Ministry of Finance

Government of the Republic of Zambia

LOCAL AUTHORITIES
ACCOUNTING POLICIES
FOR CASH BASIS ACCOUNTING

8th October 2019

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Table of Contents
ACRONYMS AND ABBREVIATIONS..................................................................................................3
FOREWORD.............................................................................................................................................4
ACKNOWLEDGEMENTS......................................................................................................................5
PART 1: PRELIMINARY........................................................................................................................5
1.1 ARRANGEMENT OF THE POLICIES.....................................................................................5
1.2 DEFINITIONS..............................................................................................................................5
PART 2: ADOPTION OF INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS
(IPSAS) FINANCIAL REPORTING FRAMEWORK.........................................................8
2.1 FINANCIAL REPORTING FRAMEWORK FOR LOCAL AUTHORITIES.....................9
PART 3: OBJECTIVE AND SCOPE OF CASH BASIS IPSAS LOCAL AUTHORITIES
ACCOUNTING POLICIES (LAAPs)....................................................................................9
3.1 OBJECTIVES AND SCOPE.......................................................................................................9
PART 4: CASH BASIS GENERAL PURPOSE FINANCIAL STATEMENTS.................................10
4.1 OBJECTIVES AND USERS OF FINANCIAL REPORTING...............................................10
4.2 INFORMATION NEEDS OF SERVICE RECIPIENTS AND RESOURCE PROVIDERS
......................................................................................................................................................11
4.3 INFORMATION PROVIDED BY GENERAL PURPOSE FINANCIAL STATEMENTS 13
4.4 BUDGET INFORMATION AND COMPLIANCE WITH LEGISLATION OR OTHER
AUTHORITY GOVERNING THE RAISING AND USE OF RESOURCES......................13
4.5 SERVICE DELIVERY ACHIEVEMENTS.............................................................................14
4.6 PROSPECTIVE FINANCIAL AND NON-FINANCIAL INFORMATION........................15
4.7 INFORMATION THAT ENHANCES AND COMPLEMENTS THE FINANCIAL
STATEMENTS AND OTHER USEFUL INFORMATION...................................................15
PART 5: APPLICATION OF PART 1 OF CASH BASIS IPSASs TO THE LAAPs.......................16
5.1 BASIS OF PREPARATION......................................................................................................16
5.2 COMPOSITION OF GENERAL PURPOSE FINANCIAL STATEMENTS (GPFSs)........17
5.3 RECOGNTION CRITERIA OF CASH BASIS TRANSACTIONS, OTHER EVENTS AND
BALANCES................................................................................................................................18
5.4 MATERILIATY GUIDELINES AND MEASUREMENT CRITERIA.................................21
5.5 CORRECTION OF ERRORS...................................................................................................21
5.6 PRESENTATION OF BUDGET INFORMATION................................................................22
PART 6: APPLICATION OF PART 2 CASH BASIS IPSAS TO THE LAAPs.................................23
6.1 ASSETS, LIABILITIES, REVENUES AND EXPENSES.......................................................23
6.2 ADMINISTERED TRANSACTIONS......................................................................................24
6.3 RELATED PARTY TRANSACTIONS....................................................................................24
6.4 EXTERNAL ASSISTANCE DIRECT PAYMENTS BY THIRD PARTIES........................25

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ANNEX 1: 2018 FINANCIAL STATEMENTS FORMATS BASED ON THE LOCAL
GOVERNMENT ACT OF 1991 – CAP 281........................................................................26
ANNEX 2: 2019 TO 2022 FINANCIAL STATEMENTS FORMATS BASED ON THE LOCAL
GOVERNMENT ACT No. 2 OF 2019..................................................................................27

ACRONYMS AND ABBREVIATIONS

CDF Constituency Development Fund

CPs Cooperating Partners
FSs Financial Statements
GIZ Gesellschaft fur International Zusammernabeit (Germany Corpporation for
International Corporation
GPFS General Purpose Financial Statements
IPSAS International Public Sector Accounting Standards
LAs Local Authorities
LAAPS Local Authorities Accounting Policies
LGEF Local Government Equalisation Fund
ZICA Zambia Institute of Chartered Accountants

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FOREWORD

The Ministry of Finance in its quest to improve financial management in Local Authorities (LAs)
established the Local Government Finance Department under the Office of the Accountant
General in 2017 as part of the restructuring of the Ministry of Finance. The mandate of the
Department is to manage and coordinate the development and implementation of financial
management policies, legislation and guidelines in LAs in order to ensure accountability and
transparency in the management of public resources for enhanced service delivery to the
residents, business entities and other stakeholders.

LAs are at the front end of service delivery. To achieve this, it is important that there is
effectiveness and efficiency in the management of resources used to finance service delivery. In
this regard, the Ministry of Finance has prepared the Local Authorities Accounting Policies
(LAAPs) for Cash Basis International Public Sector Accounting Standards (IPSAS) to guide LAs
in the preparation of annual Financial Statements (FSs) that meet acceptable international
reporting standards.

