Advanced Accounting II

CHAPTER TWO

2.1. Accounting for Public Enterprises in Ethiopia

The term Public Sector refers to the section of the economy that is owned and operated by the
government not private businesses or individuals. All public entities and NGOs other than
government business enterprise qualify as a public entity to use IPSAS issued by IFAC and
IPSASB, the public sector environment differs from the private sector environment and public
sector used IPSAS and private sector uses IFRS for their financial report preparation accordingly.
Public sector accounting is the accounting principle used by public sector to prepare both yearly
budget plan and financial statement. Public accounting can be divided into budget accounting,
financial accounting, and management accounting. It classifies in terms of purpose of using
information and each kind of accounting has its own characteristic. There are several bases of
accounting which will be used by public sectors for preparation of their financial report and
budget formulation. From those some of them are including (cash basis of Accounting, Accrual
basis Accounting and Modified Accrual basis Accounting) are listed and discussed as below

1. Cash Base Accounting: Cash accounting records the inflow and out flow of cash is regardless
of when revenues are earned, and expenses are incurred. A cash accounting system is simple.
Cash base accounting and budget accounting coincides in many countries. Cash-based budgeting
does not require cash accounting, but cash accounting requires cash budget.

2. Accrual Basis Accounting: Accrual basis means a basis of accounting under which
transactions and other events are recognized when they occur (and not only when cash or its
equivalent is received or paid). The elements recognized under accrual accounting are assets,
liabilities, net assets/equity, revenue, and expenses.

3. Modified Accrual Base Accounting: Modified accrual accounting recognizes transaction and
events when they occur, no matter when cash is paid or received. In comparison with cash basis
of accounting, this model is better in giving an adequate framework for assessing and arrears due
to expenditures at the verification stage recognized as liabilities. There is a variety of modified
accrual accounting systems, depending on the treatment of superannuation, inventories,
depreciation, etc.

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Public Enterprise or Share Company the ownership of which is fully or. partly owned by the
Government.” Is a business organization wholly or partly owned by the state and controlled
through a public authority. Some public enterprises are placed under public ownership because,
for social reasons, it is thought the service or product should be provided by a state monopoly.
The state has a public purpose in the exercise of its sovereign power. Such power is inherent in
statehood and justifies the existence of a government. That is primarily manifested in the specific
function of governments in discharging their traditional role of ensuring peace and security. But
any modern state assumes responsibility beyond its traditional function of maintaining peace and
order and protecting the country from external aggression, and it engages in economic activities.
To accomplish this, one of the options is setting up an entity that undertakes commercial
activities. Such enterprises have become a universal phenomenon in all contemporary societies.
However, the reason why and the extent to which such a role is assumed varies depending on the
political economy or ideology of a state. It is common to find enterprises owned by the state in
different countries despite variation in their ideologies. The role of public enterprises in Ethiopia
is manifested in the quantum of capital they command and the magnitude of the economy’s
dependence on such enterprises

Public Enterprises may be defined as autonomous or semi-autonomous bodies owned by the

government and engaged in providing services and or products. The growth of public enterprises
has been partly by nationalization and partly through creation of new ones. Some industries are
also reserved for the public sector as a matter of national policy. Such industries could be
airways, defense industries, railways, telecommunication and the like. The need to have public
enterprises may be justified on a number of grounds:

The role of public enterprises in Ethiopia is manifested in the quantum of capital they command
and the magnitude of the economy’s dependence on such enterprises. Essential services such as
electricity, telecommunication, shipping and logistics, transport and the like are mainly, if not
solely, provided by public enterprises. Owing to the dearth of research on the subject, there is the
need for conceptual clarity on the notion and the legal forms (or designations) of such
enterprises. Leafing through the relevant laws, one encounters many definitions. Moreover, the
form or designation of public enterprises and the diversity of the legislation applicable thereof
necessitate inquiry into the concept and their characteristics.

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2.2. What are the reasons for establishment of public enterprises?

Correct the market failure resulting from public monopoly and misallocation of public resources;
Facilitate regional development through government-planned and controlled location of public
enterprises and their branches; Create jobs; and, Ensure adequate provision of social services

2.3. Benefits of Public Enterprises

Public enterprises are highly beneficial to the economy. In general, we can sub group the benefits
of public enterprises in to two as an economic and social benefit.

