Should government account for revenue it never intends to collect?

Soweto residents owe Eskom R18 billion. The picture isn’t any different when you look at how much residents owe their municipality. So, if government is providing goods and services to residents and never collects the money, is it really revenue?

Revenue or not?

Based on changes the IPSASB plans to make to its Standards, the answer is ‘no’. The IPSASB is planning to revise IPSAS 9 on Revenue from Exchange Transactions to align it to IFRS 15 on Revenue from Contracts with Customers. One of the criteria that must be met for a transaction to be recognised as revenue, is for the entity to be able to demonstrate that it is probable that it will collect the consideration that it is entitled to in exchange for the goods and services that will be transferred to the purchaser. Collectability is based on the purchaser’s ability and intention to pay the consideration when it becomes due.

If an entity continuously supplies goods and services to a consumer who has not paid for past goods or services, it is unlikely that the consumer has the ability and intention to pay. The effect is that the supply of goods and services will not be recognised as revenue until this criterion can be satisfied. This could be never, or it could be when cash is received. From a practical perspective, it also means that an entity will need to constantly re-assess the transaction to determine if there has been a change in probability.

Is not recognising revenue the right answer?

From a private sector perspective, it is unlikely that businesses that operate to make a profit will enter into arrangements where they do not receive consideration for their goods and services. Consequently, the accounting principles are appropriate. The public sector is different. While conceptually it can be argued that the transaction is not revenue because there is no inflow of benefits, does this give users of the financial statements the right information to hold officials accountable?

The consequence of the proposed change is that entities may never recognise revenue for the transactions is question. At best, revenue might be recognised when the cash is received – and this could be only a partial collection. How would Parliament, municipal councils, funders etc. know that the entity has effectively given services away for free and how would they know what amounts are due to the entity in unpaid debt? The IPSASB may propose disclosure of information about these transactions in the notes to the financial statements, but the preparation of this information is likely to complex for entities to prepare.

Locally, the ASB has indicated that all revenue (and debts) due to the state should be recognised in full. Any subsequent non-collection is treated as an impairment loss. While some may argue that this is not conceptually pure, and overstates the revenue and impairment numbers, the ASB believes that it provides the right information to hold entities accountable and make decisions. The ASB would however need to redeliberate this issue given the potential changes internationally.

Follow the debate

The IPSASB plans to issue ED 70 on Revenue with Performance Obligations at its December 2019 meeting for comment. The ASB will issue ED 70 locally for comment and will arrange a series of discussions to discuss the IPSASB’s proposals. Updates will be provided on the ASB’s website, or through the monthly Newsletter (subscribe here: https://www.asb.co.za/subscribe-to-email-alerts/)

The views expressed in this article are those of the author and are not those of the ASB or its Board.