Specifically, the Cash Basis LAAPs will provide guidance on how financial transactions that
involve cash are recognised, measured and disclosed in the Cash Basis IPSAS General Purpose
Financial Statements (GPFSs) of LAs. The LAAPs also include Financial Statements formats
that LAs will use in their preparation of annual financial statements.
The LAAPs will therefore make it easy to compare the financial performance of LAs with
similar characteristics and facilitate decision making and corrective action to be taken against
non-performing LAs.
The LAAPSs for Cash Basis Accounting will provide a basis for migration of LAs to Accrual
Basis IPSAS in 2022.
It is my expectation that the provision of financial statements that meet acceptable reporting
standards will also enable stakeholders hold LAs accountable in their discharge of functions as
mandated under Article 151 of the Constitution of Zambia (Amendment) No. 2 of 2016.
I wish to urge all Town Clerks and Council Secretaries to comply with the LAAPs.

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ACKNOWLEDGEMENTS

The preparation of the LAAPs was done in a consultative process through the involvement of all
key stakeholders. The process was spearhead by the Office of the Accountant General and had
representation from the Office of the Auditor General, Ministry of Local Government, Budget
Office, Controller of Internal Audit, LAs, Decentralisation Secretariat and GIZ through the
Decentralisation for Development.

I wish to express my profound gratitude to all the stakeholders for their invaluable contribution
to the production of the LAAPs. Special gratitude goes to the staff from the Office of the Auditor
General for their insights drawn from their experience gained through the annual audits of LAs.

I am confident that with the LAAPs in place, LAs will be able to produce high quality financial
statements that meet acceptable international financial reporting standards.

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PART 1: PRELIMINARY

1.1 ARRANGEMENT OF THE POLICIES

The policies are divided into numbered parts, paragraphs and sub-paragraphs.

1.2 DEFINITIONS

“Accounting policies” means the specific principles, bases, conventions, rules and practices
applied by LAs in preparing and presenting financial statements.
“Accrual Basis” means recognition of transactions and other events recognised when they
occur and not only when cash is received or paid.
“Basis of Preparation” means either Cash Basis or Accrual Basis used in recognising,
measuring and disclosing transactions, other events and balances in the General Purpose
Financial Statements
“Budget Adjustments” means approved supplementary provisions and re-allocations of
provisions among various budget lines.
“Cash” means cash on hand, demand deposits and cash equivalents.
“Cash equivalents” are short term, high liquid investments that can easily be converted to
known amounts of cash and are subject to insignificant risks of changes in value. High liquid
investments are those that can easily be converted to cash within three months. The
examples include treasury bills, other marketable securities of less than three months
maturity period and fixed deposit balances that can be converted to cash without significant
penalties.
“Cash flows” means inflows and outflows of cash.
“Cash on hand” is actual notes and coins that a Local Authority can easily use.
“Cash payments” means a payment by outflow of actual cash rather than in kind.
“Capital Expenditure” means amounts spent on items that will generate economic benefits
or service potential for more than one year
“Cash receipts” means a receipt by inflow of actual cash rather than in kind.
“Central Government” means the Executive, Judiciary and Legislative branches of
Government and their Agencies.
“Control of Cash” is when an LA can use the cash for the achievement of its objectives and
benefit from the cash or regulate or exclude others from the access of that benefit.

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“Control of an entity” means the ability of an LA to control another entity when the LA is
exposed, or has rights, to variable benefits from its involvement with the other entity and has
the ability to affect the nature or amount of those benefits through its power over the other
entity.
“Controlled entity” means any entity that is under the control of an LA, making the LA the
controlling entity.
“Demand deposits” is money deposited in bank accounts.
“Entity” means an organisation, institution, establishment or body that is established
through laws or accounting principles that separates it from its owners (with a distinct and
independent existence).
“Final Budget” means the budget after approved adjustments are made to the original
budget.
“General Purpose Financial Statements (GPFSs)” means financial statements prepared
primarily for a wide range of users that are not in a position to demand preparation of
financial statements tailored to their needs. In these policies, GPFSs may also simply be
referred to as financial statements.
“Key management personnel” are:
a. All members of the Council of an LA,
b. Principal officers of LAs,
c. Chief Officers of LAs and
d. The advisors to the persons in ‘a to c’ above in the conduct of their work
“Liquidity” means the ability of an LA to meet current financial obligations. Net cash flows
or surpluses and positive cash balances may be indicative of health liquidity.
“Materiality” means that information is material if its omission or misstatement could
influence the discharge of accountability or decisions that users make on the basis of the
LA’s financial statements prepared for that period.
“Original budget” means the Estimates of Revenue and Expenditure as approved by the
Minister of Local Government.
“Pass-through cash flows” means cash flows that relate to revenue collections an LA may
make on behalf of Central Government and its Agencies which are initially deposited in the
bank account of an LA but are later transferred to the Central Government or its Agencies.
Any cash flows with similar characteristics shall be deemed pass-through cash flows. The
cash merely passed through the bank of the LA.
“Recurrent Expenditure” means the operating expenses of an LA other than capital
expenditure that are incurred on a regular basis to meet its mandate.
“Related Parties” are those persons or entities with authority and responsibility to control,
or exercise significant influence over the LA in making financial and operating decisions or
entities with which the LA are both subject to common control.

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“Reporting Date” means the date of the last date of the financial period to which the
financial statements relate.
“Resource providers” means any entities or persons that provide economic resources used
by an LA to deliver services to residents and citizens of the district it is responsible for. The
resources may include personnel, cash, technical support, land, buildings and machinery.
“Service recipients” means residents, citizens, entities or individuals in a particular district
administered by a particular LA who receive or are entitled to receive services provided by
the LA.
“Solvency” means the ability of an LA to meet financial obligations over the long term.
Purchase of machinery and investing into long term assets and moderate dependency on
borrowed resources may indicate a health solvency situation.

