GTZ Report on Accrual Accounting Status Quo - LGCDP

Urban Development through Local Efforts 

Programme 

A joint programme of the Ministry of Local Development (MLD) and 

the German Technical Cooperation (<strong>GTZ</strong>) 

Accrual Accounting 

in the Nepalese Municipal Public Sector 

December 2008

Abbreviations and Acronyms 

ADB 

<strong>GTZ</strong> 

IAS 

ICAN 

IFAC 

IPSAS 

IPSASB 

IPT 

KMC 

LBFC 

LGCDP 

MC/PM 

MLD 

MuAN 

OECD 

RLC 

udle 

UDTC 

WTO 

Asian Development Bank 

German Technical Cooperation 

International Accounting Standards 

Institute of Chartered Accountants of Nepal 

International Federation of Accountants 

International Public Sector Accounting Standard (of IFAC) 

International Public Sector Accounting Standard Board 

Integrated Property Tax 

Kathmandu Metropolitan City 

Local Bodies Fiscal Commission 

Local Governance and Community Development Program 

Minimum Conditions and Performance Measures 

Ministry of Local Development 

Municipality Association of Nepal 

Organisation for Economic Co-operation and Development 

Regional Learning Centre 

urban development through local efforts program 

Urban Development Training Centre 

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 1 

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-<strong>GTZ</strong>) 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 today’s 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 2 

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 doesn’t 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


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 

Resources 

No single accounts for assets and 

resources 

Full knowledge on the value of 

resources and assets


Depreciations, reserves, revenue, 

expenses 

Cost and results accounting 

Not possible 

No knowledge of costs by specific cost 

centres or service products since the 

linkage between source and application 

of funds is missing; no matching of 

revenues and expenses 

Resource consumption and the wear 

and tear of resources is displayed 

Full knowledge of true costs by specific 

cost centres and products 

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


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.


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.


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.


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 

Disbursements 

Debits 

Floating 

assets 

Credits 

Equity 

capital 

Revenues 

Expenses 

Liquidity 

capital 

assets 

Debits 

Reserves 

Liabilities 

Credits 

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).


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 year’s 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.


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. 

1 

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.


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,


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).


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 it’s 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 

Non OECD implemented 

Non OECD in the process 

Switzerland, the Netherlands, Sweden, Spain, Portugal, Finland, France, Great Britain, 

Germany, Italy, USA, New Zealand, Australia, Canada and Iceland, Poland and Slovakia 

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

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. 

2 

This was reported by different municipalities during the research.


• 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, 

o 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, 

o a system running phase, 

o a system reporting phase that included the creation of financial statements like a balance statement and 

cash flow statement by udle, 

o a full implementation phase supervised by udle for manual accrual accounting practice and reporting 

handled by the municipal staff, and finally 

o 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 

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

4 

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


• 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.


• 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.


• Existing experience in accounting software. 

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

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


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). 

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

Type IV • 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).


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 

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

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

system. 5 

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

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

Who is supporting 

Udle (MLD-<strong>GTZ</strong>),, 

Comptroller General 

Office, Institute of 

Chartered Accountants, 

LBFC, MuAN, 

5 

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.


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

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 

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

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

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

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

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

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

• 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 

environment of accrual accounting. 

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

software training and following project phases should be started 

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

implementation 

consultants 


Udle (MLD-<strong>GTZ</strong>), 


Office, the Institute of 


LBFC, MuAN, , 





Office, MuAN


Accrual Accounting Implementation Plan 

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

the different assignments of the relevant stakeholders. 

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

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

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

• 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) 

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

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

asset, debt and tax management will not be possible. 

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

advance. 

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

Chart of Accounts 

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

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

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

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

and private sector. 

