Professional Documents
Culture Documents
1. Introduction
The study focused on the Accounting System for Ethiopia Construction Works
Corporation (ECWC). The Study aimed to find some limitation and recommend the best way
that can provide efficient and economical utilization of ECWC’s resources, ensuring the profitability of
Accordingly, this accounting system assessment serves as a guide in the process of financial management
recording, analyzing and summarizing, accounting transactions in such a way that it enables the
generation of financial information for both internal and external users and for the efficient management
This study contains accounting system and guiding principles on the financial management of ECWC
including cash, receivables, inventory, property and equipment, payables, reporting and auditing. The
system part contains details of steps to be followed as a consistent and repetitive approach to accomplish
various financial management activities. Accordingly, the system on collection, disbursement, inventory
and fixed asset valuation, recording, disposal, financial report preparation, financial analysis and the
accounting and internal controls are explained in the accounting system part of this study.
1.2. METHODOLOGY
As research approach case study is taken to make an empirical inquiry that investigates a phenomenon
within its real life context. Here the accounting system of Ethiopia Construction Works Corporation
is described in a framework within an organizational environment. The events are described in
some detail with the main and subsidiary points highlighted. The accounting system is identical in
every outlet and for every project. The information used in this case study is both primary (collected
from field) and secondary.
The information was taken from the Head office (ECWC) by interviewing the staff and management.
• Annual report,
• Progress report
• Code of conduct
• Statements
• And written Financial Policy and Procedure Manual of Ethiopia Construction Works Corpoaration.
2. Discussion
2.1. ANALYSIS OF ACCOUNTING SYSTEM
2.1.1. The Chart of Accounts.
The first step taken by ECWC is to choose an accounting software package which is clear and concise and
easy to operate and maintain the Construction accounting. The second step of ECWC was to clarify
purpose of organization and reflect that in a clear and concise chart of accounts. It is important that a chart
of accounts reflect all the major functions and project operation of the organization in a concise and
systematic manner.
ECWC has more than twenty projects and ten districts, it prepares charts of accounts and code them for
computer aided soft ware. The coding of the account head represents the specific project, district
office, and lastly the respective income, expenditure, liabilities or assets. The Chart of account will be
designed in such a way that it suits the internal reporting requirement, cost accounting and IFRS.
The structure of the chart of accounts of ECWC has the following structure:
Subsidiary accounts for account receivables, inventory, account payables and projects shall be handled
using the relevant modules of the ACCPAC (Accounting Package) system. The project cost accounts
includes activity costs.
Finance Department has to deliver the interim financial reports with the minimum content requirement as
indicated in the following section together with financial analysis to managers of ECWC at all levels,
monthly and quarterly, including the Board of Directors through the CEO.
When it is not possible to produce a Consolidated interim financial reports on a monthly basis, branches
and the head office may submit monthly Profit and Loss income statements only until such time that the
efficiency is gained.
Assets and liabilities, and income and expenses, are not offset Comparative prior-period information is
presented for amounts shown in the financial statements and notes.
2.1.4. Disclosure
Sufficient disclosure provided on information about the significance of financial assets and liabilities to
ECWC’s financial position and performance. Information on revenue and expenses of its operating
segments (e.g Construction, maintenance and others) which constitute at least 10% of the total revenue
and expenses to disclosed users of ECWC’s financial statements to evaluate the nature and financial
effects of the business activities in which it engages and the economic environments in which it operates.
The financial statements of ECWC adjusted to reflect events after the balance sheet date that provide
evidence of conditions that existed at the end of the reporting period (such as the resolution of a court
case after the end of the reporting period). The financial statements however are not adjusted to reflect
events that arose after the end of the reporting period (such as a decline in market prices after year end,
which does not change the valuation of investments at the end of the reporting period). The nature and
impact of such events are disclosed.
Annual Financial statements should be prepared within three months from ending date of the fiscal year.
2.2. Auditing
The accounts of ECWC shall be audited annually by External Auditor.
External Auditor shall be appointed by the supervising authority. The Board of Director may appoint
External Auditor if delegated by the Supervising Authority.