“Spot Exchange Rate” is exchange rate for immediate delivery.

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PART 2: ADOPTION OF INTERNATIONAL PUBLIC SECTOR
ACCOUNTING STANDARDS (IPSAS) FINANCIAL
REPORTING FRAMEWORK

2.1 FINANCIAL REPORTING FRAMEWORK FOR LOCAL

AUTHORITIES

2.1.1 The Government has adopted International Public Sector Accounting Standards
(IPSASs) as the Financial Reporting Framework for preparation and presentation of
GPFSs in LAs starting with the GPFSs for the year ended 31st December, 2018.

2.1.2 In setting 2018 as the year of adoption of the IPSAS Framework, the Government
followed guidance under IPSAS 14 – Events after the Reporting Date which allows for
the adjustment of financial statements anytime during the period from the reporting to
the authorisation dates of financial statements. At the time of the issuance of the
LAAPs, all LAs were in this period as none of their financial statements had been
authorised for publication.
2.1.3 In adopting the IPSAS Framework, the Government considered the Zambia Institute of
Chartered Accountants (ZICA) IPSAS Applicability Pronouncement 2018/3 and the
provisions of Cash Basis IPSAS that require that entities with the following
characteristics should adopt the IPSAS Framework:

i) Public sector entities that deliver services for the benefit of the public and or
redistribute income and wealth,
ii) Public sector entities that raise finances through taxes, levies, social contributions and
or from other levels of Government and
iii) Public sector entities that do not have profit as their primary motive.

2.1.4 In line with the mandate of the Treasury as enshrined in the Public Finance Management
Act No. 1 of 2018, Section 9(1) (b), further guidance will be issued by the Treasury
regarding the implementation of the IPSAS Framework.

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PART 3: OBJECTIVE AND SCOPE OF CASH BASIS IPSAS LOCAL
AUTHORITIES ACCOUNTING POLICIES (LAAPs)

3.1 OBJECTIVES AND SCOPE

3.1.1 The objective of the Cash Basis LAAPs is to provide guidance on how cash transactions,
other events and balances are recognised, measured and disclosed in the Cash Basis
IPSAS General Purpose Financial Statements (GPFS) of LAs.

3.1.2 The LAAPs also help provide information on the various objectives, uses and users of
GPFSs as well as the types of information they contain.

3.1.3 These LAAPs apply to all LAs in Zambia at every level – Town, Municipal and City
Councils.

3.1.4 The Cash Basis LAAPs have been issued as an intermediary step for LAs in their
transition process to Accrual Basis IPSASs. Cash Basis LAAPs are not meant to be an
end it itself but as means to Accrual Basis.

3.1.5 Cash Basis LAAPs shall apply to preparation and presentation of financial statements of
LAs for the years ended 31st December, 2018 to 2021. Application of Cash Basis LAAPs
thereafter shall be under special authority of the Secretary to the Treasury.

3.1.6 Under these Accounting Policies, the reporting entity is an individual LA that presents
financial statements.

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PART 4: CASH BASIS GENERAL PURPOSE FINANCIAL STATEMENTS

4.1 OBJECTIVES AND USERS OF FINANCIAL REPORTING

4.1.1 The objectives of financial reporting are to provide information about the LAs that is
useful to users of GPFSs for accountability and decision-making purposes. Therefore,
the two objectives are referred to as usefulness for accountability and decision-
making purposes.

4.1.2 GPFSs of LAs are, therefore, developed primarily to respond to the information needs
of service recipients and resource providers who do not possess authority to require
LAs to prepare and disclose the information they need for accountability and
decision-making purposes.

4.1.3 There are various users of GPFSs produced by Local Authorities and these include
Central Government, local taxpayers, residents, employees, investors, financial
institutions, suppliers, Cooperating Partners and the Civil Society bodies.

4.1.4 LAs are required to be accountable in line with Article 156 of the Constitution of
Zambia (Amendments) of 2016 which states that “Councillors shall be collectively
and individually accountable to the national Government and residents in their
wards and districts, for the performance of their functions.” GPFSs of LAs therefore
respond to this constitutional requirement by ensuring information is provided to
appropriate users for assessing accountability.

4.1.5 The primary function of LAs is to provide local public goods and services that
enhance the well-being of citizens and other eligible residents in the districts they
administer. Those services include solid waste management, maintenance of street
lights, drainage maintenance, prevention of disease outbreaks, and maintenance of
social amenities.

4.1.6 LAs are accountable to those that provide them with resources, and to service
recipients that depend on LAs to deliver services during the reporting period and over
the longer term.

4.1.7 The discharge of accountability obligations requires the provision of information on

how an LA manages resources entrusted to it for the delivery of services.

4.1.8 Information about the costs, efficiency and effectiveness of past service delivery
activities, the amount and sources of cost recovery, and the resources available to
support future activities will be necessary to hold the LAs accountable.

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4.2 INFORMATION NEEDS OF SERVICE RECIPIENTS AND
RESOURCE PROVIDERS

4.2.1 For accountability and decision-making purposes, service recipients and resource providers
need information that supports the assessments of such matters as:

a) The performance of the LAs during the reporting period in:

i) Meeting their service delivery and other operating and financial objectives;
ii) Managing the resources they are responsible for;
iii) Complying with relevant budgetary, legislative, and other authority regulatory
requirements;

b) The liquidity and solvency of the LAs.