• 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 


Udle (MLD-<strong>GTZ</strong>), the 

Institute of Chartered 

Accountants, MuAN, 

LBFC, private software 

company, consultants 


MLD, Central 

Government Agencies 

(e.g. Land Revenue 

Office), MuAN, a private 

software company, all 

municipalities 


Udle (MLD-<strong>GTZ</strong>), LBFC, 


Office and the Institute of 

Chartered Accountants, a 

private software company 

Who is supporting


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

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

• 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, 

health care, emergency facilities and other infrastructure) 

Valuation of assets 

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

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

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

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 

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

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

• 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 

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. 

Udle (MLD-<strong>GTZ</strong>), all 

municipalities, 









consultants


• 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 

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

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

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

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

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. 



Regional Coordinators, 

Regional Learning 

Centres, UDTC


Training and Education 

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

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

proposes four training and education categories: 

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

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

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

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

a) Manual Basis of Accrual Accounting 

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) 

2) 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: 

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. 

3) 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. 



Institute of Chartered 

Accountants or any other 

reliable, high-level 

training institution, 

universities, public sector 

education facilities, a 

private software company


User Friendly Accrual Accounting Information Technology 

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

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

could be tracked down to specific cost centres. 

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

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 

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

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

municipalities together. 

• 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. 

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

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

Communication 

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

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


Joint software 

development 

programmed by a private 

software company 

Who supports 

Udle (MLD-<strong>GTZ</strong>), Donor 

community, MC/PM, 

LGCDP, municipalities 



Municipalities and 

Mayors 


Udle (MLD-<strong>GTZ</strong>), MuAN, 

LBFC, Institute of


community, donor organizations etc. 

Part of broad reform 

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

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

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. 


the municipalities and 

mayors 



municipalities 

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.


Table 4: Macro and Micro Level Strategy 

Macro level strategy 

Milestones: 

Micro Level Strategy 

Milestones 

1) Form a project planning steering group 

2) Develop a national implementation plan 

3) Establish a legal framework for accrual accounting 

4) Develop a new chart of accounts 

5) Develop detailed accrual accounting guidelines and manuals (also focussing on 

implementation phase) 

6) Software Development 

7) Prepare nationwide training in manual and computerized accrual accounting 

8) Prepare long term education 

9) Establish post implementation back up facility 

1) Create a project management steering group 

2) Accounting system and needs assessment 

3) Decide on modified or full accrual accounting 

4) General and specific training 

5) Inventory; Obtaining information 

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

7) Budgeting 

8) Opening balance sheet 

9) First fiscal year should be done both manually and computerized 

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

11) Thereafter, computerized Accrual Accounting only 

12) Financial statements

Annex 30 

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 <strong>Report</strong>ing in Hyperinflationary Economies 

IPSAS 11 - Construction Contracts 

IPSAS 12 - Inventories 

IPSAS 13 - Leases 

IPSAS 14 - Events after the <strong>Report</strong>ing Date 

IPSAS 15 - Financial Instruments: Disclosure and Presentation 

IPSAS 16 - Investment Property 

IPSAS 17 - Property, Plant and Equipment 

IPSAS 18 - Segment <strong>Report</strong>ing 

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 <strong>Report</strong>ing under the Cash Basis of Accounting

Annex 31 

Annex 2 

Macro level implementation plan (see p.25) 

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

Learning 

Impact 

Evaluation 

& 

Post implementation 

support 

Piloting 

& 

Implementation 

Legal Framework 

Regional Monitoring 

by Coordinators 

Training 

& 

Education 

Chart of accounts, 

Guidelines and 

Manuals 

Software 

Development 

Communication & Political Commitment 

Annex 3 

udle monitoring (see p 25) 

Regional Coordinator 

UDTC 

Regional Learning Center 

Municipalities

References 32 

06. References 

ADB (2002). Diagnostic Study of Accounting and Auditing Practices in Selected Developing Member Countries. Link: 

http://www.adb.org/Documents/Books/Diagnostic_Study_Accounting_Auditing/Selected_DMCs/default.asp#c 

ontents (Last Review on: 25.08.2008). 