Draft Financial reports shall be delivered to auditor in four months time from the end of the fiscal year
(not later than Tikimt 20).
The final audit report should be delivered to the Board before Tahisas 30 (end of the six month from the
end of the fiscal year).
The CEO shall issue copies of the audit report to the relevant stakeholders.
ECWC wishes to adopt Enterprise Resource Planning (ERP) software for the execution of the financial
management system in line with the envisaged financial activities of the corporation, including all of the
ECWC business processes. This system enables the Corporation to capture costs and other financial
information timely in an integrated manner, and this intern increases the capacity of compiling and
Utilizing Financial Management Information System (FMIS) effectively.
2.5. Accounting Document & Recording
2.5.2. Cash
Cash includes cash in hand, in bank and cash equivalents.
Cash and Cheque collected for the settlement of credit sales of Construction project and
Maintenance services and others should be evidenced by pre-numbered and serially sequenced
Cash Receipt Voucher.
Cash collected from other sources, such as settlement of staff advances, collection of insurance
claim, grant received, additional investment and others shall be evidenced by Cash Receipt
Voucher if received in cash or cheque.
All cash sales, such as rent of building and equipment, sales of construction materials and
goods…, shall be evidenced by VAT invoice. Payment certificates issued to customers should be
supported by Credit VAT Invoices that serves as Credit sales invoice.
Cash Receipt Voucher should be prepared for collection directly transferred to ECWC’s account.
Cash and cash equivalents shall not be kept in the safe box in excess of the sum insured.
2.5.7. Disbursement
Disbursements are made out of cash funds and bank accounts. Cash funds include petty cash
funds, cash withdrawn for payments at project sites and purchase funds.
Payment Request shall be approved if supported by adequate budget.
Payments made in cash and cheque shall be evidenced by pre-numbered payment voucher, which
shall be approved by designated officials.
Petty cash fund shall be established on imprest system and the fund shall be used for effecting
single payments below Birr 3,000.
Petty cash float at the level of head office is Birr 60,000 and Birr 50,000 at the level of
district/Project/. The size of the float may be revised in accordance with the volume of
transaction, when approved by the Finance Manager
2.5.7.3. Transfers
Bank transfers shall be used when it is found to be efficient than cheque and cash payments.
Bank transfers are made using letter requests to the bank by mentioning the name of the
beneficiary and the name of the Bank branch and of the bank account (when applicable).
Bank transfer payments should be evidenced by Disbursement Payment Vouchers and transfer
request of a requesting Department/ project which initiates the transfer. The requester shall fill in
the request for payment form and get the approval from the designated officials.
2.5.7.4. Payroll
Payroll shall be paid on a monthly basis.
Payroll preparation and payment is decentralized at district/project levels. However, the personnel
database of ECWC is centralized in Head Office. Districts and projects access to the central
database regarding their respective staff members.
Human Resource & Facility Management Department is responsible for maintaining and
updating of personnel database. The personnel data, among other things, should include
information on employment, transfer, promotion, change in salary and benefits, penalty, pension
registration, termination and retirement. Whenever such issues are initiated the Human Resource
Department should send copies of the information to Finance Department/Finance Team. Finance
should maintain the files for reviewing that the personnel records in the payroll system is in line
with the hard copies.
All employees shall be provided with a unique identification number (i.e.; badge no) centrally by
the Human Resource Division.
Payroll payment may be paid to employees in cash only when employees do not have yet their
bank account or no bank branch in close proximity to their duty station. Otherwise, payroll
payment has to be transferred to the account of the employees on a monthly basis.
2.5.8. Revenue
Revenue is generally recognized when it is possible that the economic benefits will flow to the
entity, and when the amount of revenue can be measured reliably, and when the following
conditions are met:
From sale of Construction Material and Goods: when significant risks and rewards have been
transferred to buyer, seller has lost effective control, and cost can be reliably measured.
From rendering services: percentage of completion method (See section on Construction
accounting). Interim Payment Certificate (IPC), which is approved by a consultant IPC) is a basis
for revenue recognition which is basically in line with percentage completion method.
From interest revenue: using the effective interest rate as per agreed with the bank or borrower.
