CHAPTER TWO

2. ACCOUNTING FOR PUBLIC ENTERPRISES IN ETHIOPIA

2.1 Overview of Proc. No. 25/1992 and other related Provisions

Establishment of public enterprises in most countries of the world dates back as early as
post World War period. It was only in some countries such as the UK that the
nationalization process began shortly after World War I when the state intervened in
commercial activities to take over mines and railways in situations where the existing
private owners were facing financial difficulty.
Even though the objectives of establishing public enterprises differ from country to
country, there are common factors that necessitated their coming into existence. In some
countries, governments would hold a belief that the scale and range of investment
required for sustainable economic development was beyond the reach of pure market
forces. Hence, activities supposed to have a significant contribution in building the
economy of a country but not undertaken by the private sector due to involvement of
greater risk had to be undertaken by the government. The other motive was governments’
political commitment to multiple non-commercial objectives for enterprises such as
employment generation, income distribution and economic welfare that can be provided
by the state only. In still some other countries, ruling parties had a belief that their
continued stay in power and subsequent electoral success depended on socialist principles
emphasizing the state’s control of the “commanding heights” of the economy. In
addition, the reluctance or inability of the equally devastated business communities to
commit resources to capital-intensive sectors with long payback periods in the years
immediately following World War II compelled governments to takeover some
commercial activities.
Nevertheless, the later proliferation of public enterprises, especially in developing
nations, was induced by the requirement of developed nations to do the same in order to
attain level of economic development appropriate to warrant self-sufficiency in certain
areas of products. With the challenging objectives of fostering infant industries,
promoting indigenization, creating employment and controlling strategic resources, many
developing country governments responded by accelerating the role of the state.

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Statutory companies (also known as "public enterprises" or "State owned enterprises,
SOEs") are companies that are established by law, as opposed to registered companies
which are established by a memorandum of association. Public enterprises are defined as
wholly State owned enterprises established to carry on for gain manufacturing,
distribution, service rendering or other economic and related activities. These are
companies that are "formed to carry out some special public undertakings, for example,
railways, waterworks, gas, electricity generation, etc. There are several reasons for their
establishment that include (a) national security for areas such as defense industries and
public transport; (b) revenue raising in particular in events such as where tax collection is
difficult or impossible; (c) economic control and self-reliance; (d) lack of private
investment in undertakings where large-scale investment is required; (e) equity
considerations when private companies fail to function profitably; and (f) the fear of
private monopoly situations.
The major characteristics of such public enterprises include public ownership, public
control and establishment by a separate law, having distinct legal personality, limited
degree of autonomy and public finance.

Public enterprises acquire legal personality upon establishment by Council of Ministers

Regulations to be issued pursuant to Article 6 of Proclamation No.25/1992. These
establishment Regulations have to contain, inter alia, the name and purpose of the
enterprise, the authorized and paid up capital, extent of liability and supervising
authority. As companies established by Regulations, any change or amendment of the
Regulations establishing such statutory companies has to go through the formal
procedure of amendment of Regulations by the Council of Ministers.
It can be observed from review of the various Regulations establishing various types of
public enterprises in various sectors that statutory companies operate in Ethiopia under
three distinct names, i.e., corporations, enterprises and share companies. Prominent
examples of corporations include the Ethiopian Telecommunication Corporation, and the
Ethiopian Electric Power Corporation; examples of companies established as enterprises
include the Ethiopian Airlines Enterprise, Water Works Design and Supervision
Enterprise, Ethiopian Seed Enterprise and agricultural development enterprises such as
Bale Agricultural Development Enterprise, Arsi Agricultural Development Enterprise,