The sustainability of the LAs’ service delivery and other operations over the long term,
and changes therein as a result of their activities during the reporting period including:
i) The capacity of the LA to continue to fund its activities and to meet their operational
objectives in the future (their financial capacity), including the likely sources of
funding and the extent to which the LAs are dependent on, and therefore vulnerable
to, funding or demand pressures outside their control;
ii) The available resources to support the provision of services in future periods (their
operational capacity); and

c) The capacity of the LAs to adapt to changing circumstances, whether changes in

demographics or changes in domestic or global economic conditions which are likely to
impact the nature or composition of the activities it undertakes and the services it
provides.

4.2.2 The information service recipients and resource providers need for these purposes may
overlap in many respects. For example, service recipients, like resource providers, would
require information as input to assessments of such matters as whether:

a) The LAs are using resources economically, efficiently, effectively and as intended,;
b) The range, volume and cost of services provided during the reporting period are
appropriate, and
c) Current levels of local taxes, levies, charges, fees or other resources raised are
sufficient to maintain the volume and quality of services currently provided.

4.2.3 Service recipients also require information about the effects of decisions made, and
activities undertaken, by the LAs during the reporting period. This includes the resources
available to support the provision of services in future periods, the LA’s anticipated
future service delivery activities and objectives, and the amounts and sources of cost
recoveries necessary to support those activities.

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4.2.4 Resource providers will require information to assess whether the LAs:

a) are achieving the objectives established as the justification for the resources raised
during the reporting period;
b) Funded current operations from funds raised in the current period from taxpayers or
from borrowings or other sources; and
c) are likely to need additional (or less) resources in the future, and the likely sources of
those resources.

4.2.5 Lenders / creditors also require information to assess the liquidity of the LAs to
determine whether the amount and timing of repayment will be met. Cooperating
Partners require information to support assessments of whether the LAs are using
resources economically, efficiently, effectively and as intended. They also require
information about the LAs’ anticipated future service delivery activities and resource
needs.

4.3 INFORMATION PROVIDED BY GENERAL PURPOSE FINANCIAL

STATEMENTS

4.3.1 Information on the cash flows of LAs contributes to assessments of financial performance
of LAs which includes the following elements:
 It’s liquidity and solvency position,
 It indicates how the LAs raised and used cash during the period, including their
borrowing and repayment of debt and their acquisition and sale of non-current assets,
and
 It identifies the cash received from, for example, local taxes and investments and the
cash transfers made to, and received from, Central Government, Government Agencies
and Cooperating Partners (CPs).

4.3.2 Information about cash flows can also support assessments of the LAs’ compliance with
spending plans expressed as cash flows needed in future periods to support service
delivery objectives.

4.3.3 Information about cash flows are typically presented in financial statements to assist
users to better understand, interpret and place in context the information presented in the
financial statements.

4.3.4 GPFSs may also provide financial and non-financial information that enhances and
complements the financial statements, including information as follows:
 Compliance with approved budgets and other authority governing their operations,
 Service delivery activities and achievements during the reporting period and
 Expectations regarding service delivery and other activities in future periods, and the
long term consequences of decisions made and activities undertaken during the
reporting period, including those that may impact expectations about the future. This
information may be presented in the notes to the financial statements.

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4.4 BUDGET INFORMATION AND COMPLIANCE WITH
LEGISLATION OR OTHER AUTHORITY GOVERNING THE
RAISING AND USE OF RESOURCES

4.4.1 Typically, an LA prepares Estimates of Revenue and Expenditure, which are submitted
for approval to the Minister of Local Government. Once the Budget is approved, it is
made available to the public in order to provide financial information about the LA’s
operational plans for the forthcoming period, its capital needs and, often, its service
delivery objectives and expectations. It is used to justify the raising of resources from
taxpayers and other resource providers, and establishes the authority for spending.

4.4.2 Some resources to support the activities of LAs may be received from CPs, lenders or
as a result of exchange transactions. However, resources to support the activities of LAs
are predominantly provided in non-exchange transactions by taxpayers and others,
consistent with the expectations reflected in an approved budget.

4.4.3 GPFSs provide information about the financial results described as “increase or
decrease in cash or surplus or deficit,” of the LA during the reporting period, its assets
and liabilities at the reporting date (under Part 2 Cash Basis IPSAS) and the change
therein during the reporting period, and its service delivery achievements.

4.4.4 The inclusion within GPFSs of information that assists users in assessing the extent to
which revenues, expenses, cash flows and financial results of the LA comply with the
estimates reflected in approved budgets.

4.4.5 The LA’s adherence to relevant legislation or other authority governing the raising and
use of resources, is important in determining how well an LA has met its financial
objectives. Such information is necessary for the discharge of an LA’s accountability to
its constituents, enhances the assessment of the financial performance of the LA and will
inform decision making.

