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Antonella Risi
We will now begin session four of the workshop, which is all about revenues. Requirements in respect of all types of revenue are covered by their revenue standard IPSAS 47. IPSAS 47 was issued in May 2023 and has an effective date of January 1, 2026. Please note that IPSAS 9 and IPSAS 23, the other revenue standards, will be withdrawn in January 2026. With that, I will now pass it on to Iman to tell us about the revenue standard.
Iman Sheikh
Thank you, Antonella. IPSAS 47 covers all types of revenue in a single standard, with the exception of revenue that is covered in other IPSAS. Revenue will be covered in another IPSAS when the transaction that gives rise to the revenue also involves other elements, such as assets or expenses. The link between revenue and other elements means that specific, more detailed requirements will be required, and these are best dealt with in the IPSAS covering that specific transaction.
IPSAS 42, Social Benefits, permits an entity to account for social benefits using the insurance approach, where the specified criteria are met. Where this option has been taken, all aspects of the social benefit scheme are accounted for as if they were an insurance contract. As a result, social benefit contributions accounted for under the insurance approach are outside of the scope of IPSAS 47. Revenue is covered by another IPSAS and includes the following transactions: A public sector combination within the scope of IPSAS 40, Lease contracts within the scope of IPSAS 43, Insurance contracts within the scope of the relevant international or national accounting standard dealing with insurance contracts, Financial instruments and other contractual rights or obligations within the scope of IPSAS 41, and The initial recognition or changes in fair value of biological assets related to agriculture activity as per IPSAS 27.
IPSAS 47 does not cover gains from the sale of non-financial assets that are not an output of the entities activities and are within the scope of IPSAS 16, for example, which is in this Investment Property standard; or IPSAS 45, the Property, Plant and Equipment standard; or IPSAS 31, the Intangible Asset standard. These gains arise from the derecognition of an asset and are covered in the standard that deals with the derecognition requirements. Similarly, revenue from changes in the value of current and non-current assets arising from subsequent measurement is excluded from the scope of IPSAS 47, as these gains arise from the measurement of assets, which is addressed in specific standards. IPSAS 47 applies to rights and obligations arising from binding arrangements, where these rights and obligations relate to the consideration to be received and any obligation to be satisfied.
The existence or absence of binding arrangement is used to distinguish between different types of revenue, revenue transactions with or without binding arrangements, and to determine how to account for that revenue. While the term “binding arrangement” is used throughout the IPSAS suite of standards, the definition of binding arrangement in IPSAS 47 emphasizes the enforceability of the binding arrangement and is crucial to applying the concept of revenue.
Contracts are a form of binding arrangements for transactions that would fall under IFRS 15 in the private sector; IPSAS 47 prescribes the same accounting treatment. This alignment with IPSAS 15 aids consolidation for government enterprises using IFRS. The same distinction is made in IPSAS 48, the Transfer Expense standard, which applies a model based on the existence of a binding arrangement. The definition of a “binding arrangement” in IPSAS 47 emphasizes the need for the arrangement to be enforceable by all parties to the arrangement and for the parties to have both rights and obligations. This is a narrower definition of binding arrangements than in some other IPSAS and only applies to IPSAS 47 and IPSAS 48.
Enforceability can arise from various mechanisms as long as those mechanisms provide the entity with the ability to enforce the terms of the arrangement and hold the parties accountable for the satisfaction of the stated obligations. An entity needs to determine if an arrangement is enforceable based on whether each entity in the arrangement has the ability to enforce the rights and the obligations. In determining whether an arrangement is enforceable, an entity considers the substance rather than the legal form of the arrangement. The assessment of whether an arrangement is enforceable is based on an entity’s ability to enforce specified terms and conditions of the arrangement and ensure the satisfaction of the other parties’ stated obligations. An entity’s intentions regarding enforcement are not considered in assessing whether the arrangement is enforceable. In some jurisdictions, public sector entities cannot enter into legal obligations because they are not permitted to contract in their own name. However, there are alternative processes with equivalent effect to legal arrangements. These are described as enforceable through equivalent means. For an arrangement to be enforceable through equivalent means, the presence of an enforcement mechanism outside the legal system but with similar effect is required to establish the right of the resource provider to obligate the entity to complete the agreed obligation or be subject to remedies for non-compliance or non-completion. Similarly, a mechanism outside the legal system is required to establish the right of the entity to obligate the resource provider to pay the agreed consideration.
Public sector entities may have a range of different revenue transactions. These may be non-reciprocal or non-exchange transactions or commercial exchange or exchange transactions. Entities will need to consider the nature of the transaction and whether it arises from a binding arrangement when determining how to account for the transaction. While commercial sales of goods and services will always arise from a binding arrangement, other examples may give rise to revenue from transactions without a binding arrangement or revenue from transactions with binding arrangements, depending on the circumstances of the transaction.
Transfers are one of the main types of revenue from transactions without binding arrangements. The entity receiving the transfer does not directly provide any good, service or other asset in return. Fines are a type of transfer that a public sector entity may receive. IPSAS 47 uses a term “resource provider” to refer to the entity or individual that provides the resources to the entity through a transfer. The main type of revenue from transactions without binding arrangements is taxes. They are covered later in this module. The principles of accounting for revenue without binding arrangements applies to both taxes and transfers. However, IPSAS 47 includes additional guidance for taxes because of the particular issues that arise with accounting for revenue from taxes.
In determining how to account for revenue transaction, an entity must assess whether the transaction involves a binding arrangement or not. A significant volume of revenue transactions in the public sector are expected to be without binding arrangements, such as the case for taxes. In making this determination, the entity considers whether it has both an enforceable right and an enforceable obligation, and whether the other parties involved have enforceable rights and obligations also. Where all parties to the transaction have either an enforceable right or an enforceable obligation, the transaction involves a binding arrangement. In a transaction without binding arrangements, the entity will not have both an enforceable right and an enforceable obligation.
