Focus: A pathway to accrual accounting for national and provincial departments

The continued use of the current Modified Cash Standard (MCS) for national and provincial departments deprives government of high-quality and relevant information for decision-making. The current MCS means that the Statements of Financial Position are still prepared using cash-based financial reporting with only some notes to the annual financial statements reflecting limited accrual-based information. Accordingly, government might not always appreciate the balance sheet impact of some decisions until the cash flow occurs.

Accrual accounting provides necessary input for public sector entities to assess whether they can continue to provide current services and the extent to which they can afford new programmes and services. High-quality accrual-based financial reporting is required to allow government to make more informed decisions to respond appropriately to country-wide challenges as it allows for a longer-term view when making financing decisions and greater accountability for their financial impact.

Section 216(1)(a) of the Constitution of the Republic of South Africa 1996 requires that national legislation must prescribe measures to ensure both transparency and expenditure control in each sphere of government, by introducing generally recognised accounting practice (GRAP). The Public Finance Management Act 1999 (PFMA) was partly promulgated to comply with this constitutional requirement with section 89(1)(a)(i) assigning the function of setting Standards of GRAP to the Accounting Standards Boards (ASB).

The ASB develops Standards of GRAP specifying how transactions and other events are to be recognised, measured, presented and disclosed in the financial statements. The objective of the Standards of GRAP is to meet the needs of users of financial statements by providing the information needed as a tool for accountability and decision making by government institutions. Standards of GRAP are currently being applied by public entities, trading entities (as defined by the PFMA), constitutional institutions, municipalities and boards, commissions, companies, corporations, funds, or other entities under the ownership control of a municipality, and Parliament and provincial legislatures. International Financial Reporting Standards (IFRS Standards) are used by public entities meeting the criteria outlined in ASB Directive 12. It is therefore only national and provincial departments that still have not implemented Standards of GRAP or IFRS.

The ASB and National Treasury, under the leadership of the Minister of Finance as the executive authority, are urged to accelerate the introduction of Standards GRAP for departments by recommending an effective date to the Minister.

It is acknowledged that any accrual implementation project needs to follow an integrated approach covering at a minimum, the accounting, technology, data and knowledge/skills gaps. In 2013 Cabinet approved a program to implement an Integrated Financial Management Information System (IFMIS) for departments by 2021, which would have been one of the key pillars in the transition to accrual accounting. However, challenges have been experienced with the IFMS which has led to delays in its implementation. This delay partly led to the Finance Minister issuing a PFMA section 40(1)(b) exemption for national and provincial departments from complying with the PFMA for a period of five years effective 8 April 2021, which effectively meant that departments are exempted from applying the Standards of GRAP for that period.

It must be noted that accrual accounting was successfully implemented in local government in the 2008/09 financial year even though accounting, technology, data and skills gaps prevailed at the time.

There is therefore an urgent need for National Treasury to develop and approve an Integrated National Implementation Strategy and Plan for departments to transition to accrual accounting to ensure compliance with section 216(1)(a) of the Constitution by 1 April 2026. The Integrated National Implementation Strategy and Plan should outline the overall approach to the migration to an accrual-based financial accounting and reporting framework, including the reform timetable and key delivery milestones.

As private citizens and as part of our commitment to active citizenry We owe it to our country to ensure that the Minister of Finance is not again compelled to extend the exemption for national and provincial departments when it expires on 7 April 2026 on account of not being able to address the prevailing gaps. A properly functioning public sector that adheres to the fundamental principles of good governance is one of the key pillars to the realisation of South Africa as envisaged in the constitution.

Author
Sandiso Gcwabe CA(SA), CFO of the Western Cape Liquor Authority and Deputy Chairperson of the SAICA Southern Region Public Sector Committee