Question Tag: Accrual Basis

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  • 10 Marks

PSAF – May 2021 – L2 – Q2b – International Public Sector Accounting Standards (IPSAS)

Explain differences between accrual and cash accounting, justify IPSAS adoption, and describe commitment accounting benefits.

You have received an official memo from your Permanent Secretary, which reads:

Director of Account and Finance: Hope you are doing well. We have just closed from a workshop organised by the Ministry of Finance on public finance management not long ago, and the discussion was all about the adoption of IPSAS accrual accounting in the public sector. It was emphasised that migration from IPSAS Cash Basis to IPSAS Accrual Basis is necessary to improve financial reporting and transparency in the public sector. You know I have little knowledge in accounting, so I was completely lost in the discussions and I wished you had attended the workshop with me.

Another issue discussed was commitment accounting. We were made to understand that commitment accounting strengthens public finance management and therefore all Ministries, Departments and Agencies (MDAs) must ensure that every expenditure is committed in accordance with the appropriation prior to spending.

Please could you help me with some information on these issues?

Required:
Explain to the Permanent Secretary:
i. THREE differences between accrual accounting and cash accounting. (3 Marks)
ii. THREE justifications for adopting IPSAS accrual accounting in the public sector. (3 Marks)
iii. The term “commitment accounting” and illustrate THREE ways it could strengthen public financial management. (4 Marks)

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  • 40 Marks

PSAF – Nov 2020 – L2 – Q1 – International Public Sector Accounting Standards (IPSAS)

Discuss IPSAS transition exemptions and prepare financial statements for Oranta State Government using IPSAS accrual.

IPSAS 33, gives a transition relief (exemption) of up to three years within which to develop models for transiting to IPSAS accrual. However, the government of Nigeria adopted accrual IPSAS on revenue from exchange transactions effective January 1, 2016.

Oranta State Government mandated the Accountant-General of the State to implement the IPSAS accrual in the preparation of their financial statements with effect from January 2018 which was complied with accordingly.

For the smooth implementation of IPSAS accrual, the State Executive Council approved the following:

(i) Asset valuation committee to be chaired by the Deputy Governor with the Commissioner of Finance, Commissioner of Budget and Planning, Chairman State Internal Revenue Service, Accountant-General of the State, and Head of Service as members while a Director in the Office of the Secretary to the State Government was appointed as the Secretary.
(ii) The Committee was mandated to value all the State assets and liabilities on or before the implementation of IPSAS accrual.
(iii) The Committee was allowed to engage the services of competent valuers for the job.
(iv) The valuation of the assets and liabilities should be on a continuous basis and any value agreed and approved by the State Executive Council should be brought into the books in the year of valuation.
(v) All assets and liabilities incurred after implementation of IPSAS accrual should be recognized in the year they occurred.

The consolidated trial balance for the year ended December 31, 2017, based on IPSAS cash is as follows:

Extracted consolidated cashbook for the year 2018:

The following information is relevant:
(i) The employees‟ salaries and wages bill for the month of December 2018
amounting to N6.5billion was outstanding at the end of the year.
(ii) The following information was extracted from the unit in charge of
accounting for property, plant and equipment (PPE): 100 sets of HP
computers were received from Koko Computers Limited to assist the State
government to eradicate ghost workers from the payroll- the HP series
P1120, 2016 model. Based on this information, a call was made to three of
their computer suppliers to find out the current price of the HP P1120. Two of
the suppliers quoted N450,000 each, while one quoted N500,500 each.
Based on this information, the fair value of the computers, were taken as
N500,000 each.
(iii) The government during the year received an asset valuation report from the
Asset Valuation Committee that was set up to carry out the valuation of the
old assets and liabilities of the State.
(iv) The following values were recommended and approved by the State
Executive Council respectively:

(v) Pension and gratuity of N15 billion was outstanding at the end of the year
(vi) Some of the accounting policies adopted by the government for depreciation
include the following rates;

(vii) During the year, one of the contractors took the State to court for breach of
contract. The case was still in court as at the end of the year and from all
indications, judgment will eventually be in his favour. The legal adviser
estimated the judgment debt to be N50million.
(viii) Value of office consumables based on inventory sheet as at December 31,
2018 was N550million.
(ix) The following expenses were incurred but not settled as at end of the year.