Athukorala, S. & Reid, B. (2003). Accrual Budgeting and Accounting in Government and its Relevance for Developing 

Member Countries. Asian Development Bank. Link: 

http://www.adb.org/Documents/<strong>Report</strong>s/Accrual_Budgeting_Accounting/Accrual_Budgeting_Accounting.pdf 

(Last review on: 11.08.2008). 

Boothe, Paul (2007). Accrual Accounting in the Public Sector: Lessons for Developing Countries. In Shah, Anwar (Ed.). 

(2007). Budgeting and Budgetary Institutions. (pp. 179-201).Link: 

http://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdf (Last review 

on: 11.08.2008). 

CESifo (2007). Accrual Accounting in the Public Sector. Link: http://www.cesifogroup.de/pls/guestci/download/CESifo%20DICE%20<strong>Report</strong>%202007/CESifo%20DICE%20<strong>Report</strong>%203/200 

7%20/dicereport307-db1.pdf (Last review on: 25.08.2008). 

Champoux, Mark (2006). Accrual Accounting in New Zealand and Australia: Issues and Solutions. Link: 

http://www.law.harvard.edu/faculty/hjackson/NewZealand_Australia_27.pdf (Last Review on: 22.08.2008). 

Chhetri, Ram B. (2002). Local Government Finance. 

Chu, Teh Ben (2008). Accrual Accounting in the Public Sector. In ACCA (2008). International Public Sector Bulletin: 

11. (p.9). Link: 

http://www.accaglobal.com/pubs/publicinterest/activities/library/public_sector/ipsb/archive/2008/11/tech_ips_ 

011.pdf (Last review on: 22.08.2008) 

CPA Australia (2004). Singapore reform. Link: http://www.cpaaustralia.com.au/cps/rde/xchg/SID-3F57FECA- 

6FB905F0/cpa/hs.xsl/724_4339_ENA_HTML.htm (Last review on: 25.08.2008). 

Diamond, Jack (2002). Performance Budgeting – Is Accrual Accounting Required. IMF Working Paper 02/240. Link: 

http://www.imf.org/external/pubs/ft/wp/2002/wp02240.pdf (Last review on: 11.08.2008). 

Diamond, Jack & Khemani, Pokar (2005). Introducing Financial Management Information Systems in Developing 

Countries. IMF Working Paper 05/196. Link: 

http://www.imf.org/external/pubs/ft/wp/2002/wp02240.pdf (Last review on: 11.08.2008). 

FEE (2003). The Adoption of Accrual Accounting and Budgeting by Governments (Central, Federal, Regional and 

Local). Link: 

http://www.fee.be/fileupload/upload/Adoption%20of%20accrual%20accounting%20and%20budgeting%20by 

%20governments%20030716%20WEB1532005161540.pdf (Last review on: 22.08.2008).

References 33 

FEE (2007). Accrual Accounting in the Public Sector. Link: 

http://www.fee.be/fileupload/upload/Accrual%20Accounting%20in%20the%20Public%20Sector%200701301 

20072491.pdf (Last review on: 22.08.2008). 

Grossi, Giuseppe (2006). Public sector accounting and budgeting reforms in Europe. Link: 

http://www.mtk.ut.ee/orb.aw/class=file/action=preview/id=157481/IPSASB+27.04.06.pdf (Last review on: 

22.08.2008). 

IFAC (2006). Glossary of Accounting Terms. Link: http://www.ifac.org/Members/DownLoads/2008_B11_Glossaryrevised_repaired_MB.pdf 


IMF (2007). Public Financial Management Technical Guidance Note. Transition to Accrual Accounting. Link: http://blogpfm.imf.org/pfmblog/files/fad_guidance_note_transition_to_accrual.pdf 


IPSASB (2008a). Homepage. Link: http://www.ifac.org/PublicSector/ (Last review on: 20.08.2008). 

IPSASB (2008b). List of International Public Sector Accounting Pronouncements. 

