IPSASB proposes accounting requirements for government expenses

  • June 2, 2020
  • Posted by: Julianne
  • Category: Blog
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No guidance on government expenses

Governments exist primarily to provide services to its citizens and others. These services take many forms and include providing services for all to access, as well as direct support to individuals in the form of goods, services and financial support.

The International Public Sector Accounting Standards Board (IPSASB) sets requirements for governments around the world to use when preparing their financial statements. Up until 2019, there was a lack of guidance internationally on how to account for expenditure incurred by governments to provide such services to citizens and others. This means that governments – and their entities – could have applied widespread accounting practices in deciding when, and at what value, to recognise these expenses and any corresponding liability.

The IPSASB issued ED 72 on Transfer Expenses for comment. ED 72 is one component of a larger reform dealing with accounting for expenses. As the ASB primarily uses IPSAS in developing Standards of GRAP, it is exploring and discussing the proposed approach in ED 72 and how feasible it is to apply locally. Issues identified locally on ED 72 will be shared with the IPSASB.

Classification of government expenses

Historically, when debating the accounting for government expenditure there have been two broad categories – expenses where government gives consideration and receives approximately equal value in return (“exchange expenses”), and those where consideration is given, but either the value received is not approximately equal to the consideration given, or there is no direct exchange of value between the parties (“non-exchange expenses”). The following are examples:

• Exchange transactions include consideration paid to employees for services rendered, the purchase of goods, assets, or services for use by an entity, and financing transactions including leases, service concession arrangements and financial liabilities.
• Non-exchange transactions include goods, assets, cash and services provided or distributed to citizens and others, as well as intergovernmental or inter-entity transfers.

The categorisation of government expenses to date has also been driven by statistical reporting – specifically the Government Finance Statistics Manual (GFSM) issued by the International Monetary Fund. Government statistics aim, in part, to measure who benefits from government expenditure. As a result, identifying the beneficiary, e.g. an individual, household, or another entity is important.

As the accounting for expenses has been deliberated by the IPSASB, the broad categorisation of expenses as exchange or non-exchange has evolved. One of the key issues that may need to be considered is whether expenses will continue to be classified broadly into exchange or non-exchange, or whether another distinction will be used. For revenue transactions, there is a proposed change in focus from exchange or not, to whether transactions have performance obligations or not (see ED 70 on Revenue with Performance Obligations and ED 71 on Revenue Without Performance Obligations).

What are transfer expenses?

The IPSASB issued IPSAS 42 on Social Benefits in January 2019. This was the result of more than a decade long debate about (a) what social benefits are, and (b) when do they give rise to liabilities for governments. Prior to the issue of IPSAS 42, any benefits provided to individuals and households – whether in cash or in-kind – were broadly categorised as “social benefits”. As the accounting evolved, the IPSASB made a clear distinction between those benefits that are provided in cash or in-kind, who they were provided to, and for what purpose.

Diagram 1 outlines an overview of the types of government expenses identified for accounting purposes.

Diagram 1 – Overview of expenses

In summary, “non-exchange expenses” can be analysed into the following categories:

• Social benefits – are provided to individuals and/or households, in cash, to mitigate social risk and address the needs of society as a whole. A social risk is a risk related to the characteristics of an individual or household including age, health, and employment status. Social benefits are designed to address the broader needs of a community or society rather than specific individuals of groups of individuals. This is a key distinction between social benefits and insurance which only covers the risks of specific individuals. Examples of social benefits include social grants and unemployment benefits.
• Collective and individual goods and services – are goods and services provided to communities, or individuals and households, and address the needs of society as a whole. A key feature of these types of arrangements is that government usually enters into an exchange transaction to acquire goods and services to settle these transactions. Examples of collective and individual goods and services include policing, the provision of public infrastructure and facilities, and universal education and healthcare. The accounting implications of these transactions are discussed in a revised IPSAS 19 on Provisions, Contingent Liabilities and Contingent Assets.
• Transfer expenses – are transfers of goods and services between an entity and an individual, household or entity, without the entity directly receiving any consideration in return. The transactions may involve a third-party transaction where one entity provides resources to another entity and that entity is required to use those resources to provide goods or services to beneficiaries. Examples of transfer expenses include any other benefits not dealt with in IPSAS 42, and transfers of goods, services or cash between government entities and others.

ED 72 only deals with transfer expenses. Typical examples in the local environment include:

• Intergovernmental transfers made in terms of the national and provincial division of revenue acts, e.g. grants, transfers, equitable share allocations.
• Donor funding arrangements.
• Arrangements where one entity collaborates with another entity to provide goods or services to third party beneficiaries, e.g. housing provided by the Department of Human Settlements to qualifying individuals in the National Housing Programme by collaborating with municipalities.

ED 72 proposes two approaches for accounting for transfer expenses. These approaches will be explored in articles throughout June.

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

ED 72 was issued for comment along with proposed IPSAS on changes to revenue recognition. ED 72, along with the Exposure Drafts on revenue 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. The comment deadline is 1 October 2020.

The views expressed in this article are those of Secretariat and not the ASB Board.

 



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