From dividend revenue;-when the dividend declared from shareholding.
From Rental of building: As per agreement stated in the contract.
- cost Birr 5000.00 and above for goods and Birr 50,000 and above for Construction / Works for
own use
- have a useful life of over one year and which shall be capitalized.
Any purchase of a fixed asset whose cost/value lower than Birr 5000.00 shall be recorded as
expense of the period.
Nominal value of Birr10.00 shall be maintained for fixed assets that are fully depreciated, until
the asset becomes out of use or sold as scrap and is written off the books.
Fixed assets of ECWC shall be classified as follows:
Fixed assets received by the store and kept up to delivery shall be recorded as inventory and when
issued from store to the user, it shall be recorded as fixed asset.
SL-FM- Straight line full month: Depreciation will be computed for the full month in the
month of purchase
SL – Straight line
Minimum book value for fixed asset in use but completed its depreciation life shall retain Birr 10 as a
book value until its disposal.
2.7.4. Revaluation
Revaluation may be conducted for the following reasons
When the book value of the properties of ECWC is significantly lower than its market value
When ECWC considers merger or transform into a share company
When ECWC financial statement presentation required to be adjusted to reflect the current values
by financiers and other stakeholders
Fixed asset should be disposed in accordance with the Property and Equipment Disposal manual
of ECWC. The manual describes the manner in which users request for disposal, the role of
property team, the disposal committee, the DGMs - Support and Chief Executive Officer and
Board of ECWC.
Fixed Asset segregated and held for sale shall be measured at the lower of carrying amount and
fair value less costs to sell.
The record of the fixed asset should be adjusted by the value of the disposed assets. Such non-
current assets held for sale (whether individually or as part of a disposal group) are not
depreciated. Fixed assets held for sale are classified separately in the balance sheet.
If an asset segregated for disposal is sold, it shall be evidenced using a VAT invoice.
- it is probable that the future economic benefits that are attributable to the asset will
flow to the entity; and
Intangible assets at ECWC are accounted for using a cost model. Under the cost model, assets are
carried at cost less any accumulated amortization and any accumulated impairment losses.
2.9. Inventory
Inventories are consumable materials/stock items which are not qualified for definition of fixed asset.
2.9.1. Recording
Inventories purchased are recorded as Inventory (inventory) at the time of purchase, and receipt at
store. The value of Inventory is adjusted perpetually for a change in Inventory position.
Inventory of stock items shall be valued using moving weighted average method.
Costs include purchase cost, conversion/manufacturing cost (materials, labour and overheads),
and other costs to bring inventory to its present location and condition, but not foreign exchange
differences.
Transportation, handling and other related costs incurred to transfer stock item from head office
to project offices and within project offices shall be recorded as periodic expense.
2.9.3. Disposal
Obsolete and deteriorated or damaged supplies shall be disposed of timely when approved by the disposal
committee and the Chief Executive Officer in accordance with the property and disposal guideline.
2.10. Payables
2.10.1. Account Payables
Account payables are those arising from credit purchases of goods and services.
Liabilities are recognized when goods or services are received from a vendor or service provider
based on a valid contractual agreement entered into by ECWC and/or authorized purchase order
issued by ECWC in line with the procurement manual of ECWC.
Evidence of receipts of goods and services should be supported by the required documentation
before recognizing account payables.
Separate subsidiary records shall be maintained to each creditor using the ACCPAC system.
A provision is recognized only when a past event has created a legal or constructive obligation, an
outflow of resources is probable, and the amount of the obligation can be estimated reliably and the
amount recognized as a provision is the best estimate of the settlement amount at the end of the reporting
period.
Taxes to be collected by ECWC on behalf of the government (including tax on employment, withholding
taxes, VAT, Cost Sharing, Pension) and other similar obligation should be performed according to the
law and paid in time to the relevant government body.
A deferred tax asset should be recognized for deductible temporary differences, unused tax losses
and unused tax credits to the extent that it is probable that taxable profit will be available against
which the deductible temporary differences can be utilized. A deductible temporary difference is
a temporary difference that will result in amounts that are tax deductible in the future when the
carrying amount of the asset is recovered or the liability is settled.
