Should there be a difference in the way entities recognise revenue and expenses for transfers?

Should there be a difference in the way entities recognise revenue and expenses for transfers?

Long-standing guidance on revenue and none for expenses

Up until 2019, there was no international guidance on how to account for government expenditure used to provide social benefits, and goods, services and other support to citizens and others. In contrast, IPSAS 23 on Revenue from Non-exchange Transactions (Taxes and Transfers) was issued in 2006. There has long been a debate about the treatment of expenses, and particularly whether an asset should be recognised when resources are transferred to another entity. In IPSAS 23 an entity recognises a liability where the transfer has a return obligation (i.e. use the resources as stipulated or return the resources to the other party). In the absence of guidance for non-exchange expenses, some entities may have applied the opposite, or the mirror of, IPSAS 23.

The lack of guidance on government expenses has led the International Public Sector Accounting Standards Board (IPSASB) to issue several International Public Sector Accounting Standards (IPSAS), or proposed IPSAS, over the last few years to address this issue. The 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. As the ASB primarily uses 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.

Does the accounting for expenses mirror the accounting for revenue?

Apart from issuing ED 72, the IPSASB proposed reforms to the accounting for what was previously known as “exchange” and “non-exchange” revenue. The proposals are included in ED 70 on Revenue with Performance Obligations and ED 71 on Revenue Without Performance Obligations. While part of the reforms is aimed at bringing alignment to the approaches applied for revenue and expenses, the end accounting result is not necessarily the same in all instances.

Table 1 provides a high-level overview of the elements recognised under each approach.

Transactions with performance obligations

For this category of transactions, there is alignment of the approaches and the resulting elements mirror one another.

It should however be noted that the scope of the revenue transactions accounted for using the PSPOA and the expense transactions accounted for using the PSPOA differ considerably. For revenue, the PSPOA is applied to transactions that historically would have been exchange transactions and some non-exchange transactions. For expenses, the PSPOA is only applied to third-party, non-exchange transactions.

Transactions without performance obligations

This includes transactions with present obligations and those arrangements where there is no binding arrangement. For simplicity, only transactions with present obligations are discussed.

There are two distinct differences between the accounting for revenue and expenses with present obligations:

Difference #1: The existence of binding arrangement assets and liabilities

Binding arrangement assets and liabilities are recognised when one entity in the arrangement has performed. ED 71 proposes recognising these for revenue transactions with present obligations. There is no equivalent requirement in ED 72 for transactions with present obligations.

Difference #2: The recognition of assets and liabilities

Entities frequently transfer resources to others subject to the other party utilising the resources in a certain way or returning the resources (or the unutilised portion).

For revenue transactions, entities recognise revenue for the transfer of resources, unless they are required to incur eligible expenditure or undertake specified activities – in both instances there should be some form of redress or penalty such that the entity has no alternative but to incur an outflow of resources. In these instances, a liability would be recognised until the activities are performed or the expenditure is incurred.

For liabilities, the opposite is not true. Entities recognise expenses when they have a present obligation to transfer resources. An asset is only recognised for advance payments where an entity is entitled to a refund which is payable on demand. If an entity transfers resources subject to a return obligation, any entitlement to such a return is recognised as a separate transaction. The IPSASB is of the view that the events that give rise to the return still need to occur and hence no asset is recognised prior to this point.

Conceptually, there does not need to be symmetry between the accounting outcomes of transactions. This is in part because there were always different thresholds for recognising assets and liabilities. However, given the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities issued by the IPSASB and the drive to align accounting for at least some revenue and expense transactions, there will need to be a debate about whether the proposals for these transactions are appropriate.

Table 1- Summary of approaches and elements recognised in revenue and expense transactions

[ In ED 71 and ED 72 this is broadly labelled as transactions without performance obligations, and also include transactions where there is no binding arrangement.]

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. The comment deadline is 1 October 2020.

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