interlinked, making it easy for the central management to supervise the activities in the
wards. The software is also able to limit access to different accounting heads and vouchers
according to the job position of the public officer. The creation of cost centres according to
projects, taxes, fees, wards, specific individuals and so on is also possible. All in all this
integrated and modular software is easy adjustable to the needs and administrative status of any
municipality and would be a sound solution for all municipalities in Nepal.

KMC is well ahead of modified accrual accounting but is not practising asset management,
meaning depreciations, and reserve allocation etc. at the moment.

Type II

These municipalities have some experiences in accrual accounting implementation but failed in
the previous attempt for explained reasons (Dhangadhi, Nepalgunj, Pokhara, Hetauda and
Banepa).

Some of these municipalities also tried to implement accrual accounting manually but
discontinued after some time and returned to cash based accounting.

These municipalities all have at least partly computerized accounting and/or tax systems and
usually are eager to restart there accrual accounting implementations efforts.

Type III

These municipalities did not try to implement accrual accounting systems but have at least partly
computerized accounting systems and some information about what accrual accounting is (e.g.
Lalitpur, Bhaktapur).

Type IV

Some of these municipalities now feel prepared to join the accrual accounting reform process.

These municipalities are not computerized, have never tried to implement accrual accounting and
also do not have sufficient information about what accrual accounting actually is (many small
and remote municipalities etc.).

All in all the municipalities of Nepal are currently under a strong pressure for reform. They are still very much
dependent on the Local Development Fee (LDF), which is a national import tax, collected by the central government
and distributed to the municipalities. The LDF accounts for over 70 percent of the municipal tax revenues (udle, 2008).
However due to the upcoming membership of Nepal in the WTO the LDF will be abolished soon. This will leave the
municipalities with a huge revenue gap. The government has not yet decided how much money on which scheme will
be distributed to the municipalities in order to partly cover this gap in the future.
Whatsoever, the municipalities are very much under pressure to increase their own revenues through local taxes and
fees but also to find ways to efficiently allocate scare resources. The implementation of accrual accounting can be
of major help in achieving these aims (see again advantages on p.5).

Findings and observations in the Nepalese municipalities

20

Another current incentive to implement accrual accounting is its role in the new Minimum Conditions and Performance
Measures (MC/PM) system, which was developed by MLD/LBFC with technical support of udle. Within this system the
implementation of accrual accounting is supported through monetary incentives. The MC/PM system is a performance
based tool for the distribution of grants and funds honouring outstanding institutional capacity and service delivery
function. The municipalities must fulfil an increasing number of minimum conditions (MCs) in key institutional
improvement areas. The individual performance measures (PMs) allow the distribution of funds according to
outstanding performance. The use of accrual accounting systems is one of these performance indicators (PM). Future
LGCDP expanded block grant distribution to municipalities will be based on municipal MC/PM performance.

How to implement Accrual Accounting?

21

04. How to implement Accrual Accounting?


4.1.

Recommendations and preconditions for the implementation of Accrual Accounting

The different starting points and needs of the municipalities in the process have to be adequately addressed in all stages of future implementation and post implementation
phases (see Table 1, p.18).
Drawing on the findings of the study as well as international recommendations (Athukorala & Reid, 2003, p.56-62; Wynne, 2004, p.16-20; FEE, 2003, p.10-12; IMF, 2007, p.13-14;
IPSASB, 2003) this part of the report displays a possible way of implementing accrual accounting at the municipal level.
It will start with technical recommendations and preconditions for accrual accounting as well as general recommendations and preconditions for the implementation of accrual
accounting and will be concluded with a micro and macro level implementation strategy.

4.1.1. Technical accrual accounting recommendations and preconditions


Table 2: Technical accrual accounting recommendations and preconditions
Accrual Accounting Laws and Regulations

Who is supporting?

In order to guarantee an effective implementation the current legal framework has to be revised. Accrual accounting activities need to have an in

Udle (MLD-GTZ),,

tune and interconnected legal framework, including an adapted municipal and national budgeting, reporting and auditing (internal and external)

Comptroller General

system. 5

Office, Institute of

Concerning that issue one has to review possible linkages to performance or outcome based budgeting as well as reporting and auditing

Chartered Accountants,

(Diamond, 2002; IMF, 2007, p.9).