2.3.1. Economic Benefits of Public Enterprises

Public enterprises are so important in strengthening the economy of a particular nation by
providing the following benefits:

 Public enterprises generate revenue in the form of divided, interest on loans, taxes, etc.
which are paid to the government.
 Public enterprises maximize the social welfare and developmental opportunities of the
economy, since they exploit the natural and technological recourses of the state.
 Public enterprises help in reducing regional disparities through fair dispersal of industries
in taking in to account rural areas of the country in proper perspective.
 Public enterprises provide infrastructural facilities that can help for the development of
the economy.
 By exporting the foreign currency generating goods and services of the country and by
substituting imported products and services, public enterprises can save foreign
exchange.

2.3.2. Social Benefits of Public Enterprises

Public enterprises provide social benefits by promoting welfare of the society. The social benefits
of the society are summarized as follows:

 Public enterprises provide job opportunity for the society and play its role in the
reduction of unemployment.
 Public enterprises provide various welfare benefits such medical, transportation, housing
and other social benefits to employees.

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 Public enterprises provide goods and services at cheaper price to low-income groups.
 Public enterprises play a social role by safeguarding the interest of consumers by offering
items of good quality with a reasonable price.

2.4. forms of public Enterprise

The enterprises which are not run on departmental basis have, in general, two forms. One is as a
firm or company owned and controlled by the government and functions under the same laws of
the country as private firms or companies of similar type. Another form of public enterprise is
what may be called the public corporation.

 Public corporations are

Set up by legislation which defines:

 Sphere of activities
 Rights, immunities
 Artificial legal persons
 Can take independent decisions
 Can sue and be sued
 Have their own personnel policy, management pattern and the like
 Can retain and reuse their funds according to adopted policy

2.5. Public Enterprise in Ethiopia

Proclamation No. 25/1992 is a legal provision governing establishment and operation of public
enterprises in Ethiopia. The public enterprises in Ethiopia include those nationalized and
established afresh by the government the years. As per the proclamation a public enterprise is
defined as a wholly state-owned enterprise established pursuant to the proclamation to carry on
for gain manufacturing, distribution, service rendering or other economic and related activities.

According to the proclamation:

 Every enterprise shall be established by regulation and the establishment regulation shall
contain:

 The name of the enterprise

 A statement the enterprise shall be governed by the proclamation

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 the purpose for which the enterprise is established

 the authorized capital
 the amount of initial capital paid up both in cash and in kind
 A statement that the enterprise shall not be liable beyond its total assets
 the head office of the enterprise
 A statement that may authorize the enterprise to open branches
 the name of the supervising authority
 the duration for which the enterprise is established

 Each enterprise shall have:

 A supervising authority
 A management board
 Management
 Necessary staff

Each enterprise shall have a Legal Reserve Fund

 5% of net profit transferred annually to LRF until the fund equals 20% of the capital
 The fund may be utilized for covering:
 Losses
 Unforeseen expenses and liabilities
 The board of the enterprises, upon approval of the authority, may establish other funds

 Taxes and Duties

 Shall be paid as per relevant provisions of applicable laws

 State dividend

 The amount to be paid to the government in the form of state dividend shall be

Proclamation NO.25/1992:

Definition of Terms Art.2 (1) Public Enterprise: a wholly state-owned public enterprise
established pursuant to Proc.No.25/1992 to carry on business for gain in manufacturing,
distribution, service rendering or other economic related activities. Art.2 (3) Total Assets: all

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immovable and movable property, receivables, cash and bank balances of the enterprise
including intangible assets, deferred charges and other debit balances.

Art.2 (4) Net Total Assets: total assets fewer current liabilities, long term debts, deferred income
and other liabilities.

Art 2 (5) Capital: the original value of the net total assets assigned to the enterprise by the state
at the time of its establishment or any time thereafter.

Art.20 (1) the paid-up capital shall not be less than 25% of the authorized capital at the time of
its establishment.

Art. 20 (2) the authorized capital of the enterprise shall be fully paid up within 5 years from the
date of its establishment.

