Social Benefits: when should social security insurance benefits be recognised?

The Accounting Standards Board approved an Exposure Draft (ED) on Social Benefits at its July 2023 meeting. A previous 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. The ED proposes different accounting treatments for these two types of social benefits.

The foremost question the Board had to answer in developing the ED was the appropriate recognition point for social benefit liabilities. Conceptually, this point is when:

• the past event that gives rise to a present obligation occurs; and
• the present obligation can be measured reliably.

This article unpacks how the conceptual principles were interpreted for social security insurance benefits. A future article will explain the interpretation of these principles 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 security insurance 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 security insurance benefit liabilities is “the event related to the social risk occurs” (i.e. the past event occurs), for the reasons explained below.

• Current accounting policies applied to social security insurance benefit liabilities are based on the principles in the IFRS Accounting Standard on Insurance Contracts (IFRS 4). The policies result in liabilities recognised when the “incident” occurs, which is comparable to when the event related to the social risk occurs. Users are expected to be sensitive to changes in the financial statements, specifically those that significantly reduce the information on liabilities.
• Users expressed a need for information on the obligation that arises when the event related to the social risk occurs, and they are accustomed to receiving this information in the financial statements.
• Entities require information on the obligation that arises when the event related to the social risk occurs for budget purposes.
• Information on the obligation that arises when the event related to the social risk occurs provides complete information about the economic phenomena that the entity providing these benefits is held responsible for, which is compensating beneficiaries for social risks that have occurred.
• Determining the liability requires the use of estimates. Based on current policies and practices, these estimates can be made in a way that is neutral, without bias and free from material error.

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.