GTZ Report on Accrual Accounting Status Quo - LGCDP

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,
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).