LBFC, MuAN,

For further information on national level budgeting, accounting and auditing as well as international literature please refer to World Bank, 2007; World Bank 2003 and Shah, 2007.

How to implement Accrual Accounting?

Currently the Comptroller General Office does not accept accrual based financial statements for external auditing purposes. This indicates that

22
consultants

existing procedures between the local and central level of government are not matched and have to be revised.

A Nepal Public Accrual Accounting Standard should be developed according to IPSAS and the Nepal Accounting Standard (NAS).

Regulations must acknowledge the different starting points and experiences of the municipalities in accrual accounting (see p.18-19).

An efficient auditing and monitoring of the implementation process combined with selected support is essential for the success of the accrual
accounting implementation.

The term Corporate Accounting System or CAS should be revised since it implies that public and private accounting are identical, which
however is not the case.

Accrual Accounting Guidelines and Manuals

Who is supporting?

Accrual accounting guidelines and manuals are supposed to close the gap between the developed public accrual accounting

Udle (MLD-GTZ),

regulations/standards and the practical implementation, transition period and operation (see also IPSASB, 2003 and IMF, 2007).

Comptroller General

Specific technical accrual accounting guidelines and manuals which address not only accrual accounting in general but also the transition or

Office, the Institute of

implementation are necessary. This is an important lesson learnt since there needs to be more clarity on how to proceed during the

Chartered Accountants,

implementation process. Information must be provided on difficult issues like the valuation methods of specific asset types, inventory,

LBFC, MuAN, ,

depreciations, debt management, revenue management, opening balance sheet, closing balance sheet, and other financial statements.

consultants

The guidelines should use standardized methods for each accrual accounting component, e.g. in the valuation of certain asset types, since many
different methods will be misleading and would be an obstacle to achieve a certain quality standard of accrual accounting across Nepal.

Conceptual Clarity

During past reforms municipal staff was not sufficiently trained and informed about the characteristics, the meaning, the scope and the

Udle (MLD-GTZ),

environment of accrual accounting.

Comptroller General

One has to ensure that the accounting staff is capable of using and understanding the manual accrual accounting practise. Only after that

Office, MuAN

software training and following project phases should be started

Who is supporting?

Also in this case it is important to acknowledge the different starting points and needs of the municipalities before a possible accrual accounting
implementation

How to implement Accrual Accounting?


Accrual Accounting Implementation Plan

23
Who is supporting?

A detailed implementation plan with major project milestones from a macro (national) as well as micro (municipal) perspective is needed to clarify

Udle (MLD-GTZ), the

the different assignments of the relevant stakeholders.

Institute of Chartered

The micro level implementation plan needs to be flexible enough to be adjusted to the different situations and needs in the municipalities

Accountants, MuAN,

(especially with regard to the components of the accrual accounting).

LBFC, private software

The macro level accrual accounting implementation plan displays the overall national perspective of accrual accounting implementation.

company, consultants

Both types need to include specified inputs, activities, milestones, project phases, timelines, objectives and outcomes.

These plans must be available for interested stakeholders in written and digital version to enhance the transparency of the process.

Obtaining information (databases, past records and documentation)

Who is supporting?

Central government agencies (e.g. Land revenue office) and the municipalities have to integrate their information on assets, receivables (e.g.

MLD, Central

tax), payables etc. into one database. This has to be done before accrual accounting software implementation. Otherwise a comprehensive

Government Agencies

asset, debt and tax management will not be possible.

(e.g. Land Revenue

If these information are not available, the municipalities should start the valuation of capital and floating assets according to the guidelines well in

Office), MuAN, a private

advance.

software company, all

In the end the obtained information and databases should be integrated into a ready available accrual accounting software.

municipalities

Chart of Accounts

Who is supporting?

Before accrual accounting implementation, a new standardized chart of accounts for public accrual accounting needs to be developed.

Udle (MLD-GTZ), LBFC,

A chart of accounts organizes the different accounting heads based on specific number digits. That makes the classification and coding of

Comptroller General

transactions and events possible, so that they can be tracked down to specific cost centres (e.g. a bus park or individuals).

Office and the Institute of

The digits should be similar to the private sector chart of accounts. That would facilitate the knowledge and staff exchange between the public

Chartered Accountants, a

and private sector.

private software company

The chart of accounts should allow the integration of current tax reform programs in Nepal (i.e. adding PAN to four to six digit account numbers
to track tax payments).

