IPSASB – When do expense transactions have present obligations?

When do expense transactions have present obligations?

Lack of universal guidance on accounting for government expenses

The lack of guidance on government expenses has led the International Public Sector Accounting Standards Board (IPSASB) to issue several 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. The transactions often involve three parties where one entity provides resources to another entity and that entity is required to use those resources to provide goods or services to beneficiaries. Examples include transfers of goods, services or cash between government entities and others.

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.

What is the IPSASB’s proposed approach for recognising transfer expenses?

The accounting for transfer expenses depends on whether the transaction:

• Arises from a binding arrangement (i.e. both parties have both rights and obligations to each other in the arrangement) and has performance obligations (i.e. there is a promise of distinct goods and services being provided to a beneficiary in return for consideration).
• Arises from a binding arrangement and has present obligations (i.e. there are no goods and services to be provided in return for consideration but an entity has an obligation to transfer resources to another entity).
• Does not arise from a binding arrangement (i.e. both parties to the arrangement do not have both rights and obligations).

The most complex approach is where transactions arise from a binding arrangement and have performance obligations and was discussed on 8 June 2020 (https://bit.ly/2YkeyA8). The approach for the remaining transactions is discussed below.

Expense transactions that do not have performance obligations, or those that do not arise from binding arrangements, are broadly called “transfer expenses without performance obligations”. These types of arrangements could include the following locally:

• Equitable share allocations transferred from national to provincial government.
• Some intergovernmental transfers.
• Transfers by government to other organisations (i.e. those outside of government).
• Taxes and levies paid.

Many of the arrangements locally may be in the category of “do not arise from a binding arrangement”. While these arrangements arise from legislation, there are not both rights and obligations for both parties. For example, the entity making the transfer only has an obligation to make the transfer, and the entity receiving the transfer only has a right to receive the transfer. It is important to note that while taxes and levies meet the broad principles of these arrangements, they are specifically excluded from the definition of a transfer expense in ED 72.

The proposed accounting for expenses without performance obligations is as follows:

Recognition

An entity that is required to make a transfer, recognises an expense at the earlier of the following dates:

• When the entity has a present obligation to make a transfer, e.g. if a transfer in the relevant division of revenue act is due at the start of the financial year, an expense is recognised for the full amount of the transfer at the start of the year.
• When the entity ceases to control the resources, e.g. when cash or another asset is provided to the other entity an expense is recognised. However, if an entity transfers resources in advance of having to do so, and is entitled to a refund on demand, then an asset may be recognised.

Is the approach appropriate?

The approach proposed by the IPSASB for transfer expenses without performance obligations does not allow for the recognition of an asset, unless an advance payment has been made and a refund can be demanded at any time. If the transfer has a return obligation, for example, that unspent funds should be returned, this is seen as a separate transaction requiring recognition and does not affect the initial recognition of an expense. The IPSASB has taken the view that entities do not have the ability to enforce the return until a future event occurs, i.e. the funds not being spent, or a breach of the arrangement occurs.

The IPSASB has indicated that an entity should account for any return of resources as follows:

• Where an expense was recognised in the current period – adjust the relevant expense and recognise an asset.
• Where an expense was recognised in a prior period – recognise revenue and an asset.

As many of the arrangements locally include return obligations, the appropriateness of the IPSASB’s accounting treatment will need to be carefully considered.

Where can the EDs be accessed and how can you provide comment?

ED 72 was issued for comment along with proposed IPSAS on changes to revenue recognition. ED 72, along with the Exposure Drafts on revenue 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.