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and Awassa Agricultural Development Enterprise. As regards State owned share
companies, these are forms of share companies that are 'transitory' in nature as they are in
the process of transformation and are waiting for sale to the private sector. It must be
underscored that the power to convert a public enterprise into a share company type of
business organization resides in the Council of Ministers by virtue of Article 47(2) (a) of
Proclamation No. 25/1992. The capitals of these share companies are divided into shares
and totally held as government shares.
Turning to a short historical synopsis of public enterprises in Ethiopia, the institutional
framework under which economic enterprises operated prior to 1974 was a free enterprise
system with an open policy in the sense that no minimum requirement was imposed on
the establishment and operation of enterprises. With the taking of power by the Dergue in
1974 and owing to the Marxist-Leninist political ideology that influenced policies and
laws, many privately owned companies were nationalized and became public enterprises
through a series of laws. Since the middle of the seventies, public enterprises became one
of the significant facets of the Ethiopian economy. Pursuing its economic and political
policy of centralism, the Dergue regime expropriated private owners and nationalized
large and medium scale enterprises in the productive, service and financial sectors... At
the end of the seventies, the economy to a large extent was under the dominance of the
socialist state and over 200 large public enterprises were operational. These enterprises
accounted for over 20 per cent of Ethiopia's GDP. In some sectors, like manufacturing,
mining, power and transport, the share of public enterprises added up to over 50 per cent
of the total production.
In Ethiopia pursuant to Proc. No. 25/1992 a Public Enterprise is defined as a wholly state
owned public enterprise established to carry on for gain manufacturing, distribution,
service rendering or other economic and related activities. Some examples of public
enterprises in Ethiopia include the Natural Gum Production & Marketing Enterprise,
Ethiopian Fruit & Vegetable Marketing Sh. Co, Bole Printing Enterprise, Ambo Mineral
Water Factory, National Alcohol & Liquor Factory, Faffa Foods Sh. Co, Berhanena
Selam Printing Enterprise, Fish Production & Marketing Enterprise, Maritime & Transit
Service Enterprise, Mugher Cement Factory, and Educational Materials Production
&Distribution Enterprise.

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Benefits of Public Enterprises
The operation of public enterprises in an economy is highly beneficial to the economy.
The contribution of public enterprises can be viewed from two perspectives: economic
benefit and social benefit.
A. Economic Benefits

From economic point of view, public enterprises produce important impacts that
strengthen the economy by providing the following economic benefits. They generate
revenue for the government through various means. Dividend, interest on loans, excise
duty, sales taxes, corporate taxes etc are paid to the government by public enterprises.

• Public enterprises also exploit the natural and technological resources of the state. This maximizes the
social welfare and developmental opportunities in the economy.

• Public enterprises save scarce foreign exchange either by exporting the foreign currency generating
goods and services of the country by substituting imported products.

• Public enterprises help in reducing regional disparities through fair dispersal of industries.
Accordingly, the government will consider backward areas of the country in proper perspective.

• Public enterprises provide infrastructural facilities for the development of the economy and the private
sector. Public enterprises provide infrastructural facilities to foster private sector and accelerate the
pace of national economic development.
B. Social Benefits

On the social area, public enterprises are considered as a welfare promoting

organizations. The social benefits of public enterprises can be summarized as follows.
Public enterprises provide job opportunity, serve as model for employers by providing
various welfare benefits like housing, medical, transport, staff centers and other social
services, safeguard the interest of the consumers by offering subsidized goods at fairly
low price, they insure provision of goods and services to low income groups at cheaper
prices. Public enterprises also produce residual surplus, which may be used for public
welfare, which will maximize the social satisfaction of the public and public enterprises
possess an attribute similar with business firms as they engage themselves in profit
oriented business activities.

