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

Does ED 71 provide guidance on statutory receivables? 

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) and includes guidance on the subsequent measurement of receivables as follows:

1. Receivables that are financial assets in the scope of IPSAS 41 on Financial Instruments are measured in accordance with IPSAS 41.
2. Other receivables not in the scope of IPSAS 41 are measured using amortised cost in accordance with IPSAS 41. 

The Board has developed GRAP 108 on Statutory Receivables to provide guidance on receivables that are not financial assets. The article will focus on the ED 71 proposals for receivables not in the scope of IPSAS 41 (see (b) above), compared to GRAP 108.

What is a statutory receivable?

GRAP 108 defines statutory receivables as receivables that:

1. arise from legislation, supporting regulations, or similar means; and
2. require settlement by another entity in cash or another financial asset.

This includes receivables from taxes, levies, fines, appropriations and grants that arise from legislation rather than from a contract. Although ED 71 does not define statutory receivables, the GRAP 108 definition means statutory receivables in GRAP 108 are comparable to the receivables in (b) above that are not contractual and therefore not in the scope of IPSAS 41.

What guidance is included in ED 71 on subsequent measurement of statutory receivables?

ED 71 refers entities to the amortised cost model in IPSAS 41 to subsequently measure receivables not in the scope of IPSAS 41. Amortised cost requires entities to, among other things: 

• Calculate interest revenue by using the effective interest method. 
• Calculate impairment losses using the “expected credit loss” (ECL) model.

While there may be challenges to initially measure statutory receivables at “fair value” (see a previous article on How does ED 71 change the measurement of revenue? [https://bit.ly/2TmOjWO]), the most challenging part of measuring statutory receivables may be applying amortised cost, and in particular the ECL model. Although there are concessions in IPSAS 41 for receivables (e.g. allowing entities to always consider the lifetime expected credit losses and ignoring the requirements for purchased or originated credit-impaired financial assets) the requirements of the ECL model are onerous. The ECL model requires entities to determine an unbiased and probability-weighted amount of impairment by evaluating a range of possible outcomes with the possible risk of default occurring as the weight. Time value of money should also be considered. The model must further consider past, present and forecast data, as well as economic conditions of the borrower and general economic conditions. 

What are the implications of applying an ECL model to statutory receivables?

The ECL model is relatively new. It was introduced in the private sector with IFRS 9 on Financial Instruments that became effective 1 January 2018. The IPSASB introduced it for the public sector in IPSAS 41, which is not yet effective. The ECL model is different to the previous impairment model for financial instruments that waited for a loss event to occur before calculating impairment (the “incurred loss” model). It may be particularly difficult to apply the ECL model to statutory receivables because the transaction is compulsory and entities may not have the same level of information about the counterparty’s credit risk, especially current and future information. 

How are the ED 71 requirements different to local requirements?

An earlier article on Do you know what statutory receivables are and how to account for them? [https://bit.ly/2Zh3J2A] explains the GRAP 108 requirements for statutory receivables. The measurement requirements in GRAP 108 are based on what is specified in legislation or similar means and is referred to as the cost method. Applying the cost method means that the initial transaction amount is only adjusted for interest or other penalties (if required to be charged in terms of legislation or similar), payments received and other amounts derecognised, and impairment losses. This is because it may be difficult to obtain, and inappropriate to use, market related information for compulsory transactions such as statutory receivables given the lack of a market. 

The differences, on a high level, between GRAP 108 and ED 71 are illustrated below:

Applying the requirements of ED 71 to statutory receivables would be more onerous and may be difficult to apply in practice, given the nature of statutory receivables and the information available about them. 

As the Board aims to align its Standards with IPSAS, the Board would need to consider the differences between ED 71 and GRAP 108. 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.