This paper is the first of a series examining the differences between International Financial Reporting Standards (IFRS) and International Public Sector Accounting Standards (IPSAS) with a view to better understanding each accounting framework's suitability for use in public sector financial reporting.
Government grants are one of the most common public sector transactions, both within government – intra-governmental transactions – and externally to the private sector. The financial reporting of these transactions is important since grants are likely to be material to an individual entity's financial statements. The recognition criteria and the timing of either grant income or expenditure is likely to have a big impact, not only for budgeting purposes, but also for accountability and decision making.
On a practical basis, the timing of when grant expenditure and grant income is recognised in the financial statements makes a big difference for consolidation purposes, for example in relation to eliminating intra-group transactions and balances. This is especially true at a Whole of Government Accounts level due to the large volumes of government grants between all government entities.
In early 2023, the International Public Sector Accounting Standards Board (IPSASB) published a number of new and updated standards including the new 'non-exchange' (transfer) expenditure standard and a revised 'non-exchange' income accounting standard, which provide guidance on grant accounting for both the grant recipient and grant provider.
The IFRS standard on accounting for grant income, IAS 20 – 'Accounting for Government Grants and Disclosure of Government Assistance', is based on the matching principle where grant income is recognised over the relevant periods to match it with expenditure that the grant income should compensate. To achieve this, grant income is typically deferred, creating a liability on the balance sheet, which is then released as income to offset expenditure for which the grant was provided.
IAS 20 predates the Conceptual Framework for Financial Reporting that underpins IFRS, which does not include the matching principle as an underlying concept. There is an argument that deferred government grants do not always meet the IFRS definition of a liability. However, preparers are required to follow IAS 20 irrespective of whether the grant recipient has any obligations to fulfil for the grant or whether the grant would need to be repaid if those obligations are not met, potentially in conflict with the definition of a liability since the grant recipient may not have probable future outflow of resources (such as returning the grant or incurring eligible expenditure).
IPSASB's previous standard covering the accounting for grant income, IPSAS 23 – 'Revenue from Non-Exchange Transactions', is based on non-exchange transactions that either have conditions or restrictions in place. However, this standard is being phased out and is replaced by IPSAS 47 'Revenue' which will be effective from 1 January 2026, although early adoption is permissible.
The new revenue standard replaces three existing standards (revenue from exchange transaction (IPSAS 9), revenue from non-exchange transactions (IPSAS 23) and construction contracts (IPSAS 11)) and will provide users with more useful information as well as addressing the application issues in the legacy revenue IPSAS.
IPSASB's updated guidance on non-exchange revenue is no longer based on whether there are conditions or restrictions but instead is centred around whether there is a binding arrangement and whether there are any enforceable rights and obligations. Most grants will not involve a binding arrangement since it would be unusual if the recipient could enforce payment from the grantor.
Nevertheless, an entity will need to ensure that any rights to an inflow (asset) and obligations associated with an outflow (liability) are considered as this impacts the timing of revenue recognition. Revenue is recognised when (or as) the entity satisfies any enforceable obligation associated with the inflow of resources or immediately if there are no enforceable obligations.
IPSAS provide more relevant public sector application guidance, in particular in relation to the factors that give rise to binding arrangements and enforceability mechanisms beyond legislation and contracts.
IFRS and IPSAS are principles-based accounting standards that require judgement. The recognition of expenses, revenue, assets and liabilities will depend on whether the definitions within the standards have been met.
High level comparison between IFRS and IPSAS
The options for recognising grant transactions are quite limited - expenditure and income are either recognised immediately, over time or when the binding arrangement has been satisfied. But as always, the devil is in the detail and principles-based standards require some judgement.
IPSASB are moving away from distinguishing between exchange and non-exchange type transactions and whether grants are subject to any restrictions or conditions. Instead, the new approach will be to ascertain whether a binding arrangement exists or not. IFRS has one standard covering grant income (IAS 20) and it is written in the context of a company receiving a government grant. IFRS does not provide guidance for transfer expenses.
IPSASB overview of current and future accounting standards
|IPSAS 23 – non-exchange transactions based on conditions and restrictions. Conditions require an entity to return goods if not consumed as specified thus creating a liability. Restrictions do not have a return clause and revenue is recorded when resource (eg cash) is received.
|IPSAS 47 – 'Revenue' is the new revenue standard based on transactions with or without binding arrangements. Recipients will need to ascertain if there are any enforceable obligations or rights which may lead to the recognition of liability or an asset which would affect the timing of revenue recognition.
|A standard covering grant expenditure (or transfer expenses more generally) was issued in 2023.
|IPSAS 48 – 'Transfer Expenses' is the new standard for expenses that are not at arm's length. As with the revenue standard, it is rooted in whether or not there is a binding arrangement and if there are any obligations and rights attached to the binding arrangement.
