Social Benefits: when should social assistance benefits be recognised?

The Accounting Standards Board approved an Exposure Draft (ED) on Social Benefits at its July 2023 meeting. The article on Are all social benefits the same and should they be accounted for the same? explained the two types of social benefits proposed in the ED – social security insurance benefits and social assistance benefits. Social security insurance benefits are social benefits that are managed in a manner similar to insurance contracts where individuals and/or households (or another party on their behalf) pay contributions to the entity bearing the social risk. Examples include unemployment benefits and injury on duty benefits. Social assistance benefits are all social benefits other than social security insurance benefits. Examples include social grants. The ED proposes different accounting treatments for these two types of social benefits.

The article on Social Benefits: when should social security insurance benefits be recognised noted the foremost question the Board had to answer in developing the ED was the appropriate recognition point for social benefit liabilities. The article explained the proposed accounting treatment for social security insurance benefits. This article explains how the recognition criteria were interpreted for social assistance benefits.

Present obligation as a result of a past event

An entity’s obligation to provide social benefits arises from legislation which requires that benefits are provided to specific individuals and/or households when an event related to a social risk occurs. Therefore, the past event that gives rise to a present obligation for all social benefits is the occurrence of the event related to the social risk. At this point the entity has a binding obligation for which it has little or no realistic alternative to avoid an outflow of resources. This is the earliest point that a social benefit liability can be recognised.

Present obligation can be measured reliably

The Board considered the point when relevant information about social assistance benefit liabilities will be provided in the financial statements and when the information would be a faithful representation of the economic phenomena that the liabilities represent.

The ED proposes the appropriate recognition point for social assistance benefit liabilities as when “the entity receives an application for social benefits”, for the reasons explained below.

Current accounting policies

At the time of developing the ED, entities providing social assistance benefits recognised liabilities for social benefits that met all eligibility criteria and were approved for payment. Based on preliminary discussions with stakeholders the Board did not support such a recognition point in the ED because it:

• results in limited information on the liabilities provided in the financial statements, which is unlikely to meet users’ information needs; and
  
• depends on the effectiveness of the entity’s own internal processes to verify and approve applications received.

Relevant information in the financial statements

Social assistance benefits are assessed, managed and funded by government on an on-going basis.  These features establish the information that is relevant to provide in the financial statements. Users consulted in developing the ED did not express a need for information in the financial statements on events related to the social risk that have occurred but have not yet been reported to the entity. These entities are held accountable for managing the benefits with the resources allocated to them from government on an on-going, often annual, basis. Government policy determines the benefits and the affordability of the policy is reviewed and balanced with the societal need for social benefits. Entities providing these benefits are responsible for compensating beneficiaries based on applications received for social benefits.

Faithful representation of the social benefit liability

The recognition point “the entity receives an application for social benefits” provides information about the economic phenomena that the entity providing these benefits are held responsible for and reflects the economic substance of the social benefit liability from the perspective of the entity providing the social benefit.

The Board’s initial research also found that the information needed to recognise a liability earlier than the recognition point proposed in the ED was unavailable when the ED was developed. Considering the information needs expressed by users about social assistance benefit liabilities, the Board concluded it is unlikely that the benefit would outweigh the cost to develop this information.

The Board noted that information beyond the recognition point proposed in the ED may be suitable for reporting outside the financial statements, and may form part of an entity’s broader reporting of sustainability information.

Provide your comment on the proposals

Access ED 205 on Social Benefits on the ASB website. Comment is due by 17 November 2023. Contact elizna@asb.co.za for more information.

Disclaimer

The article 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.