IPSASB Exposure Draft on Revenue without Performance Obligations (ED 71)

How does ED 71 change the measurement of revenue? 

The International Public Sector Accounting Standards Board (IPSASB) issued three Exposure Drafts in February 2020 on Revenue with Performance Obligations (ED 70), Revenue without Performance Obligations (ED 71) and Transfer Expenses (ED 72). ED 71 updates IPSAS 23 on Revenue from Non-exchange Transactions (Taxes and Transfers) but the IPSASB is of the view that measurement requirements in ED 71 remain largely unchanged from IPSAS 23. This article explores the proposed measurement requirements in ED 71 compared to IPSAS 23.

In a previous article on What is a present obligation in the context of recognising revenue? [https://bit.ly/3g22dqK] we discussed the impact of the proposals in ED 71 to change what gives rise to present obligations, i.e. a change from “conditions” in IPSAS 23 (which needed to be distinguished from “restrictions”) to specified activities and a requirement to incur eligible expenditure in ED 71. Revenue recognition is driven by an entity obtaining control of resources and therefore recognising an asset. Depending on if a present obligation exists, an entity recognises revenue to the extent that a liability is not recognised.

What are the measurement requirements in IPSAS 23?

IPSAS 23 requires entities to initially recognise the asset at fair value and recognise revenue at an amount equal to the asset. Fair value is determined in a way consistent with IPSAS, e.g. property, is measured with reference to IPSAS 17 on Property, Plant and Equipment, and a financial asset is measured with reference to the IPSAS on financial instruments. If a liability is also recognised, the liability is measured at the best estimate of the amount required to settle the present obligation at the reporting date, in accordance with IPSAS 19 on Provisions, Contingent Assets and Contingent Liabilities. Where a liability is recognised, revenue is recognised to the extent that a liability is not recognised. 

What changes are proposed in ED 71 from IPSAS 23 for transfers?

ED 71 proposes to recognise monetary assets initially at “transaction price” – the amount of inflows of future economic benefit or service potential which a transfer recipient expects to receive in a revenue transaction, and may include fixed and/or variable amounts.

Variable inflows are estimated using either of the following methods:

1. The expected value: the sum of probability-weighted amounts in a range of possible amounts.
2. The most likely amount: the single most likely amount in a range of possible amounts.

In both methods, an entity is required to determine a range of possible amounts based on past, current and forecast data. This is not currently required in IPSAS 23. 

Non-monetary assets are proposed to be measured at fair value, which is similar to IPSAS 23. 

The measurement of the liability in ED 71 is also similar to IPSAS 23, i.e. referring entities to IPSAS 19.

What is the impact of the changes proposed in ED 71 on the measurement of taxes?

In IPSAS 23, assets arising from taxation transactions are measured at the best estimate of the inflow of resources to the entity. Although it is not fair value, the Standard requires entities to develop accounting policies that are aligned to the principles of fair value. In estimating tax revenue, IPSAS 23 requires entities to consider a number of factors when building measurement models, including:

• history of collecting the particular tax in prior periods, e.g. income tax collection history from taxation statistics;
• consideration of the timing of cash receipts from taxpayers compared to the taxable event, e.g. income tax instalments deducted by employers compared to employees earning salaries; 
• declarations made by taxpayers; and 
• the relationship of taxation receivable to other events in the economy, e.g. a downturn in economic activity resulting in a rise in unemployment statistics. 

ED 71 proposes that taxes are measured at “transaction price”, as explained for transfers in the section above. It would therefore require the tax authority to build a model which identities a range of possible amounts based on different sets of data for each taxpayer to estimate variable consideration. 

The Standards of GRAP dealing with revenue transactions are aligned to the existing IPSAS, including GRAP 23 on Revenue from Non-exchange Transactions (Taxes and Transfers). The Board would need to consider whether to align with any new or revised IPSAS that are issued. The potential differences in accounting will need to be explored and discussed in responding to the IPSASB.

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/. The EDs are as follows:

• ED 181 on IPSASB Exposure Draft on Revenue with Performance Obligations (ED 70)
• ED 182 on IPSASB Exposure Draft on Revenue without Performance Obligations (ED 71)
• ED 183 on IPSASB Exposure Draft on Transfer Expenses (ED 72) 

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