During the first phase of our project, we sought to understand how entities account for transfer expenses and the challenges they experience in doing so, particularly as there is no Standard of GRAP addressing transfer expenses. The ASB is exploring the requirements in IPSAS 48, Transfer Expenses, to identify principles that may help address these challenges.
Understanding the principles in IPSAS 48
IPSAS 48 applies to transfer expenses, including capital transfers, accounted for by transfer providers applying IPSAS. IPSAS 48 defines a transfer expense as an expense arising from a transaction, other than taxes, in which an entity provides goods, services, cash or another asset to another party (which may be an individual) without directly receiving goods, services, cash or another asset in return.
A key principle in IPSAS 48 is that accounting depends on whether the transfer expense arises from a binding arrangement or from a transaction without a binding arrangement. This is because the existence of enforceable rights and obligations affects when a transfer provider has a present obligation and when it should recognise an expense.
Transactions without a binding arrangement
A transfer expense is recognised when the transfer provider has a legal or constructive obligation to transfer resources, or when it loses control of those resources.
Example
An entity (transfer provider) announces drought-relief funding for qualifying farmers. Once the announcement creates a valid expectation that eligible farmers will receive assistance, a constructive obligation may exist. Under IPSAS 48, the transfer expense may be recognised before the cash is paid because the obligation has arisen.
Transactions with a binding arrangement
IPSAS 48 introduces two concepts that may be unfamiliar to stakeholders: a transfer right asset and a transfer obligation liability.
A transfer right asset arises when the transfer provider transfers resources before the recipient has fulfilled the specified requirements in the binding arrangement. A transfer obligation liability arises when the recipient fulfils the specified requirements before the transfer provider transfers the resources. Transfer expenses are recognised as transfer rights are derecognised or as transfer obligations are recognised.
Example
An entity (provider) provides funding to another entity (recipient) to construct water infrastructure. The agreement specifies that certain construction milestones must be achieved.
If the transfer provider transfers the funding before the milestones are achieved, IPSAS 48 requires the transfer provider to recognise a transfer right asset. This is because the provider still holds a right arising from the binding arrangement, namely the right to require the recipient to achieve the agreed milestones. As those milestones are achieved, the transfer right asset is reduced, and a transfer expense is recognised.
Similarly, if the recipient achieves the milestones before the funding is transferred, the provider may recognise a transfer obligation liability because it has an obligation to transfer resources arising from the recipient’s performance under the arrangement.
Share your thoughts
We would like to hear from preparers, auditors, oversight bodies and other stakeholders. Do the principles in IPSAS 48 address challenges encountered in practice? Does the concept of a transfer right asset provide useful information to users of financial statements, or does it introduce unnecessary complexity? What challenges do you foresee if these principles were applied in the local environment?
Leave a comment below or send an email to info@asb.co.za.
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.