4.5 SERVICE DELIVERY ACHIEVEMENTS

4.5.1 The primary objective of LAs is to provide local public goods and services to service
recipients. Consequently, the financial performance of LAs will not be fully or
adequately reflected in any measure of financial results. Therefore, LAs’ financial
results will need to be assessed in the context of the achievement of service delivery
objectives.
4.5.2 In some cases, quantitative measures of the outputs and outcomes of the LAs’ service
delivery activities during the reporting period will provide relevant information about
the achievement of service delivery objectives―for example, information about the cost,
volume, and frequency of service delivery, and the relationship of services provided to
the resource base of the LA. In other cases, the achievement of service delivery
objectives may need to be communicated by an explanation of the quality of particular
services provided or the outcome of certain programs.

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 4.5.3 Reporting non-financial as well as financial information about service delivery
activities, achievements and/or outcomes during the reporting period will provide
input to assessments of the economy, efficiency, and effectiveness of the entity’s
operations. Reporting such information is necessary for LAs in discharging their
obligations and being accountable. Decisions that Cooperating Partners make about
the allocation of resources to particular LAs and programs are also made, at least in
part, in response to information about service delivery achievements during the
reporting period, and future service delivery objectives.

4.6 PROSPECTIVE FINANCIAL AND NON-FINANCIAL

INFORMATION

4.6.1 Given the longevity of LAs and many of their programs, the financial consequences of
many decisions made in the reporting period may only become clear many years into
the future. Financial statements which present information on cash flows over the
reporting period will then need to be assessed in the context of the long term.

4.6.2 Decisions made by LAs in a particular period about program delivery and funding
services in the future can have significant consequences for:
 Citizens and residents who will be dependent on those services in the future; and
 Current and future generations of taxpayers and other involuntary resource providers
who will provide the taxes and levies to fund the planned service delivery programs
and related financial commitments.

4.6.3 Information about the LA’s anticipated future service delivery programs and objectives,
their likely impact on the future resource needs of the LA and the sources of funding,
will be necessary to assess the ability of the LA to meet its service delivery and
financial commitments. The disclosure of such information in GPFSs will support
assessments of the sustainability of service delivery and enhance the accountability of
the LA and provide additional information useful for decision-making purposes.

4.7 INFORMATION THAT ENHANCES AND COMPLEMENTS THE

FINANCIAL STATEMENTS AND OTHER USEFUL
INFORMATION

4.7.1 The scope of financial reporting establishes the boundary around the transactions,
other events and activities that may be reported in GPFSs.

4.7.2 Public interest in LAs requires that the scope for financial reporting is more
comprehensive than that encompassed by financial statements. It entails the
presentation within GPFSs of additional information that enhances and complements,
those statements.

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4.7.3 Service recipients and resource providers may also need to consider information from
other sources, including reports on current and anticipated economic conditions,
Government budgets and forecasts, and information about Government policy
initiatives not reported in GPFSs.

4.7.4 For example, while comparison of actual with budget information for the reporting
period may be included in GPFSs, the budgets and financial forecasts issued by LAs
provide more detailed financial and non-financial information about the financial
characteristics of the plans of the LAs over the short and medium terms.

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PART 5: APPLICATION OF PART 1 OF CASH BASIS IPSASs TO THE
LAAPs

5.1 BASIS OF PREPARATION

5.1.1 Mandatory Requirements of Part 1 of Cash Basis IPSAS as interpreted and laid out in
these LAAPs shall apply to preparation and presentation of financial statements of LAs
for the years ended 31st December 2018 to 2021.

5.1.2 LAs whose financial statements comply with all appropriate requirements of Part 1 of
Cash Basis IPSAS shall disclose that fact. The disclosure shall be as follows:

“Basis of Preparation
The Financial Statements have been prepared in accordance with Part 1 of Cash Basis
IPSAS, Financial Reporting under the Cash Basis of Accounting, issued by the
International Public Sector Accounting Standards Board (IPSASB) and Local
Authorities Accounting Policies (LAAPs).”

5.1.3 Where the financial statements meet the requirements of both Part 1 and Part 2 of the
Cash Basis IPSAS, the statement of basis of preparation shall read as follows;

“Basis of Preparation
The Financial Statements have been prepared in accordance with Cash Basis IPSAS,
Financial Reporting under the Cash Basis of Accounting, issued by the International
Public Sector Accounting Standards Board (IPSASB) and Local Authorities Accounting
Policies (LAAPs).”

5.2 COMPOSITION OF GENERAL PURPOSE FINANCIAL STATEMENTS

(GPFSs)

5.2.1 The General Purpose Financial Statements of an LA shall be made of the following:
 The Statement of Cash Receipts and Payments which recognises all cash transactions,
other events and balances controlled by an LA,
 The Statement of Comparison of Budget and Actual Amounts,
 Summary of significant accounting policies and
 Explanatory notes to the Financial Statements. This includes disclosure of cash
balances held in the bank account of an LA on behalf of other entities

5.2.2 The Statement of Cash Receipts and Payments shall recognise all cash controlled by
the LA including cash controlled for short periods or on temporal basis. Cash
Controlled for short term basis shall be appropriately disclosed in the explanatory.

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 5.2.2 The Statement of Comparison of Budget and Actual Amounts shall be presented as
separate statement showing the original, adjustments and final Budget.
5.2.3 All material differences between final budgets and actual amounts shall be explained in
the notes to the annual financial statements. Budget differences of 20% and above are
considered.

5.2.4 Explanatory notes to the financial statements shall be in form of numbered detailed
narrations, schedules and analyses properly cross referenced to the financial statements.

