Government services – transfer expenses or not?

Government services – transfer expenses or not?

Governments exist primarily to provide services to its citizens and others. These services take many forms and include providing services for all to access, as well as direct support to individuals in the form of goods, services and financial support.

The IPSASB has issued substantial guidance on accounting for government services over the last two years. This includes issuing IPSAS 42 on Social Benefits in 2019 and amendments to IPSAS 19 on Provisions, Contingent Liabilities and Contingent Assets in 2020. Most recently, the IPSASB issued ED 72 on Transfer Expenses for comment.

The classification of transactions and whether they should be accounted for using IPSAS 42, IPSAS 19 or ED 72 can be complex. For some transactions, the classification is straight-forward. For others, the classification may require a high degree of judgement. As we discuss the proposed principles, it is important to understand the potential areas of complexity and raise these with the IPSASB.

Classification of government services

Social benefits are accounted for using IPSAS 42, collective and individual services are in the scope of IPSAS 19, and transfer expenses in ED 72.

Social benefits

Social benefits are cash transfers provided to specific individuals and/or households who meet eligibility criteria to: (a) mitigate the effect of social risks and (b) address the needs of society as a whole.

Social risks are events or circumstances that relate to the characteristics of individuals and/or households – for example, age, health, poverty and employment status; and may adversely affect the welfare of individuals and/or households.

It may be easier to identify whether government services are social benefits or not, as it is clear that IPSAS 42 only deals with cash payments to individuals or households who meet specific eligibility criteria. It is still important to assess whether the benefit being provided is to mitigate a social risk.

An example of social benefits could be the payment of social grants.

Collective services

Collective services are services provided by a public sector entity simultaneously to all members of the community that are intended to address the needs of society as a whole.

A key feature of collective services is that services are made available to communities at the same time, and that they are not “consumed”, i.e. the availability of the service is not reduced through consumption by an individual or community. Key examples of collective services include providing policing and defence services, and public infrastructure.

Individual services

Individual services are goods and services provided to individuals and/or households by a public sector entity and are intended to address the needs of society as a whole.

In contrast with:

• Social benefits – Individual services only include goods and services, and individuals or households may or may not need to meet eligibility criteria.
• Collective services – Individual services are goods or services provided to specific individuals or households.

Typical examples include universal healthcare or universal education. There are however some potential examples where the classification of individual services and transfer expenses may require judgement (discussed below).

Transfer expenses

A transfer expense is an expense arising from a transaction in which an entity provides a good, service, or other asset to another entity (which may be an individual) without directly receiving any good, service, or other asset in return.

Transfer expenses generally arise from binding arrangements, i.e. rights and obligations exist for both parties to the arrangement and may require the other party to either (a) transfer specific goods or services to 3^rd party beneficiaries (transfer expenses with performance obligations), or (b) undertake an activity with the resources transferred (transfer expenses without performance obligations). Transactions where there is no binding arrangement, i.e. those that just require the transfer of resources to another party, are also transfer expenses.

The types of transactions that could be classified as transfer expenses could include:

• Example 1: Entity A enters into an arrangement with Supplier X to acquire construction equipment which is to be provided to Entity B. This arrangement is a transfer expense (with performance obligations) for Entity A as it has distinct goods or services and is for the benefit of a 3^rd
• Example 2: Entity A provides construction equipment to Entity B to build specific infrastructure. This is a transfer expense (without performance obligations) for Entity A as goods are provided to another entity to undertake certain activities.

Individual service or transfer expense?

There are some examples where the difference between IPSAS 19 and ED 72 may not be immediately clear, or may require judgement.

Take an example of an entity providing food parcels. The classification could vary depending on the circumstances in the specific arrangement. Three scenarios are discussed below:

• Example A – Municipality X provides food parcels to individuals in need as part of an ongoing programme of the municipality.
• Example B – Municipality X provides food parcels to individuals that are affected by recent floods as “emergency relief”.
• Example C – Municipality X provides food parcels to a charity to distribute to individuals in need.

Example A would be classified as an individual service. The Application Guidance to IPSAS 19 indicates that individual services should be part of an ongoing programme of government.

Example B would be classified as a transfer expense as it is provided as “emergency relief” rather than as part of an ongoing programme of government.

Example C could be classified as a transfer expense as the municipality is providing goods to another party without receiving anything in return. As a 3^rd party beneficiary is involved, it could also affect the classification of the transaction as a transfer expense. It is however debatable whether this could also be an individual service, particularly if the transfer of goods or services are part of an ongoing programme of government.

These types of examples, along with the principles in ED 72, should be discussed when commenting to the IPSASB to avoid potential issues being raised in practice.

Where can the EDs be accessed and how can you provide comment?

ED 72 can be accessed on the ASB’s website by following this link: https://www.asb.co.za/comment-on-proposals/.

Comment can be submitted to the Secretariat of the ASB at info@asb.co.za by 1 October 2020.