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The growth of the public sector especially in developing countries has given rise to
increasing awareness of the role and importance of the public enterprises in the economy.
Public enterprises are now significant instruments of macro-economic policy in many
countries following different economic system. As a result, there is a growing concern to
understand their operations, assess their performance and provide adequate mechanism
for their management and accountability.
Traditionally public enterprises referred to as government owned and government-
controlled enterprises operating in spheres of inelasticity of demand, and or natural
monopoly condition, while recent phenomena show enterprises operating in non-
traditional commercial and industrial activities with government ownership or in
partnership with foreign investors. The forms and names of public enterprises are many.
For example, public corporations, state enterprise, state corporation, chartered bodies,
parastatals, state development agencies, state marketing boards are among the many types
and forms of public enterprises.
In Ethiopia, in general, it was the state corporations that had the legal personality and not
the enterprise during the early period of the nationalization process but more recently the
enterprises have been made to be the legal and operating tax-paying units.
Characteristics of Public Enterprise
Attempts to identify and articulate essential characteristics of public enterprises in
comparison with private enterprises have not been easy. The efforts at time have been
confusing and hard to discern that one is almost tempted to say that “private enterprise
like the leopard cannot change its spots, but that public enterprise, like the chameleon,
can adopt appropriate colour to the appropriate occasion.” Early literature discusses the
following dichotomous features of public enterprises.
 Statutory body: A public enterprise is an expression of the wish of the state to create a
new separate agency with specific objective.
 Insulated personality: For the reason that it possesses legal personality, a public
enterprise not only is separate from persons who conduct its affairs but also from the
state. Nevertheless, this independence of legal personality is not always lasting in
application nor is that concisely demarcated. For public enterprise, being part of the

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 state can also be regarded and treated as part of the same state. The degree of
insulation, therefore, may not be that definite.
 Independent governing body: Usually an independent board administers the affairs of
public enterprises. But there has been a division of opinion as to what should be the
composition of the members of this board; whether they should be specialists or
representatives of any section, class or group interest. In the twenties, there was a
tendency for the board membership to be composed of all interest groups. Labor
movements gave rise to “workers control board” which in 1944 came to be replaced by
an efficiency board of persons solely chosen on their ability and expertise.
 Respectful relationship with minister: A public enterprise is answerable to the
government that establishes it through the appropriate minister. The power given to
ministries may vary according to the acts, but the power the minister exercises has
important implication on the enterprise’s operations, and the level and extent of these
controls is not easily determinable.
 Autonomous working conditions: As far as the public enterprise is a “child of the
state”, it is subject to supervision and control. However, over centralization is the
characteristic of public undertaking that can cause managerial inefficiency in the
enterprises. Thus, it is reasonable to say that public enterprises must ensure their
autonomy of normal (day to day) operations affording freedom from government red
tape, treasury control, and political dictation.
 Self-contained finance: This is a consequence of the above point, as the autonomy
concept will remain not real unless accompanied by financial independence. To realize
the expected outcome, the public enterprises must rely on assured economic resources
they can command at once rather than on the annual “generosity of the legislature”. Its
resources must be free from lapse system that may encourage imprudent spending at the
close of the financial period. If the public corporation is to adhere to “proper business
principles” of operation, it will have to operate on accrual basis accounting and not on
cash basis that is the accepted financial procedure of government department and
ministries.
 Purposes other than profit: The public enterprise has a public purpose and other
objectives than profit only. It is, as a result, not interested in maximizing profits, but

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 should run efficiently and in the process make profits or surpluses that are essential
especially for the growth of the economy.
 No share and shareholders: The public enterprise has no share or shareholders and
the “profit motive” is to be replaced by “public service motive”, but in financial terms
the nation or the state owns the equity of the public enterprise. The nation is, therefore,
the entrepreneur in the final analysis, and it stands in gain or loss from the operation of
publicly owned enterprises. It must be noted that the gain or loss may be in various
forms, i.e. lower prices, reduced level of taxation brought about by efficiency, or higher
prices and increased level of taxation caused by inefficiency.
 Public monopoly: It is customary for the state to declare monopolistic rights for itself
in any particular area of business activity. Public enterprise may then have monopolistic
rights in that particular line of business activity, as it would be uneconomical and
wasteful to permit competing units in parallel lines of public undertakings. There is
thus a strong case for combination and amalgamation of similar activities and enforcing
a monopolistic operation by public enterprises. However, to guard against the ill effects
of public monopoly, some kind of control is necessary to provide assurance of
adequacy of operation, frequency and efficiency of service, control of prices to be
charged, judicious hiring practices, fixing of compensation schemes, prevention of
corrupt and discriminatory practices, and protecting customer rights.
 Commercial audit: The public enterprise is formed in order to operate free from
constraints of tedious rules and procedures applicable to government departments and
ministries. It must prepare its accounts according to well-settled commercial principles,
including payment of interest on capital outlays, taxes on profit, and adequate rate of
return on investment. Consequently, financial performance must be subject to
commercial audit, instead of the usual government comptroller or government audit
rule of compliance. Public enterprise audit will need more understanding of broader
questions of business efficiency, accounting principles, and prudent management.
Recently six essential elements characterizing the public dimension and enterprise
dimension of the public enterprise have been identified. The public dimension includes
public purpose, public ownership, and public control. The enterprise dimension