5.2.5 Explanatory notes to the FSs shall give disclosure details of cash balances held in the
bank account of the LA on behalf of other entities as well as per cash book.

5.2.6 Additional FSs shall include:

 Constituency Development Fund (CDF) Statement of Cash Receipts and Payments

 Local Government Equalisation Fund (LGEF) Statement of Cash Receipts and
Payments

5.2.7 Recognition and presentation of additional statements will follow rules applicable to the
main Financial Statements.

5.2.8 Information included in the FSs shall include cash receipts, payments and balances on
gross basis analysed in appropriate levels of classes of transaction as per the standard
template (Attachment 1 and 2).

5.2.9 The GPFSs shall also include the Report of the Council, the Statement of the
Responsibilities for Annual Financial Statements and the Independent Auditor’s
Report.

5.2.10 LAs shall use standard formats of GPFSs provided in Attachment 1 and 2 which
form part of these policies. Attachment 1 provides guidance for GPFSs using the Local
Government Act, Cap 281 before its repeal in 2019 while attachment 2 provides
guidance based on the Local Government Act No. 2 of 2019.

5.2.11 LAs are encouraged to design and use their own covers for their FSs which should
display and promote socio-economic activities of the district.

5.3 RECOGNTION CRITERIA OF CASH BASIS TRANSACTIONS,

OTHER EVENTS AND BALANCES

5.3.1 Cash transactions, other events and balances should be recognised in the GPFSs using
the following criteria:

a) When cash and cash equivalents are received or paid by an LA and

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 b) When the LA controls or controlled the cash transaction, other events and
balances during the relevant period and/ or at end of that period.

5.3.2 Control of cash itself is determined using all or any of the following four conditions:

a) When the LA can use the cash to achieve its own objectives, or
b) When the Local Authority can benefit from the cash and exclude others from that
benefit,
c) When that cash is collected by, or appropriated to or granted to, the LA which it can
use to fund its operating objectives, acquire capital and repay debts, or
d) When that cash is deposited into the bank account of that LA.

5.3.3 Regarding paragraph 5.3.2(a) & (c) above, ‘objectives’ and ‘operating objectives’ of
LAs shall be determined from the functions, duties and responsibilities conferred on
them by following authorities:

a) Constitution of Zambia (Amendment) No. 2 of 2016,

b) Public Financial Management Act No. 1 of 2018,
c) Local Government Act No. 2 of 2019 and any other Act
d) Decentralisation Policies
e) Intergovernmental Fiscal Architecture (IFA) and,
f) Cabinet and Ministerial Circulars.

This means that when a Local Authority uses cash to fulfil functions, duties and
responsibilities conferred on it by any of the authorities listed above, it will be
deemed to have used the cash to meet its ‘objectives’ and ‘operating objectives’. This
will apply in determining control of cash under the CDF, LGEF and any other Fund.

5.3.4 Paragraph 5.3.2 (d) above will be applied as follows among other examples:

a) Cash collected by an LA on behalf of the Central Government or other Government

Agencies and is deposited in the bank account of the LA before transfer to the Central
Government or other Government account is cash under the control of the LA for the
period the cash remains in the LA bank account.

b) There will be times a Local Authority will hold cash in its bank account from Central
Government or others which it shall need to transfer to third parties. Such amounts
will be cash controlled by the LAs for the period the cash is in the account of the LA.

5.3.5 Application of recognition criteria to CDF

a) Cash transactions, other events and balances relating to CDF at district level are
deemed to be under control of the LA because of the following:

i) Section 5(4) of the CDF Act, 2018 states that “The Directorates of Planning, and
Finance in the Local Authority in a district shall provide the necessary
secretarial and accounting services to a Committee to perform its functions under

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 this Act.” The committee in question is CDF committee at constituency level.
Section 5(4) therefore vests secretarial and financial management functions of
CDF at such levels with LAs. This, in substance, gives the Council latitude in
procuring and supervision of contractors and suppliers. The contracts get to be
signed with the councils. The Council enjoys legislative authority. (See also entire
section 10 of the CDF Act, 2018)

ii) Section 8 (1) & (2) of the CDF Act, 2018 mandates an LA to open and operate a
CDF account for each constituency in the district.

Section 8. (1) states that: “A Local Authority shall, subject to the approval of the
Ministry responsible for finance, open and operate a special bank account in the
name of each constituency for the purposes of the Fund at a commercial bank
that the Local Authority may determine, in which the money received for the
purposes of the Fund shall be deposited and kept.” The LA opens and operates
bank accounts and determines which bank to open the account with. The power
to operate the account lies with the LA.

iii) Section 8(2) states that: “A Local Authority shall retain unutilised funds in the
constituency account and investments shall not be permitted elsewhere, except for
funds meant for a project that is cancelled or discontinued.” The Act lays the
obligation to retain funds in the bank accounts with the LAs. It also confers power
to no other entity other than an LA to retain funds in CDF accounts.

iv) Section 9 of the CDF Act, 2018 charges Local Authorities with responsibilities of
spending and disbursing CDF monies in the district.

Section 9(2) states that: “A disbursement from the Fund shall be made to the
constituency account maintained and managed by the Local Authority as the
spending agency.” The Account is maintained and managed by the Council and
therefore controlled by them.