(x) An extract from the foreign loan amortisation schedule indicates that a total
sum of N32billion comprising principal and interest of N2billion was due
and paid during the year. Also domestic loan of N13billion comprising
principal and interest of N1billion was paid during the year. The interest
payable on domestic and external loans at the end of the year amounted to
N3billion and N5 billion respectively.
(xi) The investment of 10% treasury bills for 360 days was due to mature on
January 1, 2018 and reinvested immediately for another term.
(xii) The revolving loan attracts interest of 4% per annum and it is paid along
with the principal.
Required:
a. In line with the provisions of IPSAS 33, explain how the following revenue
from exchange transactions should be recognised:
i. Aid and grants receivable as at December 31, 2015 (2 Marks)

ii. Debt forgiveness approved on or after January 1, 2016 (2 Marks)
iii. Personal income tax on or after January 1, 2016 (2 Marks)
b. Prepare in vertical form:
i. Statement of financial performance for the year December 31, 2018.
(17 Marks)
ii. Statement of financial position for the year December 31, 2018.
(17 Marks)
(Total 40 Marks)

 

 

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  • 8 Marks

FA – Nov 2015 – L1 – SB – Q6a – Bases of Accounting: Accrual vs. Cash

Differentiate accounting bases and discuss a setback of the cash basis.

i. Differences between Accounting Bases

  • Cash Basis: Recognizes revenue and expenses only when cash is received or paid. It does not match income with expenses incurred in the same period.
  • Accrual Basis: Recognizes revenue when earned and expenses when incurred, regardless of when cash transactions occur. It provides a more accurate picture of a company’s financial position.
  • Break-up Basis: Assumes that a business will not continue as a going concern, and assets are valued at their realizable amounts rather than their carrying amounts.

ii. Setback of Cash Basis

  • It does not provide a true picture of financial performance, as income and expenses may not be recorded in the period to which they relate.

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  • 6 Marks

FR – May 2018 – L2 – Q5b -Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain the differences between the accrual, cash, and break-up basis of accounting, with examples

Explain the differences between the accrual, cash, and break-up basis of accounting.

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  • 1 Marks

FA – May 2018 – L1 – SA – Q14 – Bases of Accounting: Accrual vs. Cash

Determines the correct timing of income recognition under the accrual basis of accounting.

In the statement of cashflows, when recognizing income under the accrual basis, which of the following statements is correct?
A. Income is recognized when earned and cash is received
B. Income is recognized only when it is not certain that cash will be received
C. Income is recognized only when cash is received
D. Income is recognized when earned and not necessarily when cash is received
E. Accrued income is only recognized in the financial statements.

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  • 6 Marks

FA – Nov 2022 – L1 – SB – Q4a – Accounting Concepts

Explain the cash, accrual, and break-up accounting bases.

Accounting concepts are the broad principles and general assumptions underlying the preparation of financial statements.

Required:
Explain the following accounting bases:
i. Cash basis
ii. Accrual basis
iii. Break-up basis
(6 Marks)

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  • 1 Marks

FA – MAY 2015 – L1 – SA – Q15 – Bases of Accounting: Accrual vs. Cash

Identify the correct condition for recognizing income under the accrual basis of accounting.

When recognizing income under the accrual basis, which of the following statements is correct?
A. Income is recognized when earned and cash is received.
B. Income is recognized only when it is not certain that cash will be received.
C. Income is recognized only when cash is received.
D. Income is recognized when earned and not necessarily when cash is received.
E. Accrued income is only recognized in the financial statements.