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recognizes a field of activity of business character, investment and return, and marketing
of output in the public enterprise.
• Public purpose-a public enterprise is created for attaining broad socioeconomic
development objectives and thus has a public purpose.
• Public ownership-ownership of the enterprise by the controlling government,
state, or public authority could be quantitatively marked by 51% more ownership
position. The following diagram shows the classification of corporate firms on the basis
of ownership.
Corporation

Public Sector Private Sector

With Stock Without Stock

Open Enterprises Closed Enterprises

Listed Enterprises Unlisted Enterprises

• Public control-as the state or the public authority owns the public enterprise, it is
subject to public control. This control over the operations and activity of the enterprise
is not just to be done through the classical parliamentary control procedures, but
through new appropriate management and accountability concepts. This involves a very
complex affair of performance evaluation of multi-dimensional set of objectives, and
reporting accountability to a variety of authorities. The problem of providing proper
management and accounting system is of a paramount importance in this matter.
• Field of activity or business character-the public enterprise operates in a sphere of
activity that has “business character”. If so, in line with business principles, it would be
involved in marketing its output and seeking reasonable return on its investment.
• Marketing of outputs-pursuant to its business character, a public enterprise will have
to market or sell its output free. It is assumed the enterprise will have to market its
output.

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• Investment and return-an enterprise in business makes use of a capital investment and
expected return to the investor. Accordingly, a public enterprise operation to be in
business would have to include a concept of profitability or surplus.
Accounting for Public Enterprises
Providing adequate accounting system for the public enterprise, first and foremost,
depends on the relationship and organization structure of the State Corporation, state
enterprise, and supervising authority, that is, whether accounting is centralized at the
corporation or at the enterprise level paralleling the extent of centralization or
decentralization of authority and responsibility of the organs related to it.
The problem of the relationship of the state corporation to the enterprise centers around
the accounting issue of whether the corporate entity constitutes one entity or embodies
more than one entity, whether, the legal entity is the enterprise or the corporation, and
whether the accounting entity, legal entity, and economic entity coincide. This
accounting dilemma is conceptualized in the framework of (a) Head office and Branch,
(b) Principal and Agent, (c) Parent and Subsidiary, (d) Holding company views.
Accounting for the public enterprises must be based on clear understanding of the
underlying assumptions to be made on the character of the public enterprise, and the type
or structural relationship established. The workable assumptions in this case are:
• The public enterprise is involved in profit.
• The economic performance of the public enterprise is measured by its financial
profitability. Financial profitability is determined by net income or surplus. Financial
profitability must be distinguished from social profitability that should be measured
also additionally where possible.
• The public enterprise is self-costing and perhaps price setter. From the above
assumptions, entity accounting or enterprise accounting would seem to be most
suitable accounting concept for adaption to public enterprise accounting except in the
capital of proprietorship section and accumulation and distribution of earnings. Entity
accounting is accounting for a separate organization that has legal personality of its
own separate from its owners. This is the foundation for the corporate accounting.

