A weeklong virtual meeting of IPSASB in September provided the setting for another round of fruitful discussions. There are a number of active projects being worked on, such as the Conceptual Framework, leases and retirement benefit plans but this article focuses on revenue and transfer expenses and natural resources as these commanded most Board time.
Revenue and transfer expenses:
The discussions have taken an interesting turn in that IPSASB has changed the accounting model for transfer expenses following feedback from the 2020 consultation. It is good to see that consultation responses do have the power to make IPSASB think again which demonstrates strength in their due processes, transparency as well as acting in the public interest.
But before we get to transfer expenses, let’s recap where we are now.
- There are no major issues arising regarding the alignment project with IFRS 15, which covers revenue with performance obligations (i.e., contracts with customers). It has been noted that these will form the minority of transactions in the public sector and that transactions involving a transfer of goods or services (not receiving an equivalent value in return) should feature more prominently.
- A transfer recipient can defer revenue (liability) in a binding arrangement if it has already received resources and it has not yet completely fulfilled its obligations. The terms of the binding arrangement must also make it clear that if the recipient doesn’t fulfil its obligations, then it will be required to return the resources (or face another type of consequence that will result in an outflow of resources). The binding arrangement will therefore need to include enough specificity to be able to identify the performance.
- The consequence of this is that the transfer provider will have an asset. It was agreed that the asset represents the transfer provider’s right to force the recipient to fulfil its obligations within a binding arrangement. That right represents service potential since the actions taken by the recipient would go towards fulfilling the objectives of the provider.
- There are still a few areas to finesse, in particular the potential difficulties a transfer provider may have in monitoring the extent to which the recipient has fulfilled its obligation and thus the extent to which the provider retains control over the transferred resources.
Transfer expenses – new model adopted. In the 2020 consultation, IPSASB proposed to differentiate the accounting treatment depending on whether the recipient had to provide goods and services to third parties or whether it had to undertake a specific activity and thus incur eligible expenditure. The transfer provider would be able to recognise an asset in the first case but would recognise expenditure immediately in the latter case.
This has now changed since IPSASB acknowledges that whatever type of obligation the recipient has, it has no bearing on the asset recognition of the transfer provider. The key driver behind the asset is the provider’s enforceable right to have the recipient fulfil its obligations. On top of the transfer provider’s ability to monitor the fulfilment of the obligation (in particular for multi-year grants), there are also further discussions required on how the provider can demonstrate that the asset is achieving service potential. This is a sensible change of direction which will simplify the financial reporting for transfer expenditure. It may mean that IPSASB has to re-expose and thus delay the pronouncement.
Natural resources
The discussion on natural resources rages on with a distinct possibility that, similar to heritage assets, not a lot will come from it. This project focuses on subsoil resources, water and living resources and in many instances it is hard to see how these can actually meet the definition of an asset in accounting terms. The term “natural resources” is quite emotive and most stakeholders have a certain understanding of it but compared with perhaps its everyday usage, the financial reporting outcome might look disappointingly sparse.
One major area of debate has been around human intervention. In a nutshell, if there is any, then the resource in question can no longer be a natural resource and would most likely fall to be accounted under a different accounting standard, such as inventory or agriculture. However, more work is required on scenarios where human intervention does not impact on quality and quantity of the natural resources, such as micro-chipping animals to facilitate count, tracking etc. Some Board members also argue that human intervention is sometimes required to maintain a natural resource such as active forest management (thinning out, disease control etc).
More clarity is required to distinguish between mandatory and non-mandatory disclosures and hence where these disclosures would be located within an annual report – as part of the financial statements (mandatory) or within the ‘front-half’ of an annual report (such as a sustainability/performance report, non-mandatory). The distinction to consider is General Purpose Financial Reports or General Purpose Financial Statements.
In discussing natural resources, the Board were repeatedly linking this topic to preservation, conservation and sustainability in general. Whilst natural resources and sustainability are easily linked, it is quite a difficult area for IPSASB to navigate since as an accounting standards board the focus is on financial statements, not on non-financial reporting. IPSASB has decided, for now, to actively monitor the non-financial reporting landscape taking shape and to review how and when they need to respond or take action.