IPSASB – Recognising government expenses using performance obligations –which binding arrangements meet the test?

Recognising government expenses using performance obligations –which binding arrangements meet the test?

Historically there has been a lack of guidance on accounting for “non-exchange” expense transactions. As part of a broader reform to provide guidance on non-exchange expense transactions, the International Public Sector Accounting Standards Board (IPSASB) issued ED 72 on Transfer Expenses for comment.

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 often involve three parties 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 include transfers of goods, services or cash between government entities and others.

As the ASB primarily uses International Public Sector Accounting Standards (IPSAS) in developing Standards of GRAP, it is exploring and discussing the proposals in ED 72 and how feasible it is to apply locally. Issues identified locally on ED 72 will be shared with the IPSASB.

Which expenses qualify to be accounted for using performance obligations?

Which “binding arrangements” qualify?

In the article published on 8 June 2020 (https://bit.ly/3e1Jrid), a broad overview of the public sector performance obligation approach (PSPOA) was explained. The first step in the approach is identifying whether a binding arrangement exists. This means that an entity needs to assess whether its binding arrangements meet these criteria when entering into the transaction. ED 72 indicates that the PSPOA is only applied to arrangements that meet all four the following criteria:

1. The parties have approved the binding arrangement and are committed to perform their respective obligations.
2. The entity providing the resources can identify each party’s rights regarding the goods or services to be transferred.
3. The entity providing the resources can identify the payment terms for the goods or services to be transferred.
4. The entity providing the resources can identify the other party’s performance obligations and monitors how those performance obligations will be satisfied throughout the duration of the arrangement.

If an entity cannot demonstrate that all four the criteria above are met, the PSPOA cannot be applied.

The first three criteria are similar to those proposed in ED 70 on Revenue with Performance Obligations. The last criterion was introduced by the IPSASB for transfer expenses to ensure that entities have reliable information about when to recognise expenses. The IPSASB was of the view that, in the absence of monitoring the satisfaction of performance obligations, there could be delayed recognition of expenses.

Where no monitoring occurs, transactions should be accounted for as transactions without performance obligations. These transactions are recognised at the earlier of the entity providing resources or having a present obligation to do so. An entity discloses in the notes to the financial statements where it has accounted for a binding arrangement as a transfer expense without performance obligations and the reasons why it is unable to monitor the satisfaction of the performance obligations.

What is the potential impact locally?

Locally, transfer expenses would typically include transfers of resources that are outlined in the relevant divisions of revenue act or budget documents. It is common practice for these documents to include details of the transfers, including outcome statements and output measures. Entities that transfer resources to others would typically monitor how the outcome statements and output measures are being met. Monitoring actual delivery to and/or acceptance by beneficiaries in order to expense a transaction in the appropriate period may introduce an additional level of complexity to existing governance arrangements and systems.

It is important to note that the requirement of criterion 4 is the monitoring of the satisfaction of performance obligations, i.e. how the distinct goods and services promised in the arrangement will be satisfied. The oversight typically undertaken by entities currently is potentially not at the level required by ED 72 as the monitoring is aimed at measuring non-financial performance rather than the satisfaction of the obligations of specific transactions.

Another reason why this level of monitoring may not be done by entities is because the PSPOA is not applied to “exchange” expense transactions, e.g. goods and services procured by an entity where it pays consideration and receives the same value of goods and services in return. It therefore seems unlikely that this type of monitoring would be introduced by entities for a relatively minor component of non-exchange transactions.

Given the complexity of the PSPOA, the nature of the monitoring undertaken by entities locally will need to be assessed in order to understand the impact of the application of ED 72.

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.