Accounting for Public

Enterprises
 Proc. No. 25/1992
Definition of Terms……..
Public Enterprise: a wholly state owned public enterprise
established pursuant to Proc. No. 25/1992 to carry on
for gain manufacturing, distribution, service rendering
or other economic and related activities.

Total Assets: all immovable and movable property,

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

Net Total assets: total assets less current liabilities, long-

term debts, deferred income and other liabilities.
 Definition of terms:
• 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.
• The paid up capital shall not be less than 25 % of
the authorized capital at the time of establishment.
• The authorized capital of the enterprise shall be
fully paid up within 5 years from the date of its
establishment.
• 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.
 Definition of terms:
• State Dividend: remaining balance after deduction of the
transfers to the legal reserve fund and other reserve fund from
the net profits.
• Legal reserve: 5% of net income of the financial year.

• Legal reserve 5% of net profits until such reserve equals 20% of

the capital of the enterprise.
• The legal reserve is used to cover losses and unforeseeable
expenses and liabilities
• Other reserve funds may be established with the approval of the
supervisory authority
• IFRS are used for financial reporting purpose
• Financial year is determined by the supervising authority and
Accounts should be closed at least once a year – within three
months following the end of the financial year.
 FORMATION PI

Example: The government formed Alle Bejimla

Enterprise with Authorized Capital of Br 50,000,000 in
accordance with the requirements of Proc. No. 25/1992
with investment of the following assets:
Cash Br 15,000,000
Equipment (fair value) 700,000
Entry:
Cash 15,000,000
Equipment (fair value) 700,000
State Capital 15,700,000
 Operation of PI
Alle Bejimla Enterprise
Trial Balance
Dec. 31, 2006 (Br ‘000) ______
Cash Br 10,050
Accounts Receivable 2,600
Property plant and Equipment 2,200
Accumulated Depreciation Br 50
Accounts Payable 150
Notes Payable 200
State Capital 15,700
Sales 5,000
Operating Expenses 2,950
Purchases 3,300 ____
21,100 21,100
– Ending inventory is Br 1,600,000.
– The board of directors decided to establish other reserves of Br
100,000 from the net income of the year.
– Profit tax rate is 35%.
 Required:

a. Prepare the income statement for Alle

Bejimla for the year ended Dec. 31, 2006.
b. Prepare journal entries for transfer of net
income to legal reserve and other
reserves, and to recognize the state
dividend payable.
c. Prepare the balance sheet at Dec. 31,
2006.
 Income statement
Alle Bejimla Enterprise
Income Statement
For the Year ended Dec. 31, 2006(‘000 birr)
Sales Br 5,000
Cost of Goods Sold 1,700
Gross profit 3,300
Operating Expenses 2,950
Income before tax 350
Income tax expense (35%) 122.5
Net Income 227.5

Journal entries:
Income summary 227,500
Legal Reserve (5% x 227,500) 11,375
Other Reserve (R/E) 100,000
State Dividend Payable 116,125

Income tax expense 122,500

Income tax Payable 122,500
 XYZ Enterprise
Balance Sheet
Dec. 31, 2006

Assets
Cash 10,050
Accounts Receivable 2,600
Inventory 1,600
Property, Plant and equipment 2,200
Less: Accumulated Depreciation (50) 2150
Total assets 16,400
Liabilities and Capital
Accounts Payable 150
Income tax payable 122.5
Notes Payable 200
State Dividend Payable 116.1
State Capital 15,700
Legal Reserve 11.4
Other Reserves 100
Total Liabilities and Capital 16400
 PRIVATIZATION
According to Proclamation on privatization of Public
Enterprises Proc.No. 146/1998 "Privatization"
means the transfer, through sale, of an enterprise or
its unit or asset or government share holdings in a
share company to private ownership and includes:
The making of an enterprise a government contribution
to a share company to be formed with the participation
of private investors; and
The privatization of the management of an enterprise.
 objectives of privatization
• To generate revenue required for financing
development activities undertaken by the
Government.
• To change the role and participation of the
Government in the economy to enable it exert more
effort on activities requiring its attention;
• To promote the Country's economic development
through encouraging the expansion of the private
sector
 Accounting for privatization
• When an enterprise is privatized :
– The assets will be recorded at FV on the date.
– Goodwill will be recorded, if any
– Equity accounts will be corrected
• The journal entry to record the privatization is slightly
different when the buyer choice to Continue with the
old books and start from the New books

• Example: The following information is given for XYZ

Company, a public enterprise, which is privatized on
Dec. 31, 2006
 XYZ Enterprise
Balance Sheet
• Dec. 31, 2006 (Br ‘000)

Assets Cost Market value

Cash 10,050
Accounts Receivable 2,600 2000
Inventory 1,600 2000
Property, Plant and equipment (net) 2150 3000
Total assets 16,400

Liabilities and Capital

Accounts Payable 150
Income tax payable 122.5
Notes Payable 200
State Dividend Payable 116.1
State Capital 15,700
Legal Reserve 11.4
Other Reserves 100
Total Liabilities and Capital 16400

An investor( Ato Kemal) has paid Br 20,000,000 to acquire the XYZ Company.
• Required: Journalize the transaction.

• Case 1: Continuing with the books of XYZ

Inventory 400
Property, Plant and equipment (net) 850
Goodwill (note) 3538.6
State Capital 15,700
Legal Reserve 11.4
Retained Earnings 100
Accounts Receivable 600
Kemal Capital 20,000
 Goodwill Computation
Note:
Cost Br 20,000.00
Less: Net Assets
State Capital 15,700
Legal Reserve 11.4
Retained Earnings 100
Revaluation surplus 650 16461.40
Goodwill 3538.60
 Case 2: New books

Cash 10,050
Accounts Receivable 2000
Inventory 2000
Property, Plant and equipment (net) 3000
Goodwill 3538.6
Accounts Payable 150
Income tax payable 122.
Notes Payable 200
State Dividend Payable 116.1
Kemal , Capital 20,000
 Dissolution and Winding up

Art. 39-45
• Process:
– Sale of assets
– Payment of creditors (if the assets of the
enterprise are not sufficient to pay the debts, and
if the authorized capital is not fully paid up, the
liquidator can ask for full payment of the
authorized capital)
– Payment of remaining assets to the government