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IFRS vs. IPSAS in public sector financial reporting

Part 1: Government Grants

The first instalment in a series looking at the differences between International Financial Reporting Standards and International Public Sector Accounting Standards, and the suitability of each 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. 

As at February 2021, the International Public Sector Accounting Standards Board (IPSASB) are consulting on a new ‘non-exchange’ (transfer) expenditure and a revised ‘non-exchange’ income accounting standard, which will provide guidance on grant accounting for both the grant recipient and grant provider. Whilst the new accounting standards are not currently finalised, it is this latest conceptual thinking that we use to compare with the existing grant guidance provided in IFRS. 

IPSASB overview of current and future accounting standards

  Existing standard Proposed Standard
Grant Income IPSAS 23 – non-exchange transactions based on conditions and restrictions.
IPSAS TBC – new standard based on transactions with or without performance obligations.
Grant Expenditure
A standard covering grant expenditure (or transfer expenses more generally) currently does not exist.
IPSAS TBC – new standard based on transactions with or without performance obligations.

IFRS overview of current accounting standards

  Existing standard
Proposed Standard
Grant Income
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.
Grant Expenditure
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.

Comparison of grant accounting between IFRS and IPSAS

  IFRS 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.
Transfers/non-exchange transactions
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 current IPSAS standard for grants, IPSAS 23, is built upon the notion of exchange and non-exchange transactions. These terms are being phased out and replaced with ‘transactions with or without performance obligations’. The term ‘transfer’ is also being introduced.

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."
Conditions
Only recognise grant income when it is reasonably certain that an entity will comply with the conditions of the grant. In the case of grants relating to assets, that income is recognised over the lives of the assets concerned.
IPSAS is moving away from using conditions, instead basing the accounting on whether the transaction contains performance obligations or present obligations.
Performance obligation N/A in grant accounting standard.
A performance obligation in relation to grants is a promise in a binding arrangement by the grant recipient to transfer goods or services to third parties.
Present obligation
N/A in grant accounting standard.
A present obligation is a binding obligation which an entity has little or no realistic alternative to avoid and which results in an outflow of resources.

Whilst performance obligations are a sub-set of present obligations (outflow of resources) they differ, since a performance obligation involves the transfer of goods or services to a third party whilst a present obligation involves the entity either having to incur eligible expenditure or carry out an enforceable activity.
Binding arrangement
‘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.
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 present obligation, then recognise grant immediately;
Option 2: If a present obligation exists recognise over time or at a point in time depending on how the present obligation is satisfied.
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.
Most probably will involve an obligation to either construct or procure an asset, meeting the definition of a present obligation (incur eligible expenditure). Recognise a liability which is reduced as recipient satisfies the present obligation when income would be recognised.
Presentation of grant income relating to income
May be presented as an item of income (i.e. other income) or deducted from the related expense.
Presented as an item of income. Deduction from expenditure not permissible.
Grant expenditure
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.
If grant recipient has performance obligations to fulfil then the grant provider applies the 5-step performance obligation approach.

When grant recipient has a present obligation (i.e. no performance obligation) or if there is no binding arrangement, the grant expense is recognised at the earlier of: 
a) When grant provider has a present obligation to transfer resources; and
b) When the grant provider ceases to control the resources (i.e. the money has been paid)

In-depth analysis

Follow these links for more detailed analysis: