IPSASB Exposure Draft on Revenue with Performance Obligations (ED 181) part 3

Accounting for revenue transactions with components 

The IPSASB issued three Exposure Drafts in February 2020 on Revenue with Performance Obligations (ED 181), Revenue without Performance Obligations (ED 182) and Transfer Expenses (ED 183). 

ED181 is aligned with IFRS 15 on Revenue from Contracts with Customers and expands the principles to deal with public sector specific issues. 

What is a revenue transaction with components?

Presently entities apply IPSAS 9 on Revenue from Exchange Transactions to exchange transactions, and IPSAS 23 on Revenue from Non-exchange Transactions (Taxes and Transfers) to non-exchange transactions. “Exchange transactions” are defined in IPSAS 9 as transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value to another entity in exchange.

IFRS 15 recognises revenue based on the satisfaction of performance obligations. ED 181 proposes that transactions are no longer defined as “exchange” or “non-exchange”, but rather as transactions “with performance obligations” or “without performance obligations”. ED 181 defines a performance obligation as a promise in a binding arrangement with a purchaser to transfer to the purchaser or third-party beneficiary either a good or service (or a bundle of goods or services) that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the purchaser or third-party beneficiary.

In the public sector, a purchaser may enter into a binding arrangement with an entity with a dual purpose of obtaining goods or services (i.e. a component with performance obligations) and to help the entity achieve its objectives (i.e. a component without performance obligations). For example, providing a donation in addition to obtaining goods or services. Entities may have found it hard to separate the components of a transaction that are partially within the scope of the existing IPSAS 9, and partially within the scope of another IPSAS as it may not have been clear when, or whether, there was a direct exchange of value between the parties. 

How should entities account for such a transaction?

ED 181 provides guidance on accounting for such a transaction as follows:

1. Another IPSAS specifies how to separate and/or initially measure components of the binding arrangement:

An entity first applies the separation and/or measurement requirements in the other IPSAS. 

The entity then excludes from the transaction price the amount of the components that are initially measured in another IPSAS and applies ED 181 to allocate the amount of the transaction price that remains (if any) to each performance obligation within the scope of ED 181.

1. No other IPSAS specifies how to separate and/or initially measure components of the binding arrangement:

The entity applies ED181 to separate and/or initially measure the components of the binding arrangement.

For example:

Public Entity A provides computer training services for free to certain qualifying members of the public. Public Entity A also provides the training at a market related rate to anyone else. Public Entity A enters into a binding arrangement with Government Entity B for Government Entity B to pay Public Entity A R10 million made up as follows:

1. R2 million as payment for Public Entity A to train the staff of Government Entity B at a market related rate.
2. R8 million as an appropriation to Public Entity A for Public Entity A to run its operations.  

Applying the requirements of ED 181, Public Entity A identifies that component (2) is within the scope of another IPSAS, being ED 182. Public Entity A applies ED182 to separate and initially measure the R8 million component of the transaction. Public Entity A applies ED 181 to account for the R2 million component of the transaction.

What are the potential implications of the change in approach to revenue transactions with components?

Entities are currently required to separate a transaction with components by analysing which part of the transaction resulted from a direct exchange of value between the parties and which did not. 

Applying the new approach, entities would need to determine the component(s) of revenue that have performance obligations, and the component(s) of revenue that have no performance obligations. Where more than one performance obligation exists from an arrangement, entities would be required to allocate the transaction price to each performance obligation.

The implications of the change in this approach will need to be discussed during the consultation on ED 181 and ED 182. 

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

The EDs have been published on the ASB’s website and can be accessed here: https://www.asb.co.za/comment-on-proposals/. Comment can be submitted to the Secretariat of the ASB at info@asb.co.za.