Inventory

Who is supporting?

How to implement Accrual Accounting?

24

The inventory is a major component when preparing the first opening balance sheet since it identifies the movable and immovable assets which

Udle (MLD-GTZ), all

will later on be valuated, maintained and perhaps are subject to reinvestments.

municipalities,

The first inventory should not be too extensive and be more focused on very valuable, crucial assets or assets at risk (e.g. transport facilities,

consultants

health care, emergency facilities and other infrastructure)


Valuation of assets

Who is supporting?

The valuation of assets is a major component of accrual accounting that should be treated carefully.

Udle (MLD-GTZ), all

There are various valuation methods according to the type of asset. Land should be valuated according to an average standard price per square

municipalities,

meter. The valuation of municipal buildings, streets etc. should be carried out in a very conservative way, focussing mainly on replacement

consultants

values since the municipality usually does not want to sell their office buildings or streets. Movable assets like cars and trucks can be valued
according to their purchase price or to their current market value.

In the past the Land Revenue Office was responsible for land inventory and valuation. However, municipalities should take over these functions
in the future since it is their property.

All in all valuation of assets should be conservative and not to high since it is very crucial to set appropriate depreciations, reserve allocations
and reinvestment amounts.

In addition, it should not be allowed to revaluate assets every year and thereby manipulating the equity capital. Revaluation should only happen
in defined timeframes according to an accrual accounting regulation.

Depreciations

Who is supporting

Depreciations are essential for asset management and are displaying the wear and tear of assets or net resource consumption.

Udle (MLD-GTZ), all

The reason for the devaluation of an asset can be the simple usage or a change in current market prices.

municipalities,

In order to depreciate, one needs to estimate how long an asset can be used. In order to keep it simple, one should then depreciate on a linear

consultants

basis per fiscal period. This should be done very realistically. It is of no use to set the usage time unrealistically high in order to be able to book a
lower depreciation per fiscal period. This will only lead to the fact that e.g. a street will be already completely devalued before the planned usage
time is achieved. Therefore the street will be in a very bad condition and the municipality has no available reserves to cover these unplanned
cots. However the usage time of an asset can be reviewed after some time to adjust the estimation, if required.

How to implement Accrual Accounting?

25

As a proposal for sustainable asset management, maintenance costs and reserve allocation for reinvestment into the asset should be connected
to the depreciation. This could be done by using a certain percentage of the booked depreciation as an estimated lump sum for maintenance
costs and reserve allocation. That way, investments might get more costly on the first glimpse but with proper planned maintenance one can
extent the usage time of an asset and, when devalued, even replace it through available reserves.

Depreciations and reserve allocation should be compulsory for crucial assets according to the individual capacity of the municipality.

4.1.2. General accrual accounting recommendations and preconditions


Table 3: General accrual accounting recommendations and preconditions
Project Management

Who is supporting?

It is a major and difficult task to coordinate and steer a nationwide municipal accrual accounting implementation.

Udle (MLD-GTZ),

A possible approach could be to decentralize the coordination process by empowering regionally based coordinators in the five development

Regional Coordinators,

regions (according to the Regional Learning Centres) to facilitate the implementation process. This coordinator needs to have sufficient

Regional Learning

knowledge in manual as well as computerized accrual accounting. The coordinator would be the contact person for the municipalities in the

Centres, UDTC

development region, udle and the government.

The Regional Learning Centres (RLCs in Dhanagadhi, Nepalgunj, Butwal, Hetauda, Dharan) could play a more active role in the facilitation of a
decentralized knowledge transfer among the municipalities in the development regions. One needs to revise if the RLCs can accomplish these
aims at the moment.

The efforts of the regional based coordinator and the RLC would provide a knowledge transfer platform within a development region.

The UDTC could be a knowledge transfer platform at the national level. One needs to revise if the UDTC currently can accomplish such a task.

Udle would primarily monitor, evaluate and control the implementation process from a macro perspective according to the implementation plan.
Secondly udle would provide technical back up on demand. Activities would be reported by the regional coordinators, the RLCs and UDTC to
udle.

Please have a look at Annex 3 and Annex 4 (p.31) to get a better impression of this implementation approach.

