What information would be disclosed on compelled transactions for revenue with performance obligations?

What information would be disclosed on compelled transactions for revenue with performance obligations?

What is a compelled transaction?

In the public sector, there may be circumstances where an entity is compelled to deliver goods or services to a purchaser, regardless of the purchaser’s ability or intention to pay for the goods or services. For example, municipalities may be required to provide clean drinking water to households, irrespective of their intention or ability to pay.

How is this relevant to accounting for revenue transactions in ED 70?

Access the article on What are compulsory transactions and how are they accounted for? on the ASB’s website here: https://www.asb.co.za/ipsasb-exposure-draft-on-revenue-with-performance-obligations-ed-70-part-4/.

In short, ED 70 states that entities can only account for a binding arrangement if certain criteria are met. One criterion is that it should be probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the purchaser or third-party beneficiary. This criterion is assessed by considering the purchaser’s ability and intention to pay. recognise any revenue or the related receivable from applying the five-step revenue recognition model in ED 70. Instead, an entity will continue to reassess whether the criterion is met at a later stage. If consideration is received from a purchaser before the criterion is met, revenue may only be recognised if certain requirements are met, or a liability should be recognised.

What information will be disclosed on compelled transactions?

Due to the potential for the delayed recognition of revenue, ED 70 requires entities to disclose specific information on compelled transactions. The disclosure requirements include, among others:

• A description of the legislation or similar means which compels the entity to enter into the transaction.
• The amount of revenue that was recognised when consideration was received and certain requirements in the ED have been met.
• The amount that was not recognised as revenue, as the collection of the consideration was not probable.
• Further information if the transaction price has been reduced because of an implicit price concession.

What could this look like in financial statements?

The following example, based on an example from ED 70, illustrates what could be disclosed in financial statements for compelled transactions:

Background

A municipality provides electricity to residential households. The energy sector is highly regulated, and under the applicable legislation, all municipalities which provide electricity to residential households are required to provide electricity regardless of the households’ ability to pay. Typically, a household would apply to the municipality to connect electricity to their location. The household would enter into a power purchase agreement with the municipality to document the payment terms and any economic consequences of non-payment, such as interest or penalties.

The agreement is a binding arrangement with performance obligations, as the municipality has agreed to provide a distinct good (electricity) to a purchaser (the household) in exchange for consideration. Given the legislation, the municipality may not deny the initial connection nor suspend the provision of electricity even if a household is in default.

What happened during the year?

The municipality provided electricity that would have resulted in total revenue of R100 million at the standard rates for 100% of the electricity provided.

Based on historical, current and forecast data, the municipality estimates that only R90 million of the amount is collectible. For the remaining R10 million, the municipality accepts that households do not have the ability and/or intention to pay for their electricity. Due to the legislation compelling the municipality to provide electricity to all households, the municipality continues to do so during the year. As a result, the municipality recognises revenue based on the households that do have the ability and intention to pay for their electricity, i.e. R90 million.

What information is disclosed in the financial statements?

The municipality discloses the following information in its financial statements:

The municipality is subject to the provisions of legislation, which requires all municipalities to provide electricity to residential households regardless of their ability to pay. As a result, the municipality is compelled to connect all residential purchasers to its power grid and to continue to provide electricity even in the event of non-payment.

During the year, the utility provided and billed R100 million of electricity to households, but only recognised revenue of R90 million, as this was the amount that the municipality estimated as receivable based on historical, current and forecast data. Therefore, R10 million of the amount billed was not recognised as revenue.

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 or via the website.