Section 9 (3) states that: “A Local Authority shall disburse funds from the
constituency account based on projects approved by the Minister.” The Council
uses its own payment systems to release funds and make payments.

v) Section 18 (1) states that: “A project under this Act shall be community-based for
the benefit of a broad cross section of the community of a particular area.” Under
the Local Government Act 2 of 2019, the community development is one of the
responsibilities of the LA.

vi) Section 24 of the CDF Act, 2018 charges LAs with responsibilities of compiling
and maintaining records showing monthly receipts and disbursements in respect
of every project in the district. This charges councils with accountability
obligations.

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 vii) Section 21(1) of the CDF Act, 2018 vests implementation of CDF Projects in
councils.

viii) Section 21(4) of the CDF Act, 2018 vests the custody and management of the
equipment purchased from the Fund in the council.

It can be seen therefore that, both in substance and form, CDF accounts belong to the
LAs and therefore any monies deposited therein should be deemed cash controlled by
the LAs as required under paragraph 5.3.5 above. The Council is deemed to have
control of CDF cash transactions and amounts and rightfully accountable for them.

5.3.6 Application of recognition criteria to grants and loans in cash from CPs

a) Any cash granted or transferred by the CPs into a bank account of an LA shall be
deemed to be cash under the control of the LA,
b) Any cash paid by the CPs directly on behalf of or for the benefit of the LA shall not
be deemed to be cash under the control of the LA as it does not meet the recognition
criteria laid above
c) Non-cash resources such as technical assistance and provision of equipment by the
CPs to an LA shall not be included in the cash transactions and any cash used to
acquire them will be cash not deemed to be under their control.

5.4 MATERILIATY GUIDELINES AND MEASUREMENT CRITERIA

5.4.1 Materiality may be quantitative or qualitative.

5.4.2 Quantitative materiality shall be a percentage of revenue (cash receipts) or expenditure

(cash payments) with ranges of 1 -3 % of the basis used.

5.4.3 Qualitative materiality takes into account the nature, incidence and impact of an item.
Qualitative materiality shall, among others, include the following:

a) Remuneration of the members of the council both in cash and in kind,

b) Cash payments and or support in kind to political causes,
c) Misappropriation of funds,
d) Fraud,
e) Related party transactions, and
f) Actions that can result in cancelation, suspension, recall of funding or repayment of
grants from government or CPs.

5.4.4 Classifications, headings and sub-heading of lines in the financial statements shall
take into account materiality of items. Individually immaterial items must be
aggregated together and presented in aggregated headings or lines.

5.4.5 The Basis of measurement is historical cost convention.

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 5.4.6 Transactions and other events shall be measured at the actual amounts of cash
received or paid out by the LA.

5.4.7 Cash balances shall be measured at the actual amounts held by the LA at the reporting
date.

5.5 CORRECTION OF ERRORS

5.5.1 Errors in financial statements may arise from mathematical mistakes, mistakes in
applying LAAPs, misinterpretation of facts, frauds or oversights.

5.5.2 Current period errors discovered in current period must be corrected before the
financial statements are authorised by the Council for issue and publication.

5.5.3 When prior period errors are discovered, the error is corrected by adjusting the
opening cash balance. The correction is made in such manner as if it was corrected in
the period it took place.

5.5.4 The error must be disclosed in the notes to the financial statement by stating the
nature of the error and how it has been corrected.

5.5.5 Suppose K2 million, an LA borrowed from a bank was wrongly treated as receipts
under LGEF in the FS for 2018 and if this mistake is discovered in 2019, then its
impact must be analysed. The opening balance in 2019 is not affected by this error.
What was affected was the classification in 2018. The line for borrowing in 2018
was understated while that for LGEF was overstated. In 2019, this error should be
corrected as though the correction was done in 2018 itself. The 2018 comparatives
are adjusted by increasing borrowings by K2m and reducing LGEF by the same
amount.

5.5.6 Suppose it is discovered that included in the cash equivalents of the prior period
were Government Bonds that did not meet definition of cash equivalents. This
adjustment will mean reducing the closing balance in the comparatives so that the
opening balance brought forward into the current period does not have Government
Bonds in them.

5.6 PRESENTATION OF BUDGET INFORMATION

5.6.1 The Statement of Comparison of Budget and Actual Amounts shall show original
budgets, approved adjustments and final budgets.

5.6.2 All comparisons of budget and actual amounts shall be on comparable basis which
means that they shall use similar basis of preparation and classification basis and for
the same accounting period.

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 5.6.3 An LA shall, by way of a disclosure note, explain material differences or variances
between the budget and actual amounts.

5.7 FOREIGN CURRENCY TRANSACTIONS AND BALANCES AND

GENERAL CONSIDERATIONS

5.7.1 Cash transactions of an LA in foreign currency shall be recognised in the GPFSs in

Kwacha using the spot exchange rate applicable at the date of transaction.

5.7.2 The date of transactions for the purpose of 5.7.1 above shall be as follows:

a) In case of receipts, the date when the cash has been received in the bank account or
by an officer of the LA and
b) In case of payment, the date when the payment has been duly authorised by all
required signatories.

5.7.3 Foreign currency cash balances held by the LA at the year-end shall be translated
into Kwacha using the closing rate for that year.

5.7.4 An LA shall disclose the amount of exchange rate differences included as

reconciling items between opening and closing cash balances for the period.
Although unrealized gains and losses arising from changes in foreign currency are
not cash transactions, they should be reported in the Statements of Cash Receipts and
Payments in order to reconcile cash at the beginning and the end of the period.