How to implement Accrual Accounting?


Training and Education

26
Who is supporting?

A comprehensive training and general education has to ensure that adequate human resources are available for an accrual accounting

Udle (MLD-GTZ),

implementation. These efforts also have to take the different starting points in the municipalities into account (see Table 1, p.18). This report

Institute of Chartered

proposes four training and education categories:

Accountants or any other

1)

2)

Firstly, there should be a general training. The aim of the general training is that everybody understands the concept of manual accrual

reliable, high-level

accounting and related topics. Each course lasts 5 days and ends with final examination. For the successful participation of a course a

training institution,

certificate should be provided in cooperation with or by the Chartered Accountants of Nepal. That would be a sufficient incentive for course

universities, public sector

participants since they have an official document that enhances their careers. The structure of the general education is as follows:

education facilities, a

a)

Manual Basis of Accrual Accounting

private software company

b)

Expenditure Administration

c)

Debt Management

d)

Asset Management (with special focus on inventory, valuation and management of municipal assets)

e)

Revenue Administration (with special focus on municipal revenue titles like taxes)

Secondly, only after successfully finishing the general training, an accrual accounting software training should be conducted. This software
training lasts 14 days and should be facilitated by the same private software company that also provides the accrual accounting software.
The concept is as follows:

3)

a)

First week the functions and possibilities of the software and its modules are presented.

b)

Second week is aimed to use the knowledge gained in exercises, ideally based on case studies from municipalities.

Thirdly, there should be further needs based training on demand and refresher trainings. Knowledge transfer between municipalities
should also be enhanced in this training category.

4) Fourthly, a mid-career degree to improve the general municipal finance capacity should be established. This degree has the aim to ensure
long term, sustainable public sector education and should not only focus on accrual accounting but also on all other important municipal
public finance and management issues (e.g. revenue and tax management). The degree could be financed to a certain level by the central
government, the municipalities and through a donor basket fund.

How to implement Accrual Accounting?


User Friendly Accrual Accounting Information Technology

27
Who is supporting

The is a need for a user friendly, network based, integrated and modular accrual accounting software that integrates other existing software and

Joint software

databases for accounting, tax management, fees etc. As a result receivables or payables would be much better documented and transactions

development

could be tracked down to specific cost centres.

programmed by a private

The software needs to be easily adjustable according to the status of the municipality (a basic, standard and sophisticated versions must be

software company

available). Please see again Table 1, p.18 for the different municipality types.

However it is in the interest of all to prevent the chaos of many different software types and software languages. Therefore the property rights of
such software should be in public hands. This would also allow the cheap distribution to small and remote municipalities. The private software
company would earn its revenue through the software training, on demand services and technical back up.

Available Technical and Financial Resources

Who supports?

As explained before on p. 6 accrual accounting implementation involves high fixed costs at the beginning and during the implementation phase

Udle (MLD-GTZ), Donor

(training costs, consultant costs, software costs etc.). The financial resources should be provided by donors, central government funds and

community, MC/PM,

municipalities together.

LGCDP, municipalities

Another way to give monetary incentives for accrual accounting implementation is the mentioned MC/PM system (see p.19). Besides simply
supporting accrual accounting implementation with this tool, one could that way also promote specific aspects of accrual accounting. An example
would be the usage of performance targets for a proper asset management or a low debt level.

One also has to revise funding possibilities directly through LGCDP.

Political Commitment

Accrual accounting implementation needs the acceptance and support of all relevant stakeholders since this will ease the process significantly.

Udle (MLD-GTZ),

Therefore it is crucial to communicate the benefits of accrual accounting to local and central political parties, local and central government,

Municipalities and

political associations, civil servants, mayors and other relevant stakeholders (for advantages see p.5).

Mayors

Communication

Who is supporting

Who is supporting?

A significant emphasis should be placed in communicating necessary information about the purpose and objectives of the reform process. A

Udle (MLD-GTZ), MuAN,

wider group should be addressed by these information, including the general public (e.g. tax payers), journalists, the scientific public finance

LBFC, Institute of

How to implement Accrual Accounting?


community, donor organizations etc.

28
Chartered Accountants,
the municipalities and
mayors

Part of broad reform

Who is supporting?