Link:http://www.ifac.org/Store/Details.tmplSID=120915676524228&Cart=121922786842692 (Last review 


IPSASB (2008c). IPSAS Adoption by Governments. Link: 

http://web.ifac.org/download/IPSASB_Adoption_Governments.pdf (Last review on: 20.08.2008). 

IPSASB (2003). Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities 

(Second Edition). Link: http://www.ifac.org/Members/DownLoads/PSC-Study14_2nd_Ed.pdf (Last review on: 

19.08.2008) 

KPMG (2005). Doppik schlaegt Kameralistik. Fragen und Antworten zur Einfuehrung eines doppischen Haushalts- und 

Rechnungswesens. Link: http://www.pfalzakademie.de/projekte/Haushalt/Doopik_schlaegt_Kameralistik.pdf 


KPMG (2008). Doppik schlaegt Kameralistik. Fragen und Antworten zur Einfuehrung eines doppischen Haushalts- und 

Rechnungswesens. Link: http://www.kpmg.de/docs/Doppik_schlaegt_Kameralistik.pdf (Last review on: 

11.08.2008). 

Nepal Legislation (1999a). Local Self Governance Act, 2055 (1999). An Act made to provide for Local Self- 

Governance. Link: 

http://www.mld.gov.np/pdf_downloadable_file/local_self_governance_act_2055(1999)_english.pdf (Last 

review on: 11.08.2008). 

Nepal Legislation (1999b). Local Self Governance Regulation, 2056 (1999). Link: 

http://www.mld.gov.np/pdf_downloadable_file/local_self_governance_regulations_2056(1999)_english.pdf 


Nepal Legislation (1999c). Local Body (Financial Administration) Regulation, 2056 (1999). Kathmandu: Law Books 

Management Board. 

SAFA (2006). A Study on Accrual-Based Accounting for Governments & Public Sector Entities in SAARC Countries. 

Link: http://www.esafa.org/About/Study-Accrual_Accounting_in_SAARC_Governments_1.pdf (Last review 

on: 22.08.2008).

References 34 

Schiavo-Campo, S. & Tommasi, D. (1999). Managing Government Expenditure. Link: 

http://www.gsdrc.org/go/display/document/legacyid/162 (Last review on: 11.08.2008). 

Schick, Allen (2006). Why most developing countries should not try New Zealand reforms. World Bank Working Paper. 

Link: http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/04/04/000012009_20060404125921/ 

Rendered/PDF/357320NZ0reforms0nz1ref.pdf (Last review on: 11.08.2008). 

Shah, Anwar (Ed.). (2007). Budgeting and Budgetary Institutions. Link: 

http://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdf (Last review 


udle (2006). Responding to Urban Developments in Nepal (not published). 

udle (2008): Annual <strong>Report</strong> on Detailed Revenue and Expenditure Breakdown. 

World Bank (2003). Financial Accountability in Nepal. A Country Assessment. Link: http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2003/05/17/000094946_03050304064861/ 

Rendered/PDF/multi0page.pdf (Last review on: 26.08.2008). 

World Bank (2007). Nepal Public Sector Accounting and Auditing. A Comparison to International Standards. Link: 

http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/Publications/448813- 

1195243379044/sar_report-nepal-full.pdf (Last review on: 21.08.2008). 

Wynne, Andy (2003). Do Private Sector Financial Statements Provide a Suitable Model for Public Sector Accounts. 

ACCA. Link: 

http://www.accaglobal.com/pubs/publicinterest/activities/library/public_sector/ps_pubs/papers/ps_doc_012.p 

df (Last review on: 11.08.2008). 

Wynne, Andy (2004). Is the move to accrual based accounting a real priority for public sector accounting. ACCA. Link: 

http://www.accaglobal.com/pubs/publicinterest/activities/library/public_sector/ps_pubs/papers/ps_doc_008.p 

df (Last review on: 11.08.2008).

GTZ Report on Accrual Accounting Status Quo - LGCDP

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?