Deferred tax liabilities should be recognized for all taxable temporary differences as per which is
a difference that will result in taxable amounts in the future when the carrying amount of the asset
is recovered or the liability is settled.
2.11. Capital
The supervising Authority may increase the capital of ECWC to be allocated by the Government
or to be paid out of the net profits of ECWC. Proposal for the increase in capital may be
submitted by the CEO of ECWC to the Board of Directors of ECWC who in turn will pass it to
the Supervising Ministry.
The Authorized and Paid up capital of ECWC may be decreased with the approval of the
Supervising Authority for the following reasons:
When requested by the CEO and Board of Directors of ECWC and approved by the
Supervising Ministry;
The authorized capital of the enterprise has not been fully paid in five years time from the
date of authorization.
The authorized capital of ECWC shall be fully paid up within 5 years from the date of its
establishment in accordance with the proclamation of public enterprise (25/1992). Where
the authorized capital is not fully paid up as stated above, the Supervising Authority shall,
without prejudice to the rights of third parties, adjust the capital to the level of the paid up
capital.
a) Losses and
3. FINDINGS
The accounting system of ECWC is well planned and contemporary and it is highly eulogized by
the Board of director and Government body. It assists the internal control, cash control, internal
auditing process, budget formulation and execution, facilities or property management, financial
operations and analysis, grants management and information resources management. But there are
some weaknesses in this financial Accounting system when we see practically. Like:
1. The project grass roots links are not efficient enough so the generation of information in that level is
weak and sometimes not supported by documents.
2. The field based development expertise sometimes fails to develop innovative measures to
support modern financial Management.
3. The project doesn’t give more emphasis on long-term commitment and sustainability; which could
assist the progress and accountability of the project.
4. The cost effectiveness of the project is not used uniformly in every outlet
5. For generation of accounting information and reporting the project authority don’t have
modern process oriented approach and they failed to increase institutional capacity.
6. The organization still not implements ERP system they are only wish to implement.
7. Different loan loss provision is not maintained properly to control customer loss provision.
9. District office and Project office don’t maintain the full form of accounts book.
For the above lacking, dissimilarities and some specialties, the accounting system of Construction
Company is not clear to all.
4.1. CONCLUSIONS
From the above analysis and findings, it can be concluded that the accounting system and financial
reporting of Ethiopian Construction Works Corporation(ECWC) would be clear to all if there is
uniform accounting system and specially separate IAS/IFRS be introduced.
4.2. RECOMMENDATIONS
ECWC is one of the largest Construction Company in Ethiopia which is financed by the
Ethiopian Federal Government; the accounting system of this corporation is well organized and
transparent. The processes of presenting the financial statements are unique and very systematic.
ECWC after all these limitations; could give the other construction Companies some guidelines for
preparing and installing accounting systems, making assumptions about accounting principles and
lastly but not the list to prepare and present financial statements and submit financial reports.
In order to make the project accounting process some recommendations could be considered:
1. Policy for uniform accounting standard, internal and external audit, should be introduced for all other
construction companies.
2. The corporation should hire more expertise and modern management technique;
Long outstanding creditors’ balances, which exceeds more than 5 years should be transferred to other
income in consultation with the legal division of corporation and against the approval of the Board of
Directors after a failed reasonable effort to settle the liabilities, especially when the creditors are diseased
or his/her inheritor could not be identified or his/her address could not be located and the period of
limitation has elapsed according to relevant laws.
At the end of the fiscal year, provisions for doubtful accounts shall be established with the
following rates. These rates may be revised based on experiences (trends) when approved by the
General Manager of ECWC.
One year old – 15%
Two years old – 40%
Three years and above - 70%
Long outstanding debtors’ balances shall be written off in consultation with the Legal Division of ECWC
against approval of the delegated body, after reasonable effort to collect the money, especially when the
debtor is diseased, the organization liquidated because of bankruptcy or his/her address is no more
traceable.
7. The information should be modernized by use of internal network and of process oriented approach
and value based management approach should make the accounting process efficient.