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

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accrual basis of accounting are essential for more adequate follow-up of the enterprise
business transaction in view of earlier rationale (characteristics). Most of asset
accounting is the same as in private corporate entity accounting except for variations in
classification and valuation procedures.
Liabilities, which represent accruals to and claims of outsiders, will also be accounted for
in similar manner as in private corporate accounting entity except for classification. The
procedures for income measurement and recognition involving accounting for revenue
and expense transactions including gains and losses are similar to those accounting
procedures for private corporate entities.
Distinctive Features of Ownership Equity Section of Public Enterprises
Capital in the private corporate accounting entity stands for the owner’s equity or
owner’s claim on assets. This is represented by capital stock account indicating the
stockholders’ equity. Legal right usually classifies the right hand side of the balance
sheet, i.e., it is the legal right of the owners (owner’s equities) and that of the creditors
(creditors’ equities) that make a classification in the right hand side of the balance sheet
of business enterprises. The public enterprise capital, on the other hand, has no share or
shareholders and the capital representing government equity (as owner and investor) is
identified by an overall capital account, and the right hand side of the balance sheet is
best classified by the objectives they are designated for. Of course, when there are
liabilities, these also are disclosed separately by the amount they claim out of total assets.
In corporate entity of market economy the proprietorship/ownership equity section is
composed of the following items:
 Capital stock: represents capital paid up initially, and or subsequently increased or
decreased as changed by additional investment, transfers from earnings and paid-in
capital (surpluses) or appraisal surplus. Initial investment could be in money (cash) or
other assets (in kind). It is the legal paid-up invested capital representing owner’s
equity or assets less liabilities.
 Additional paid-in capital or paid-in surplus is surplus or excess obtained from capital
transactions above specified initial value of stated capital. It is a result of capital
transactions.

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 Retained earnings are the sum of accumulated past net incomes from operations plus
other additions or subtractions perhaps arising from corrections of prior years or
extraordinary losses and gains or non-operating gains and losses.
 Appropriations are earmarked earnings be it from retained earnings or paid-in-capital,
which may or may not be followed by segregation of real assets.
 Dividends are distribution of incomes (earnings) and or surplus to shareholders in
return for their investment.
 Appraisal surplus is excess obtained from appraisals of assets, which represents
unrealized gains.

In Ethiopia according to Proclamation No. 25/1992 that governs the establishment,

operation, and dissolution of public enterprises contains the following important
accounting related provisions and definition of terms:

 Enterprise-a wholly state owned public enterprise established pursuant to this

Proclamation 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.
 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.
 Paid-up Capital: The paid up capital shall not be less than 25 % of the authorized
capital at the time of establishment.
 Authorized Capital: The authorized capital of the enterprise shall be fully paid up
within 5 years from the date of its establishment. Where the authorized capital is not
fully paid up as provided under sub-article 2 of this Article, the supervising authority
shall, without prejudice to the rights of third parties, adjust the capital to the level of
the paid up capital.

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 Increase of Authorized Capital: The supervising authority may cause the funds
needed to increase the capital of an enterprise to be allocated by the Government or to
be paid out of the net profits of the enterprise.
 Decrease of Capital: The capital of an enterprise may without prejudice to the rights
of third parties, be decreased where 1) the auditors have proposed that the capital
should be decreased; 2)it was decided to decrease the capital following a proposal by
the board to this effect; and 3) the authorized capital of the enterprise has not been
fully paid.
 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.

Pertaining to the legal personality and liability the proclamation states that an enterprise
shall have legal personality and as such it shall have rights and duties and an enterprise
may not be held liable beyond its total assets.

According to Proclamation No. 25/1992, the proprietorship section of the public

enterprise is composed of the following parts:
• 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.
• Legal reserve: any enterprise shall annually transfer 5% of its net profits to the legal
reserve fund until such reserve fund equals 20% of the capital of the enterprise. The
legal reserve is used to cover losses and unforeseeable expenses and liabilities.
• Other reserve funds or retained earnings (i.e. appropriations): The board of any
enterprise may, with the approval of the supervising authority, cause other reserve
funds to be established and determine their utilization.
• State Dividend: the remaining balance after deduction of the transfers to the legal
reserve fund and other reserve fund from the net profits.