Art.2 (7) Net Profit: any excess of all revenue and other receipts over costs and operating
expenses properly attributable to the operations of the financial year including depreciation,
interest and taxes.

2.6. Accounting for Public Enterprises

Accounting for the public enterprise must be based on clear understanding of the underlying
assumptions to be made on the characteristics of the public enterprise, and the type or structural
relationship established.

Entity accounting is accounting for a separate organization that has legal personality of its own
separate from its owners. The accounting equation assets equal liabilities plus capital could be
applicable in its entirety to the public enterprise. The double entry system of accounting together
with the accrual basis of accounting is essential for more adequate follow up of the enterprise
business transactions. Most of the asset accounting of public enterprises is the same as in private
corporate entity accounting except for variations in classification and valuation methods.
Liabilities, which represent accruals to and claims creditors, will be accounted for in similar
manner as in private corporate accounting entity except for classification.

Proclamation No. 25/1992 contains provisions for accounting for public enterprises in Ethiopia,
such as the formation, operation, privatization, amalgamation and division, as well as dissolution
and winding up of public enterprises.

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Example: On January1, 2006, the Government of Ethiopia formed XYZ Enterprise with
Authorized Capital of Birr 50,000,000 in accordance with the requirements of Proc No. 25/1992
with an investment of the following assets:

Cash Br. ...................................................15,000,000

Equipment (fair value) ......................................................................700,000

Required: Pass the journal entry to record the above investment.

Journal Entry:

Cash .....................................................15,000,000

Equipment (fair Value) ............................700,000

State Capital.................................................................................................. 15,700,000

2.7. IPSAS and Its Relevance to Public Enterprises in Ethiopia

2.7.1 Definition and concepts of IPSAS

The IPSASs are a set of accounting standards issued by the international public-sector
accounting standard board (IPSAS B) for use by public sector entities around the world at the
preparation of financial statements. IPSAS standards are categorized into six sections:
Presentation; Revenue: exchange and non-exchange transactions; Expenses and liabilities; Assets
and valuation; Financing, financial instruments, and foreign exchange; and Disclosure. There are
42 standards on the accrual basis of accounting and one standard on the cash basis of accounting
(IPSAS Handbook published March 2011). IPSASs is designed to promote enhanced quality and
consistency in public sector accounting and provide an accounting framework which can be
followed by all public sector entities, including national and regional and local governments,
International and local organizations and Nongovernmental organizations. Currently forty-two
accrual basis IPSAS standards were issued, from these, five IPSAS standards were superseded,
two IPSAS standards were issued as new standards (IPSAS 41 and 42). The new standards will
be implemented effective from 01 January 2022.

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Table 1.1. List of IPSAS standards

IPSAS no Name of standards

IPSAS1 Presentation of financial statement

IPSAS 2 Cash flow statement

IPSAS 3 Accounting policies, changes in accounting

estimates and errors

IPSAS 4 Accounting policies, changes in accounting

estimates and errors

IPSAS 5 Borrowing Cost

IPSAS 6 Consolidated and Separate FS

IPSAS 7 Investment in Associates

IPSAS 8 Investment in Associates

IPSAS 9 Revenue from exchange transactions

IPSAS 10 Financial Reporting in Hyper-inflationary

Economies

IPSAS 11 Construction Contracts

IPSAS 12 Inventories

IPSAS 13 Leases

IPSAS 14 Events after reporting period

IPSAS 15 Financial Instruments: Disclosure and

Presentation

IPSAS 16 Investment Property

IPSAS 17 Property, plant, and equipment (PPE)

IPSAS 18 Segment Reporting

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IPSAS 19 Provision, contingent, liabilities and

contingent assets

IPSAS 20 Related party disclosure

IPSAS 21 Impairment of Non cash generating assets

IPSAS 22 Disclosure of financial information about the

general Government for public sector

IPSAS 23 Revenue from non- exchange transactions

(Taxes and Transfer)

IPSAS 24 Presentation of Budget dada in the financial

statements

IPSAS 25 Employee Benefits

IPSAS 26 Impairment of cash generating assets

IPSAS 27 Agriculture

IPSAS 28 Financial instruments; presentation

IPSAS 29 Financial instruments;