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  • 20 Marks

PSAF – Nov 2016 – L2 – Q1a – Preparation and presentation of financial statements for central government

Prepare the Statement of Financial Performance and the Statement of Financial Position for the Consolidated Fund as of 31 December 2014 under accrual basis, in compliance with IPSAS.

Below is the Trial Balance of the Consolidated Fund for the year ended 31 December 2014.

Additional Information:
i) It is the policy of Controller and Accountant General to adopt the accrual basis of preparing the public accounts of the Consolidated Fund for the first time in compliance with the Financial Administration Regulation 2004 and the International Public Sector Accounting Standards (IPSAS). The effective date is 31 December 2014.
ii) The current Chart of Accounts based on the GFS 2001 is used in the classification of revenues and expenditures.
iii) Consumption of fixed capital charged on cost for the year has been computed as GH¢156,000,000.
iv) Direct tax revenues due to government but were not received at 31 December 2014 amounted to GH¢49,000,000.
v) An established post salary in arrears as a result of salary increment in the fourth quarter of 2014 was GH¢56,000,000 and goods and services outstanding at the end of the year amounted to GH¢12,000,000.
vi) The grant shown in the trial balance as expenditure represents a statutory transfer to the District Assembly Common Fund (DACF). Any arrears in the DACF should be treated as payable. The current rate of transfer is 7.5% on the amount received.
vii) Public debt interest of GH¢14,000,000 was due to creditors but was not paid as at 31 December 2014.

Required:
a) Prepare in a form suitable for publication and in accordance with the relevant Financial Laws and IPSAS:
i) Statement of Financial Performance of the Consolidated Fund for the year ended 31 December 2014.
ii) Statement of Financial Position of the Consolidated Fund as at 31 December 2014.
(Show all workings clearly)

b) Disclose any TWO significant accounting policies as part of the notes to your accounts, as much as the information provided will permit.

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  • 2 Marks

PSAF – Nov 2016 – L2 – Q1b – International Public Sector Accounting Standard

Identify and disclose two significant accounting policies for the Consolidated Fund using the accrual basis for the first time.

Disclose any TWO significant accounting policies as part of the notes to your accounts, as much as the information provided will permit.

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  • 20 Marks

PSAF – Nov 2020 – L2 – Q2 – Preparation and presentation of financial statements for local government

Prepare financial statements (Statement of Financial Performance and Statement of Cash Flow) and explain basic disclosure requirements for Eminaa District Assembly.

a) The following details relate to Eminaa District Assembly for the year 2018.

Details GH¢’000
Dividend Received 93,250
Central Government Salaries 12,000,000
Basic Rates 370,900
Districts Development Facility 15,000,600
Rent from Land and Building 6,120,800
Established Posts 1,140,700
Other Expenditure 600,000
Non-Established Posts 580,000
Allowances 390,470
Court Fees 240,000
Inventory and Consumables 800,000
Sanitation Fees 370,000
General Cleaning 350,000
Common Fund 2,930,000
Social Benefit 840,300
Equity Investment Acquired 420,000
Infrastructure, Plant, and Equipment 980,000
Work-In-Progress 490,000
Loans Received 2,330,000
Interest Expense 200,000
Advances to Staff 660,000
Royalties 430,000
Consultancies cost 470,000
Training and Workshop cost 275,000
Transport and Travelling cost 620,000
Consumption of Fixed Assets 960,000
Special Services 820,000
Utilities 630,000
Market Tolls 870,000
Permit Fees 990,000
Fines and Penalties 330,000
Development Bonds Issued 1,300,000
Hostel License 630,920
Business Income 2,300,600
Chop Bar License 300,400
Proceeds from Sale of Equity 990,320
Accumulated Fund (1/1/2018) 370,600
Herbalist License 530,370
Cash and Cash Equivalent @ (1/1/2018) 12,300,240
Stool Land Revenue 600,000
Lorry Park Fees 720,400
Market Store Rent 300,750
Recoveries 194,000
Loan Repayment 143,000
Property Rate 820,900

Additional Information:

  1. Eminaa District Assembly adopts the accrual basis of accounting in the preparation of its financial statements.
  2. Established Post salaries outstanding as at 31/12/2018 were GH¢180,000,000.
  3. Inventory at 31/12/2018 was GH¢170,000,000.