IFRS overview of current accounting standards
|IAS 20 - recognise grant income once there is reasonable certainty that the entity will comply with the conditions attached to the grant and that the grant will be received.1 Grants relating to assets are generally recognised over the lives of the assets concerned.
|No updates to IAS 20 are currently being proposed.
|There is no specific standard or guidance concerning how government grants should be accounted by the donor.
Similar transactions, such as charitable and other donations made by private sector entities, are generally accounted for either when paid or once the commitment to pay meets the definition of a liability in IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'.
1 IAS 41 'Agriculture' overrides IAS 20 in relation to farm subsidies, in most cases requiring all the conditions of a grant to have been met before it can be recognised as income.
High-level comparison of grant accounting between IFRS and IPSAS
|Definition of grants
|Government grants are assistance by government in the form of resources to an entity in return for past services or future compliance with certain conditions relating to the operating activities of the entity. (IAS 20.3)
|Grants are not separately defined in IPSAS but are part of a wider definition of transfers. See below.
|IFRS does not provide guidance on transfers in general and does not use this term in its literature.
IAS 37 requires obligations entered into that meet the definition of a liability to be recognised, including non-exchange transactions where applicable. (IAS 37.14)
|The old IPSAS standard for grants, IPSAS 23, is built upon the notion of exchange and non-exchange transactions. Whilst the term 'non-exchange' will continue to have relevance in the IPSAS literature, regarding revenue and transfer expenses, the fundamental principle underpinning the reporting will be based on the existence or non-existence of binding arrangements.
A transfer is a transaction, other than taxes, in which an entity receives a good, service, or other asset from another entity without directly providing any good, service, or other asset in return.
|Statistical definition of transfers
|The proposed IPSASB standards use the term 'transfer', which includes grants, and is the term used in statistical reporting frameworks. The Government Finance Statistics Manual 2014 (GFSM 2014) defines a transfer as follows:
"A transfer is a transaction in which one institutional unit provides a good, service, or asset to another unit without receiving from the latter any good, service, or asset in return as a direct counterpart."
|'Binding arrangement' is not a term used in IFRS; the term 'contract' is used instead. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations.
The idea of creating enforceable rights and obligations by other means is not necessary since these transactions take place in a commercial environment.
|A binding arrangement is an arrangement that confers both enforceable rights and obligations on both parties to the arrangement.
The binding arrangement may arise from legal contracts or through other equivalent means such as statutory mechanisms (for example, through legislative or executive authority and/or cabinet or ministerial directives). It is thus broader than a contract.
|Revenue standards – difference in scope
|A contract will contain a performance obligation which is enforceable by legal means in which the resource provider ie customer has rights to obtain goods and services.
IFRS 15 is designed for customer and supplier relationships.
IPSAS 47 uses the term compliance obligation which is broader than performance obligation. whilst both are units of account for the recognition and measurement of revenue, compliance obligations also include any:
A performance obligation would only cover the provision of goods and services back to the customer, a compliance obligation may additionally require the recipient to use the resources internally or to provide goods and services to a third party.
|Grant income recognition
|Grants recognised over the same period as eligible expenses are incurred (for which the grant is intended to compensate, matching expenses to grant income)
|Option 1: If no enforceable obligations, then recognise grant income immediately;
Option 2: If an enforceable obligation exists, recognise inflow of resources as a binding arrangement liability and recognise revenue either over time or at a point in time as and when the obligations are satisfied per the binding arrangement.
|Measurement – grant income
|Matching principle applies (not consistent with conceptual framework)
|Revenue is measured at the amount of the increase in the entity's net assets.
|Presentation of grant income relating to assets (capital grants)
|Option 1: Recognise the grant as deferred income (liability) that is subsequently recognised in profit and loss on a systematic basis over the useful life of asset; or
Option 2: Deduct the grant received from the carrying value of the related asset.
For capital transfers received an entity recognises a binding arrangement liability for any outstanding obligations and revenue as compliance obligations are being satisfied.
An entity may recognise a binding arrangement asset should the entity have commenced satisfying compliance obligations prior to receiving the grant. The asset is the right to receive consideration for the work already performed as per the binding arrangement.
|Presentation of grant income relating to income
|May be presented as an item of income (ie, other income) or deducted from the related expense.
|Presented as an item of income. Deduction from expenditure not permissible.
|No specific standard, use 'IAS 37 Provisions, Liabilities and Contingent Assets'. Recognised when funds have been paid or when a present obligation exists to make grant payments.
|Transfer expenditure is recognised when the entity loses control of the transferred resources (ie it has paid out money) or when the entity has incurred an obligation to transfer resources and recognises a liability for the obligation.
In some instances, when resources are transferred yet the recipient has not started to fulfil any of its obligations, the resource provider may recognise a 'transfer right asset'. This asset is the enforceable right to have the transfer recipient satisfy its obligations as specified in the binding arrangement.
The above considerations will be impacted by whether the transactions arise from a binding arrangement or not. The likelihood that any enforceable obligations exist is reduced if there is no binding arrangement.
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