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• Appraisal surplus: is excess obtained from appraisals of assets, which represents
unrealized gains.
Other provisions relevant to the financial reporting practices of public enterprises are
presented as follows:

• Each enterprise shall keep books of accounts following generally accepted accounting
principles. The supervising authority may issue directives to this effect.
• The financial year of an enterprise shall be determined by the supervising authority.
• Any enterprise shall close its accounts at least once a year. The annual closing of
accounts shall be completed within three months following the end of the financial
year.
• The enterprise shall prepare a report on the state of its activities and affairs during the
last financial year, including a statement of achievements and major plans and
programmes to be implemented in the near future.
• Failure to close, in due time, the accounts of an enterprise may entail liability.
• The relevant laws concerning taxes and duties shall be applicable to enterprises.
• Nothing in this Proclamation shall affect the right of an enterprise to be exempt from
taxes and duties and any other right under any other law.
• Any enterprise shall pay to the Government state dividend within seven months
following the end of the financial year.
• Without prejudice to the powers and duties of the Auditor General under other laws,
the accounts of each enterprise shall be audited by external auditors appointed by the
supervising authority.
• The supervising authority shall ascertain that external auditors appointed by it satisfy
the criteria set by the Auditor General and that they are free from being under any
form of influence.
• The supervising authority shall determine the term of the external auditors.
• Any person who has received, paid or expended, or is in charge of the accounts of, the
money or property of the enterprise being audited shall, when requested, have the
obligation to produce to the auditors the accounts to be audited and to furnish the
necessary information.

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 2.2 Accounting for Formation and Operation

Dear learner, the following example describes the accounting for the formation of a
public enterprise.
Example: The government formed XYZ 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

The journal entry for the formation of the XYZ Enterprise would be as follows:
Cash 15,000,000
Equipment (fair value) 700,000
State Capital 15,700,000
Operation of a Public Enterprise
Look at the accounting for the operation of a public enterprise assume the following
information for XYZ Enterprise: XYZ Enterprise
Trial Balance
Dec. 31, 2006 (Br ‘000)

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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
21,100
Purchases 3,300 ____ 21,100
In addition to the above trial balance assume that the 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 and profit tax rate is 35%.
On the basis of the foregoing information we can prepare the income statement for XYZ
enterprise for the year ended Dec. 31, 2006, the balance sheet on Dec. 31, 2006, and
journal entries to close the income summary account as follows:

a. Income statement for the year ended Dec. 31, 2006

XYZ 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

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 Operating Expenses 2,950
Income before tax 350
Income tax expense (35%) 122.5
Net Income 227.5
b. The journal entries for transfer of net income to legal reserve and other reserves,
and to recognize the state dividend payable would be as follows:
2006 Income summary 227,500
Dec. 31 Legal Reserve (5% x 227,500) 11,375
Retained Earnings 100,000
State Dividend Payable 116,125
Dec. 31 Income tax expense 122,500
Income tax payable 122,500
c. Balance sheet at Dec. 31, 2006.

XYZ Enterprise
Balance Sheet
Dec. 31, 2006(‘000 birr)
Assets Liabilities and Capital
Cash 10,050 Accounts Payable 150
Accounts Receivable 2,600 Income tax payable 122.5
Inventory 1,600 Notes Payable 200
Property, Plant & Equipment 2,200 State Dividend Payable 116.1
Less: Acc. Depreciation (50) 2150 State Capital 15,700
Legal Reserve 11.4

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 Other Reserves 100
Total assets 16,400 Total Liabilities and Capital 16,400

