GRAP 109 review – why it is important to report on principal-agent arrangements in the financial statements

The Standard of GRAP on Accounting by Principals and Agents (GRAP 109) provides guidance on reporting on principal-agent arrangements by principals and agents in the financial statements. Based on a need identified by stakeholders to review the Standard, the Board published the Invitation to Participate in the Post-implementation Review of GRAP 109 (ED 200) with a comment deadline of 15 September 2023.

Why report on principal-agent arrangements in the financial statements?

Providing services to the public is the primary objective of public sector entities. Entities receive resources from taxpayers, lenders and donors to provide these services. They are accountable to those resource providers and those that depend on them to use those resources for service delivery. Information in the financial statements enables these users to hold entities accountable.

Which entities are responsible for what services?

The Constitution sets out the various responsibilities of the levels of government and particular types of entities, and supporting legislation establishes the responsibilities of specific entities for the activities outlined in the Constitution. For efficiency and effectiveness reasons, entities sometimes collaborate and have certain activities executed by another entity or undertake activities on behalf of other entities. However, the ultimate responsibility for the activities still rests with the entities identified in legislation.

These collaborative arrangements may result in principal-agent arrangements for financial reporting purposes, as defined in GRAP 109 – binding arrangements in which one entity (an agent) undertakes transactions with third parties on behalf, and for the benefit of, another entity (the principal). The parties to a principal-agent arrangement may be in the public and private sectors.

In a binding arrangement, it is essential for the parties to the arrangement to identify correctly:

• the type of arrangement – principal-agent, or something else; and
• if it is a principal-agent arrangement, which entity acts as the agent and the principal.

The correct classification of an arrangement and identification of roles in an arrangement is important because it determines which transactions each entity accounts for.

Here are typical examples…

Typical arrangements where one entity undertakes activities on behalf of another entity in the public sector may include:

• An entity collecting revenue (including taxes, fees and other charges) from specific parties on behalf of another entity. For example, a municipality collecting motor vehicle licence fees from citizens for the provincial government and the revenue authority collecting taxes from citizens for the national government.
• An entity constructing assets on behalf of another entity for a third party. For example, an entity building houses for beneficiaries of the reconstruction and development programme on behalf of the national and provincial housing departments.
• An entity providing goods and services to recipients on behalf of another entity. For example, municipalities providing water to specific communities on behalf of water service authorities.
• An entity providing property management services (including maintenance of properties and collection of rental revenue) to third parties on behalf of another entity. For example, an entity providing these services to the Department of Public Works for properties rented to third parties.

These examples often meet the definition of principal-agent arrangements.

Reporting on principal-agent arrangements in the financial statements

GRAP 109 is applied before considering the other Standards of GRAP. GRAP 109 does not prescribe new recognition or measurement requirements in respect of revenues, expenses, assets and liabilities.

Entities need to provide information to users in the financial statements to enable them to make decisions on whether principal-agent arrangements effectively meet the purpose of the arrangement by delivering services and to hold entities accountable for the resources entrusted to them to provide services.

GRAP 109 requires the disclosure of information on principal-agent arrangements and the related transactions to meet these needs. In addition, entities provide information on revenue, expenses, assets and liabilities in accordance with other applicable Standards of GRAP.

Get involved in the review

The ASB invites all preparers, users and auditors of financial statements to participate in ED 200. Preparers are those responsible for preparing financial statements and those that prepare information used in the financial statements. Users of financial statements are service recipients, resource providers and their representatives. These users comprise lenders, creditors, donors and others that provide resources voluntarily, Parliament, legislatures, municipal councillors or other relevant authorities and taxpayers.

The Secretariat will obtain feedback from stakeholders through questionnaires (available on the ED 200 webpage on the ASB website), roundtable discussions and direct consultations. Contact elizna@asb.co.za to be invited to a roundtable discussion.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.