Accrual accounting implementation should be understood as part of a broad based public finance reform since it will affect municipal and national

Udle (MLD-GTZ), all

budgeting, reporting and auditing procedures in the long term as well. Moreover accrual accounting implementation should be interlinked to other

municipalities

municipal finance reforms (own resource mobilization, revenue management, expenditure management etc.). In this context one has to revise
feasible ways to integrate reform efforts e.g. in training.

4.2. Development of a macro and micro implementation plan


An accrual accounting implementation strategy for Nepalese municipalities has to fit all municipalities by taking into account their needs, different starting points. (please see Table
1, p. 18). The approach should neither slow down the, in terms of accrual accounting, advanced municipalities, nor should it overburden those municipalities which are at the very
beginning of accrual accounting implementation. However, all municipalities should be provided with the same user friendly, integrated, modular, network based accrual
accounting software which is easily adjustable to the needs and status of the municipalities. Of major strategically importance is the post implementation support since this is a
very crucial phase as drawn as a lesson learnt from past udle experiences. The following overview is a proposal for a macro as well as micro level implementation plan including
important milestones. The different components have been explained in the previous chapters.

How to implement Accrual Accounting?

29

Table 4: Macro and Micro Level Strategy


Macro level strategy

Micro Level Strategy

Milestones:

Milestones

1)

Form a project planning steering group

1)

Create a project management steering group

2)

Develop a national implementation plan

2)

Accounting system and needs assessment

3)

Establish a legal framework for accrual accounting

3)

Decide on modified or full accrual accounting

4)

Develop a new chart of accounts

4)

General and specific training

5)

Develop detailed accrual accounting guidelines and manuals (also focussing on

5)

Inventory; Obtaining information

implementation phase)

6)

Valuation of Assets (only if a full accrual accounting system is wanted)

6)

Software Development

7)

Budgeting

7)

Prepare nationwide training in manual and computerized accrual accounting

8)

Opening balance sheet

8)

Prepare long term education

9)

First fiscal year should be done both manually and computerized

9)

Establish post implementation back up facility

10) First financial statements at the end of the fiscal year


11) Thereafter, computerized Accrual Accounting only
12) Financial statements

Annex

05. Annex
Annex 1
IPSAS List
IPSAS 1 - Presentation of Financial Statements
IPSAS 2 - Cash Flow Statements
IPSAS 3 - Accounting Policies, Changes in Accounting Estimates and Errors
IPSAS 4 - The Effects of Changes in Foreign Exchange Rates
IPSAS 5 - Borrowing Costs
IPSAS 6 - Consolidated Financial Statements and Accounting for Controlled Entities
IPSAS 7 - Accounting for Investments in Associates
IPSAS 8 - Interests in Joint Ventures
IPSAS 9 - Revenue from Exchange Transactions
IPSAS 10 - Financial Reporting in Hyperinflationary Economies
IPSAS 11 - Construction Contracts
IPSAS 12 - Inventories
IPSAS 13 - Leases
IPSAS 14 - Events after the Reporting Date
IPSAS 15 - Financial Instruments: Disclosure and Presentation
IPSAS 16 - Investment Property
IPSAS 17 - Property, Plant and Equipment
IPSAS 18 - Segment Reporting
IPSAS 19 - Provisions, Contingent Liabilities and Contingent Assets
IPSAS 20 - Related Party Disclosures
IPSAS 21 - Impairment of Non-Cash generating Assets
IPSAS 22 - Disclosure of Financial Information about the General Government Sector
IPSAS 23 - Revenue from Non-Exchange Transactions (Taxes and Transfers)
IPSAS 24 - Presentation of Budget Information in Financial Statements
IPSAS 25 - Employee Benefits
IPSAS 26 - Impairment of Cash-Generating Assets
Cash Basis IPSAS: Financial Reporting under the Cash Basis of Accounting

30

Annex

31

Annex 2

Macro level implementation plan (see p.25)


udle central monitoring & back up support (see p.25)

Legal Framework
Learning

Impact
Evaluation
&
Post implementation
support

Regional Monitoring
by Coordinators

Chart of accounts,
Guidelines and
Manuals

Software
Development

Piloting
&
Implementation

Training
&
Education

Communication & Political Commitment

Annex 3

udle monitoring (see p 25)

Regional Coordinator
UDTC

Regional Learning Center


Municipalities

References

32

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