2.3 Privatization of Public Enterprises

With the demise of the Derg regime, the incumbent government adopted a market
oriented economic policy that gives prevalence to the ownership of property by the
private sector. This policy also opened the public enterprises that were in the hands of the
government to private sector ownership. That is to say, the public enterprises are being
privatized with a view to increasing private sector participation in the market and
improving their performance.
In terms of modes of privatization, it should be noted that the types and processes of
privatization could differ from one country to another. There are three types of
privatization: political privatization, fiscal privatization and economic privatization. In
political privatization, all the citizens are provided with share vouchers of state
enterprises regardless of their economic viability, their capital stock and their
management while in fiscal privatization, the enterprises are sold to the highest bidder
that increases public revenue. On the other hand, in economic privatization, the
government or one of its agencies would manage the restructuring of privatized
enterprises and negotiates clauses on employment, social benefits, training and
redundancies with other private entrepreneurs.
Just as the reasons for the creation of public enterprises are varied, the reasons for their
privatization are also varied. In addition to the failure to meet the original objectives,
diminishing profits to the State or continual increase of losses on the State, privatizations
of public enterprises are also caused by other internal and external factors. These are (a)
higher fiscal pressure on governments (high budgetary deficit, large domestic public debt,
and large external debt), (b) higher dependency on loans from international organizations
(WB and IMF), (c) a large share of SOEs in total investment, (d) inferior and poor
performance of SOEs in production and profitability, and (e) lower long term growth.
The process of preparing public enterprises for (private) market and competition takes
different stages through what is known as commercialization and corporatization." The
stage of commercialization refers to a process directed at establishing private sector
management principles, values, practices and policies within public sector organization

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without involving the private sector at all. Corporatization, on the other hand, refers to
the legal process of converting an entity into a company although initially the State is the
sole 'shareholder'. Relating to this, Article 1(2) of the Privatization of Public Enterprises
(Amendment) Proclamation No. 182/1999 provides that an enterprise converted into a
share company shall cease to exist upon registration as share company and be replaced by
the company.
It is plain to conclude from this that once a public enterprise is converted into a share
company and is registered as such, the Commercial Code should normally apply to the
company. This is affirmed by Article 5(4) (c) of Proclamation No. 146/1998 where it is
stated that the Commercial Code is mutatis mutandis applicable. Such State owned share
companies include the companies engaged in beverages industry (e.g. Awash Winery S.C
and Bedele Brewery S.C), food industry (e.g. Faffa Food S.C and Kality Food S.C) and
textiles such as Akaki Textiles S.C.
Dear learner, "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.
According to Proclamation No. 146/1998, the objectives of the Country's Privatization
Programme are the following:
• 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.
Moreover article no. 6 of the Proclamation No. 146/1998 calls for valuation of the
enterprise up on privatization and provides the following pertinent provisions:

• The Agency shall cause the valuation of an enterprise or a unit or assets of an enterprise or government
shares prior to privatizing same.

• Valuation shall be done in accordance with guidelines issued by the Board.

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 • The floor or indicative price determined as the result of the valuation shall be subject to the
approval of the Board.

Example:
In order to illustrate the accounting treatment for privatization of a public enterprise
assume the following information that is obtained from the accounting records of 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

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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 16,400

If an individual investor has paid Br 20,000,000 to acquire the XYZ Company then the
journal entries for privatization of the public enterprise under the following two
alternative assumptions are shown below.

Assumption 1: Continuing with the XYZ Books

Inventory (2000-1,600) 400
Property, Plant and equipment (3000-2150) 850
Goodwill (note) 3538.6#
State Capital 15,700
Legal Reserve 11.4
Retained Earnings 100
Accounts Receivable (2600-2000) 600
X, Capital 20,000
# Note on computation of goodwill:
Cost Br 20,000.00
Less: Market Value of Net Assets 16,461.40
Goodwill 3,538.60

Assumption 2: Establishing New Books

Cash 10,050
Accounts Receivable 2000
Inventory 2000
Property, Plant and Equipment (net) 3000
Goodwill 3538.6

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 Accounts Payable 150
Income Tax Payable 122.5
Notes Payable 200
State Dividend Payable 116.1
X, Capital 20,000
Financial Statements of Public Enterprises in Ethiopia
The financial statements of public enterprises in Ethiopia contain the balance sheet, profit
and loss statement, statement of cash flows, and Statement of Changes in Equity.
Presented below are financial statements of sample Ethiopian public enterprise financial
statements.