IPSAS 31 Intangible Assets

IPSAS 32 Service Concession arrangements; grantor

IPSAS 33 First time adoption of accrual basis of IPSAS

IPSAS 34 Separate Financial Statement

IPSAS 35 Consolidation FSs

IPSAS 36 Investments In association & joint ventures

IPSAS 37 Joint Arrangements (JA)

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IPSAS 38 Disclosure of interests of other entities

IPSAS 39 Employees Benefits

IPSAS 40 Public sector Combinations

IPSAS 41 Financial Instruments

2.7.2. Purpose of IPSAS Implementation

The International Public Sector Accounting Standards Board (IPSASB) works to strengthen
public financial management globally through developing and maintaining accrual-based
IPSASs and other high quality financial reporting guidance for use by governments and other
public sectors entities. The adoption and Implementations of IPSASs by government and non-
governmental organizations will improve both the quality and comparability of financial
information reported by public sector entities around the world. General purpose of financial
statements includes those that are presented separately or within another public document such
as an annual report. All general-purpose financial statements were prepared and presented under
the accrual basis of accounting in accordance with IPSAS

2.7.2 IPSAS and Its Relevance to Public Enterprises in Ethiopia

In Ethiopia, the adoption of IPSAS is part of a broader effort by the government to reform public
financial management. The Ministry of Finance began the implementation of accrual-based
IPSAS in 2017 across various public institutions, including government ministries, agencies, and
public enterprises. This move is aimed at strengthening transparency, efficiency, and reliability in
financial reporting.

Public enterprises in Ethiopia, being state-owned businesses, are required to manage public
resources efficiently and effectively. By implementing IPSAS, these enterprises are expected to
adopt best practices in financial reporting, which includes the recognition of revenues and
expenses when they occur (accrual basis), rather than when cash is received or paid (cash basis)

The adoption of IPSAS benefits public enterprises in several ways:

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1. Improved Financial Transparency: IPSAS provides a comprehensive framework for

recognizing and reporting financial transactions, enabling public enterprises to present a clearer
and more accurate financial position.

2. Enhanced Accountability: With detailed financial disclosures required under IPSAS,

stakeholders including the government, public, and development partners can hold public
enterprises accountable for their financial performance.

3. Better Asset and Liability Management: IPSAS emphasizes the recognition and proper
valuation of assets and liabilities, which promotes better stewardship and control over public
resources.

4. Facilitates Comparability and Consistency: Financial statements prepared under IPSAS are
more comparable across different public enterprises and across countries, enabling benchmarking
and performance evaluation. Despite these benefits, public enterprises in Ethiopia face
challenges in fully implementing IPSAS. These include lack of trained accounting personnel,
limited awareness, inadequate IT systems, and resistance to change. The government, with
support from development partners, continues to invest in capacity building and systems
development to overcome these challenges. In conclusion, IPSAS adoption is a significant step
toward strengthening the financial integrity and management of public enterprises in Ethiopia. It
supports the goals of good governance, public sector accountability, and sustainable economic
development

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Summary of Chapter Two: Accounting for Public Enterprises in

Ethiopia
This chapter explores the nature, role, legal basis, and financial management of public
enterprises in Ethiopia. Public enterprises are businesses owned fully or partially by the
government and are instrumental in both economic development and public service provision.
Their existence is often justified by the need to correct market failures, ensure equitable
development, and provide essential services that are not adequately handled by private
enterprises.

In Ethiopia, public enterprises are primarily governed by Proclamation No. 25/1992, which
outlines the regulatory framework for their establishment, operation, and dissolution. This
proclamation ensures that each public enterprise is set up through regulation, clearly specifying
its capital, objectives, structure, liabilities, and governance, including supervisory authority and
management boards.

The establishment of public enterprises in Ethiopia serves several purposes:

Correcting market failures and resource misallocation,

Promoting regional and economic development,

Creating employment opportunities, and

Providing affordable and essential public services.

Economic and Social Benefits

Public enterprises offer significant economic benefits, such as:

Revenue generation through taxes, dividends, and interest payments,

Exploiting and managing national resources for development,

Reducing regional economic disparities, and

Supporting foreign currency reserves by substituting imports and boosting exports.

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