International Public Sector Accounting Standards Board (IPSASB) achieves key milestone in developing public sector specific guidance.
After many years of consultations, rigorous debate and editorial changes, the IPSASB has finally voted in favour of the revenue, transfer expenses and measurement accounting standards at the March 2023 meeting. Whilst only the transfer expenses standard could be considered 100% public sector specific, the majority of transactions in the revenue and measurement standards are likely to be public sector specific.
Revenue and transfer expenses
The transfer expenses standard (IPSAS 48 Transfer Expenses) fills a major gap in the IPSAS literature and provides guidance on how to account for transactions that are not at arm’s length – where two parties in a transaction do not receive approximately equal value in the exchange of goods and services such as grants.
The revenue standard (IPSAS 47, Revenue) replaces three existing standards and includes guidance, which is closely linked to IFRS 15,for both commercial transactions as well as non-exchange transactions.
Both the revenue and transfer expenses standards are based on whether there are binding arrangements and what obligations each party has in those arrangements. Binding arrangements are broader than just contracts to reflect public sector transactions. Whether and when revenue and expenses are recognised depends on if the obligations in the arrangements have been fulfilled or not and the terms of those arrangements.
The effective dates for IPSAS 47 and IPSAS 48 will be for periods beginning on or after January 1, 2026.
The IPSASB also approved IPSAS 46, Measurement, which brings measurement guidance together into a single standard, and introduces a public sector specific current value measurement basis for assets held for their operational capacity.
IFRS 13’s definition of fair value is not always suitable for public sector assets, in particular the application of highest and best use. In the public sector there are some assets that are not used to maximise commercial gain and are instead held to enable an entity to meet its service objectives.
The prime example is a school in the centre of a town. There is likely to be an obligation to provide education to the local community and hence it is unrealistic for the school building to be used for any other purpose. Whilst IFRS 13 states that highest and best use of non-financial assets takes into account the use of the asset that is physically possible, legally permissible and financially feasible, the highest and best use is nevertheless determined from the perspective of market participants, even if the entity intends a different use. Therefore, an IFRS fair value of a school may produce a value that bears no correlation to how the asset is actually being used, reducing the usefulness of such information for decision making.
The IPSASB has therefore come up with an alternative current value measurement basis called current operational value which applies a replacement cost approach for assets held for their operational capacity. Assets held for their financial capacity are measured at fair value.
IPSAS 46 will be effective for periods beginning on or after January 1, 2025.
The IPSASB have updated their recommended practice guidance (non-mandatory additional reporting to complement the financial statements) to demonstrate how an entity could include sustainability related information in RPG 1 – Reporting on the Long-Term Sustainability of an Entity’s Finances and RPG 3 – Reporting Service Performance Information.
Looking ahead, IPSASB agreed to develop an ED to propose accounting requirements for natural resources, including a principled approach to describing and identifying natural resources. It is unlikely to result in material balances being recognised on the balance sheet due to the fact that many natural resources don’t meet the definition of an asset and if they do, there are limitations on their measurement certainty.
On the broader sustainability project, IPSASB agreed to focus initially on climate related disclosures, primarily due to a lack of available resources to widen the scope. It appears that the project will initially look to both ISSB and GRI frameworks as a foundation to build upon.
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