Required:
Prepare for Eminaa District Assembly:

  • Statement of Financial Performance for the year ended 31/12/2018.

(7 marks)

b) Prepare a statement of cash flow for Eminaa District Assembly for the year ended 31/12/2018. (8 marks)

c) Subject to IPSAS 6: Consolidated and Separate Financial Statements, a Controlling Entity that presents Consolidated Financial Statements shall disclose certain basic information.

 

Explain FIVE (5) basic information that an institution preparing Consolidated Financial Statements needs to disclose. (5 marks)

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  • 8 Marks

PSAF – Nov 2020 – L2 – Q1a – Accounting policies for cash and accrual-based accounting systems

This question addresses how different accounting bases (cash vs. accrual) affect the treatment of specific items in financial statements.

The Director of Finance and the Principal Spending Officer of a Public Sector Organization are in disagreement as to which basis of accounting will provide the most useful information to the users. The Principal Spending Officer strongly believes that whether an entity applies cash basis or accrual basis, the effect is the same. The Director of Finance disagrees with him totally, arguing that different accounting treatments apply to both and therefore affect the level of disclosure in the financial report. The Director of Finance proceeded to illustrate his point by drawing on the basis of accounting on these items in the financial statement:

i) Motor vehicle donated to the entity

ii) Revenue due but not received by the entity

iii) Furniture acquired in the current year

iv) Electricity consumed for the year but not paid to the Electricity Company.

Required:

The Director of Finance has tasked you to present a brief paper on how the two accounting bases would be applied in the treatment of items i) to iv).

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  • 10 Marks

PSAF – July 2023 – L2 – Q1a – Accounting policies for cash and accrual-based accounting systems

Discuss the conditions for transitioning from cash basis to accrual basis accounting in a public sector entity.

A public sector entity is transitioning from cash basis of accounting to accrual basis of accounting for the 2022 financial year. You are a member of the transitional committee set up to ensure smooth change over.

Required: Discuss FIVE (5) conditions for seamless transition from cash basis of accounting to accrual basis of accounting.

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  • 6 Marks

PSAF – May 2018 – L2 – Q1d – Accounting policies for cash and accrual-based accounting systems

Contrast cash basis and accrual basis of accounting in terms of revenue recognition, expenditure recognition, non-financial asset disclosure, and depreciation.

There are two main bases of accounting in the public sector, and these are cash basis and accrual basis. These two bases differ in many respects, though there are some similarities.

Required:
Contrast cash basis and accrual basis of accounting in the public sector in terms of:
i) Recognition of revenue
ii) Recognition of expenditure
iii) Disclosure of non-financial assets
iv) Notion of depreciation

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  • 20 Marks

FA – May 2019 – L1 – Q5 – Accruals and prepayments The IASB’s Conceptual Framework

Discuss internal and external users of accounting information, elements of financial statements, benefits of financial statements, accrual and going concern basis.

The conceptual framework for financial reporting sets out the concepts that underlie the preparation and presentation of financial statements for users. The objectives of financial statements are to provide information about the financial position, performance, and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions. Users of accounting information are classified into internal and external users.

According to the Framework of IAS/IFRS, the underlying assumptions for the preparation of financial statements are accrual basis and going concern basis.

Required:
a) State TWO (2) internal users and TWO (2) external users of accounting information and their information needs.
(4 marks)

b) Identify and explain FOUR (4) elements of financial statements.
(8 marks)

c) Identify FOUR (4) benefits that financial statements provide to its users.
(4 marks)

d) Explain what is meant by accrual basis of accounting. Illustrate your answer with a suitable example.
(2 marks)

e) Explain what is meant by going concern basis.
(2 marks)

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