IPSASB proposals Revenue, what did constituents think?

  • April 26, 2021
  • Posted by: Julianne Vissie
  • Category: Blog
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Key concerns raised with the IPSASB on their proposals for revenue

What is the history?

The IPSASB exposed proposals to revise the accounting requirements for revenue in 2020, through ED 70 on Revenue with Performance Obligations, and ED 71 on Revenue without Performance Obligations. These exposure drafts (EDs) were concurrently published by the ASB and comment letters were submitted to the IPSASB. Access the comment letters here – ED 70; ED 71.

The development of these EDs was based on IFRS 15 on Revenue from Contracts with Customers by the International Accounting Standards Board. The IPSASB agreed that an approach based on whether a transaction has performance obligations should replace the existing exchange / non-exchange approach, and developed the two EDs as follows:

ED Existing IPSAS Existing characteristics Proposed characteristics
ED 70 IPSAS 9 on Revenue from Exchange Transactions and IPSAS 11 on Construction Contracts Exchange transactions (direct exchange between two parties to an arrangement of approximately equal value) Transactions with performance obligations, i.e. those that arise from a binding arrangement which requires distinct goods or services to be provided to a purchaser for consideration.
ED 71 IPSAS 23 on Revenue from Non-exchange Transactions (Taxes and Transfers)

Non-exchange transactions:

·  With present obligations, which arise from arrangements that have conditions as well as  return obligations.

·  Other transfers with no present obligations.

·        Taxes, fines, penalties.

Transactions without performance obligations:

·   With present obligations, which arise from arrangements that have specified activities or requirements to incur eligible expenditure.

·   Without present obligations, including certain transfers, taxes, fines, penalties.

What did constituents think?

The IPSASB noted at its December 2020 meeting that an overwhelmingly large number of constituents submitted comment on the EDs. This includes the comment submitted by the Secretariat of the ASB on behalf of stakeholders locally. The Secretariat wrote a series of articles in 2020 on the key issues identified with ED 70 and ED 71 locally. These can be accessed on the ASB’s blog https://www.asb.co.za/news/.

The IPSASB received an initial indication of the issues constituents raised at their December 2020 meeting, and considered a more detailed analysis of issues and proposed responses at their March 2021 meeting. The Secretariat was encouraged to note that many constituents in other jurisdictions raised similar concerns to those raised by stakeholders locally. The key issues include the following:

Issue Detail
Clarifying “binding arrangement” Constituents requested clarification on:

(a)    enforceability – the mechanisms that should be considered, the impact of termination clauses, and how past history is considered;

(b)    who the parties are that are identified in a binding arrangement; and

(c)    the accounting principles on collectability, which is an issue especially for compelled transactions.

Constituents also noted a need for the basis for conclusions to better clarify the IPSASB’s decisions around enforceability.
Distinguishing revenue types Constituents expressed difficulty in distinguishing performance obligations from present obligations. Both these obligations arise from binding arrangements and because performance obligations are a subset of present obligations, there are similarities. The distinction is important as performance obligations and present obligations have different accounting outcomes.

More guidance and clarification are needed.
Identifying transactions with components within the scope of both EDs Constituents expressed concerns with the guidance proposed in the EDs:

·        The guidance on identifying transactions with components is conceptually flawed.

·        There is a change from existing IPSAS proposed where an entity is unable to identify the components to a transaction. Currently the whole transaction would be accounted for in IPSAS 23. The proposal was to account for the whole transaction in ED 70.

The IPSASB was asked to reconsider these requirements.
Existence of a liability in a transaction without performance obligations Constituents disagreed with the proposal in ED 71 that specified activities and requirements to incur eligible expenditure give rise to liabilities on their own. They noted that the proposal is inconsistent with the IPSASB’s Conceptual Framework. They asked the IPSASB to reconsider its proposal.

Constituents further questioned the need to distinguish specified activities from requirements to incur eligible expenditure, and proposed that the distinction be deleted.
Subsequent measurement of receivables Constituents raised concerns with the proposals in the EDs on subsequently measuring receivables – specifically measuring non-contractual receivables at amortised cost as in IPSAS 41 on Financial Instruments. They noted that it would be difficult to apply amortised cost to these receivables due to their nature and the information available for them. The information value to users was also questioned.

The IPSASB was asked to reconsider these proposals.
Need for extensive disclosure requirements Constituents raised concerns with the volume of disclosure requirements included in the EDs. They noted that not all the proposed requirements would be relevant for users in the public sector, some requirements are inappropriate and requirements within the EDs and among existing IPSAS are duplicated.

Constituents requested the IPSASB to remove unnecessary, inappropriate and duplicated requirements.

What is next?

The IPSASB will continue to consider the issues raised by constituents and proposed responses thereto during 2021. Progress on the project can be followed on the IPSASB’s website.

Disclaimer

This content 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.

 



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