Sample Manufacturing Public Enterprise

Balance sheet
At 30 June 20X4
20X3
Notes Birr Birr Birr
Assets Employed
Property, Plant and Equipment 11,474,387 11,551,868
Current Assets
Stock 20,262,003 14,343,894
Income Tax Recoverable 505,481 139,308
Debtors Net of Provisions 5,146,920 14,301,184
Cash and Bank Balances 815,826 135,257
26,730,230 28,919,643
Current Liabilities
Creditors 3,365,856 6,013,173

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 Bank Overdraft 2,729,657 2,836,318
Dividend Payable 2,776,579 ______-_
8,872,092 8,849,491
Net Current Assets 17,858,138 20,070,152
29,332,525 31,622,020
Financed by:
Share Capital
Paid Up Capital 22,053,000 22,053,000
Capital Reserve 2,547,886 2,547,886
Legal Reserve 854,943 751,337
Accumulated Profit 1,866,887 3,223,483
27,322,716 28,575,706
Proposed Dividends 1,968,519 2,999,138
Total Equity 29,291,235 31,574,844
Deferred Tax Liability 41,290 47,176
29,332,525 31,622,020

Sample Manufacturing Public Enterprise

Profit and Loss Statement
For the year ended 30 June 20X4
Notes 20X3
Birr Birr Birr
Sales 32,560,715 34,925,765
Cost of Goods Sold 27,692,055 28,309,718
Gross Operating Profit 4,868,660 6,616,047
Other Income 1,449,938 93,649
6,318,598 6,709,696
Expenses
Administration 2,101,890 1,773,895

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Selling and Distribution 1,149,400 991,563
Land and Building Taxes (1975-2003) 475,594 -
Financial Charges 113,136 53,013
Directors’ Fees 27,800 8,045
Audit Fee 20,000 18,000
Contribution to Drought Relief 13,770 250,000
Provision for Stock Obsolescence - 363
Provision for Doubtful Debts ______ -_ 3,992
3,901,590 3,098,871
Net Profit Before Taxation 2,417,008 3,610,825
Tax Expense 344,883 1,084,554
Net Profit After Taxation 2,072,125 2,526,271
Transfer to Legal Reserve 103,606
Proposed State Dividend 1,968,519

Sample Manufacturing Public Enterprise

Statement of Changes in
Equity For the year ended
30 June 20X4

Share Capital Legal Accumulated Proposed Total

Capital Reserve Reserve Profit Dividends Equity
Birr Birr Birr Birr Birr Birr

Balance at 30
June 20X1 22,053,000 2,547,886 625,023 2,023,505 9,500,354 36,749,768
Net profit for
the year 2,526,271 2,526,271
Transfer to
legal reserve 126,314 (126,314)
Dividend

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declared- (7,701,195) (7,701,195)
20X1
Proposed _________ ________ ________ (1,199,979) 1,199,979 _________
dividend
Balance at 30
June 20X3 22,053,000 2,547,886 751,337 3,223,483 2,999,138 31,574,844
Net profit for
the year 2,072,125 2,072,125
Dividend
declared- (156,618) (1,799,159) (1,955,777)
20X2

20X3 (1,199,978) (1,199,979) (2,399,957)

Transfer to
legal reserve 103,606 (103,606)
Proposed ________ ________ ________ (1,968,519) 1,968,519 ________
dividend
Balance at 30 22,053,000 2,547,886 854,943 1,866,887 1,968,519 29,291,235
June 20X4

Sample Manufacturing Public Enterprise

Cash Flow Statement
For the year ended 30 June 20X4

Notes Birr Birr 20X3

Birr
Net Cash Inflow from Operations 5,203,643 1,354,091
Returns on Investment and
Servicing of Finance
Interest Paid (110,151) (31,635)
Dividend Paid (1,579,155) (3,586,437
(1,689,306) (3,618,072)
Taxation
Profit Tax Paid (716,942) (928,332)
Investing Activities

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Payments for Acquisition of Property, Plant (2,049,165) (1,012,270)
and Equipment
Proceeds from the Disposal of Property, 39,000 15,794
Plant and Equipment
(2,010,165) (996,476)

Increase (Decrease) in Cash and Cash 787,230 (4,188,789)

Equivalents

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