5.7.5 The reporting period for FSs of LAs shall be twelve months. In exceptional
circumstances such as when a district is formed, it may produce financial statements
for more than twelve months but not more than 18 months, in which case it shall
prepare separate financial statements for that period.

5.7.6 The reporting date is 31st December of each reporting period.

5.7.7 The Authorisation Date of the FSs shall be the date when the Council sits and
approves the signing of the FSs. The authorization shall be disclosed in the FSs and
shall signal the end of the period where adjustments shall be allowed.

5.7.8 Each set or copy of the FSs shall be signed and dated. The FSs shall be signed by the
Mayor/Chairperson, Town Clerk/Council Secretary and Director Finance/ Treasurer.

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PART 6: APPLICATION OF PART 2 CASH BASIS IPSAS TO THE LAAPs

6.1 ASSETS, LIABILITIES, REVENUES AND EXPENSES

6.1.1 The disclosures included in this part shall be made by every LA in the FSs from the
year ending 31st December, 2019 onward.

6.1.2 An LA shall disclose in the notes to the FSs information about assets, liabilities,
revenues and expenses.

6.1.3 An LA shall disclose the following details about its investments in other entities:
a) Name of the entity
b) Principal activity of the entity
c) Percentage shareholding in the entity
d) Cash returns on investments (This shall be recognized under ‘other receipts’ in the
Statement of Cash Receipts and Payments as well as disclosed)

6.1.4 Information about property, plant and equipment shall disclose the following:

a) bases of measurement of the assets,

b) opening values,
c) any additions in the year,
d) any revaluations,
e) any disposals in the year,
f) any re-classification of the assets in the year and
g) closing balances.

6.2 ADMINISTERED TRANSACTIONS

6.2.1 An LA is encouraged to disclose in the notes to the GPFSs, the amount and nature of
cash flows and cash balances resulting from transactions administered by the LA as an
agent on behalf of others where those amounts are outside the control of the LA.
6.2.2 Regarding ‘Pass-through’ cash flows, an LA:
a) Controls the cash it collects in its capacity as agent for the, usually short, period the
cash is deposited in the LA’s bank account prior to transfer to third parties;

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 b) Usually benefits from any interest arising from amounts deposited in the interest
bearing accounts prior to its transfer to the other entity; and
c) Possesses an obligation to transfer the cash collected to third parties in accordance
with legislative or administrative arrangements.

6.2.3 Cash flows that pass through the bank accounts of the LA shall be recognized in the
FSs as they meet the recognition criteria set in these policies.

6.2.4 Transfer payments such as social cash transfer if handled by LAs shall be treated as
pass-through cash flows.

6.3 RELATED PARTY TRANSACTIONS

6.3.1 An LA is encouraged to disclose in the notes to the GPFSs information relating to

Related Party Transactions as required by IPSAS 20.

6.3.2 Related parties include:

a) Entities that directly, or indirectly through one or more intermediaries, control, or are
controlled by the LA;
b) Associates being entities over which the LA has significant influence
c) Individuals that have significant influence over the LA, and close members of the
family of any such individual;
d) Key management personnel, and their close members of the family and
e) Entities in which a substantial ownership interest is held, directly or indirectly, by any
person described in (c) or (d), or over which such a person is able to exercise
significant influence.

6.3.2 The key management personnel of the Council are the Mayor/Chairperson, elected
Councillors, Co-opted members of the Audit and Procurement Committees, Chiefs
who are part of the council representing other Chiefs in the district, the Principal
Officers and Chief Officers.
6.3.3 Spouses, children and grandchildren, grandparents, brothers, sisters, parents in law,
brothers in law, and sisters in law of key management personnel are related parties to
the LA.

6.3.4 The LA shall disclose the nature of the related party relationship as well as
information about those transactions and outstanding balances as a note to the
financial statements.
6.3.5 Related party disclosures may include remuneration, loans and contracts awarded to
key management personnel and their close relatives.

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6.4 EXTERNAL ASSISTANCE DIRECT PAYMENTS BY THIRD
PARTIES

6.4.1 External assistance comprises loans and grants from multilateral and bilateral CPs other
Donor agencies, under signed agreements specifying the purposes for which the
assistance will be utilized.
6.4.2

6.4.2 LAs shall disclose the following:

a) total external assistance received in cash during the period,

b) total external assistance paid by third parties for the benefit of the LA,
c) external assistance received in form of loans and grants,
d) their classifications,
e) purposes for which it was received and
f) undrawn balances of external assistance.

6.4.3 Third party payments also known as direct payments are those that are made by third
parties to construct or acquire property, plant and equipment and/ or pay for services
on behalf of the LA.

6.4.4 Third party payments do not constitute cash receipts and payments by the LA. They
include payments for goods and services made by multilateral and bilateral aid
agencies and non-governmental organizations and may be included in the
disclosures for external assistance.

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ANNEX 1: 2018 FINANCIAL STATEMENTS FORMATS BASED ON THE
LOCAL GOVERNMENT ACT OF 1991 – CAP 281

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ANNEX 2: 2019 TO 2022 FINANCIAL STATEMENTS FORMATS BASED
ON THE LOCAL GOVERNMENT ACT No. 2 OF 2019

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