Part A: The reporting framework
Background to public sector reporting
Key takeaways
- Public sector accounting provides information useful for accountability and decision making: how public resources were raised and used, for citizens, the legislature and other stakeholders, rather than mainly for investors.
- In Kenya it operates within the PFM Act, 2012 and the County Government Act, 2012, which require prescribed reporting formats and timelines for national and county entities.
- The cash basis recognises a transaction only when cash is received or paid; the accrual basis recognises it when it occurs economically, giving a fuller picture of assets and liabilities.
- The IPSASB develops IPSAS, the PSASB is Kenya's own body prescribing standards and formats for public entities, and ICPAK sets professional and ethical standards for accountants.
- IPSAS adapt IFRS principles to the public sector's distinctive features: non-exchange revenue such as taxes and grants, public accountability and the absence of a profit motive.
Authority for this chapter
Article 226 of the Constitution (accounts and audit of public entities); sections 80 to 83 of the PFM Act (the consolidated annual financial statement, annual and quarterly reporting by accounting officers, and reporting by receivers of revenue) and sections 164 to 166 for counties; sections 192 to 194 of the PFM Act, which establish the Public Sector Accounting Standards Board and let it prescribe the standards public entities apply; the cash-basis IPSAS and the accrual IPSAS the Board's roadmap moves national and county entities to from the 2024/25 financial year.
Why public entities report
Public sector accounting exists to provide information useful for accountability and decision making, showing how public resources were raised and used, and supporting oversight by citizens, the legislature and other stakeholders, distinct from private-sector accounting's primary focus on investor decision-making.
The Kenyan legal framework
Public sector accounting in Kenya operates within the PFM Act, 2012 and County Government Act, 2012 (Budgeting, Revenue and Cash Management, in the chapter on the legal and institutional framework), which require prescribed reporting formats and timelines for national and county entities.
Cash versus accrual accounting
Worked computation: the same transaction under each basis (not a decided case)
A county government issues a KES 60,000,000 invoice for a completed road contract in June 2026 (financial year end 30 June) but does not pay the contractor until August 2026, the new financial year.
Under the cash basis, the KES 60,000,000 is not recognised as an expense at all in the year ended 30 June 2026, since no cash left the county's accounts before that date; the whole amount is recognised as a cash payment in the 2026/27 year instead.
Under the accrual basis, the expense and a matching payable of KES 60,000,000 are both recognised in the year ended 30 June 2026, the year the road work was actually completed and the obligation arose, giving a truer picture of that year's service delivery cost and the county's outstanding liabilities at year end, exactly the gap the accountability objective is meant to close.
The professional bodies
International Public Sector Accounting Standards (IPSASs)
IPSASs are the accrual-based (with a separate cash-basis standard, covered in the chapter on the cash basis) accounting standards developed specifically for public sector entities, adapting IFRS principles to the public sector's distinctive characteristics:
- Non-exchange revenue (taxes, grants)
- Public accountability
- The absence of a profit motive
The cash/accrual split is this whole paper's spine
The cash and accrual distinction drawn above underpins the whole paper: every chapter but the last assumes accrual-basis IPSAS reporting, and the closing chapter covers the cash basis specifically. Keep clear which basis a given question is actually asking about, and, for any transaction a question describes, be ready to state both the cash-basis and accrual-basis treatment side by side, exactly as the worked example above does.
Self-check
(a) Explain the primary objective of public sector accounting, and how it differs from the primary objective of private-sector financial reporting. (4 marks)
(b) A county government receives a KES 25,000,000 grant in March 2026 but only spends KES 15,000,000 of it by the 30 June 2026 year end. State, under the cash basis, how much is recognised as revenue for the year, and explain how the answer would differ under the accrual basis if the grant carries no conditions attached to the unspent balance. (5 marks)
(c) Distinguish the roles of the IPSASB and the PSASB. (3 marks)
Show worked answer
(a) To provide information useful for accountability and decision making, showing how public resources were raised and used, for citizens, the legislature and oversight bodies; private-sector reporting is primarily aimed at investor decision-making, assessing returns and risk (4 marks).
(b) Under the cash basis, the full KES 25,000,000 is recognised as revenue when received in March 2026, regardless of how much was spent by year end. Under the accrual basis, if the grant carries no conditions, the full KES 25,000,000 is also recognised as revenue on receipt (an unconditional non-exchange transaction gives rise to revenue immediately); the answer would only differ if the grant were conditional, in which case only the amount for which conditions were met (here reflecting the spending) would be revenue, the rest a liability (5 marks).
(c) The IPSASB develops IPSAS, the international standards; the PSASB is Kenya's own body that prescribes the specific standards, formats and templates Kenyan public entities apply, translating IPSAS into local practice (3 marks).