Different scenarios will arise from different transactions. For example, an entity may have an enforceable right but no enforceable obligation. For example, income taxes, where a national government can enforce payment from a taxpayer but is not required to provide specific services to the taxpayer. Or there may be no enforceable right but an enforceable obligation. For example, an education grant where university is not able to enforce payment from the resource provider, such as the national government, but the university must provide grants to eligible students meeting predetermined eligibility criteria.
The entity will need to determine if its rights meet the definition and recognition criteria of an asset and whether its obligations meet the definition and recognition criteria of a liability and account for the transaction accordingly. For example, where an entity may have a liability associated with an inflow of resources is where a national government may voluntarily provide funding for environmental works to a regional government and legislation requires the regional government to use such funds for a particular purpose. The existence of a liability associated with the inflow or the right to an inflow of resources impacts the timing of revenue recognition, as shown in the next slide.
An entity shall recognize revenue from a transaction without a binding arrangement when or as the entity satisfies an enforceable obligation associated with the inflow of resources that meet the definition of a liability, or revenue is recognized immediately if the entity does not have an enforceable obligation associated with the inflow or an enforceable right to an inflow of resources. When an entity recognizes revenue when or as it satisfies any enforceable obligations associated with the inflow of resources, it will also derecognize the liability at the same time. It is expected that most revenue without a binding arrangement will be recognized immediately, as there will be no liability associated with the inflow of resources. Note that it is unlikely that the entity will have both a right to resources and a liability, as this circumstance would usually result from a transaction with a binding arrangement.
An inflow of resources or a right to an inflow of resources that meets the definition of an asset is initially measured at its transaction consideration as at the date at which the asset is recognized. If the entity receives non-cash considerations, that non-cash consideration is measured at its current value in accordance with the relevant IPSAS. The relevant IPSAS will specify whether current value is the asset’s fair value or its current operational value. Current operational value and fair value are discussed in IPSAS 46, the Measurement Standard. After initial recognition, an entity shall subsequently measure a receivable asset within the scope of IPSAS 41, the Financial Instrument Standard, as a financial asset or not within the scope of IPSAS 41 on the same basis as a financial asset in accordance with IPSAS 41 by analogy and measure subsequent initial recognition as required by the applicable IPSAS for those specific assets.
For any liability recognized, the amount of the liability is the entity’s best estimate of the amount required to settle the obligation at the reporting date. The best estimate of a liability on initial recognition is limited to the value of the associated asset recognized. That is, the liability cannot exceed the amount of resources received. The estimate takes into account risks and uncertainties that surround the events causing the liability to be recognized. If time value of money is material, the liability is measured at the present value of the amount expected to be required to settle the obligation. This treatment is consistent with the principles established in IPSAS 19. Revenue from a transaction without a binding arrangement is measured at the amount of the increase in net assets recognized by the entity. This will be the consideration received or receivable by the entity.
Taxes are one form of revenue without binding arrangements. IPSAS 47 includes specific guidance on revenue from taxes because of practical issues that can arise in determining the amount of revenue to be recognized during a reporting period.
Antonella Risi
Thank you, Iman. Before you go to the next slide, I noticed on this slide you have provided definitions in addition to the one related to taxes. Why are these other definitions important?
Iman Sheikh
Certainly. These additional definitions are important because they provide a comprehensive understanding of how taxes function within public sector accounting and financial reporting. They help clarify when taxes are levied or when a taxable event occurs, how governments support is sometimes provided through the tax system or the expenses are paid through a tax system, and how tax laws can help people or businesses not by giving them money directly, but by letting them pay less taxes through concessions, which would have been a tax expenditure.
An entity that imposes taxes recognizes an asset in respective taxes when the taxable event occurs and the asset recognition criteria are met. Under IPSAS 47, taxes include other compulsory contributions and levies. Tax revenues arise only for governments that impose the tax and not for other entities.
Antonella Risi
Iman, if we could pause here for a moment? Could you give us an example of what you just said?
Iman Sheikh
Of course! An example would be where the national government imposes a tax that is collected by its taxation agency. Assets and revenue accrue to the government and not the taxation agency in this case. So when a national government imposes a sales tax, the entire proceeds of which it passes to the state government, based on a continuing appropriation, the national government recognizes assets and revenue for the tax and a decrease in assets and expense for the transfer to the state governments. The state governments will recognize assets and revenues for the transfer. Similarly, when a single entity collects taxes on behalf of several other entities, it is acting as an agent for all of them. For example, where a state taxation agency collects income tax for a state government and several city governments, it does not recognize revenue in respect of the taxes collected. Rather, the individual governments that impose the taxes recognize assets and revenues in respect of the taxes.
Antonella Risi
Thank you, Iman. I have another question for you. You mentioned a few moments ago that taxes are recognized when the taxable event occurs and the asset recognition criteria are met. Could you elaborate a bit more on this?
Iman Sheikh
For sure! So, resources arising from taxes satisfy the criteria for recognition of an asset when it is probable that the inflow of resources will occur and their fair value can be reliably measured. The degree of probability attached to the inflow of resources is determined on the basis of evidence available at the time of the initial recognition, which includes, but is not limited to, disclosure of the taxable event by the taxpayer. The taxable event is the event that the government, legislature or other authority has determined will be subject to taxation. This is the earliest possible time to recognize assets and revenue arising from a taxation transaction and is the point at which the past event that gives rise to control of the asset occurs.
Consistent with the definitions of assets and liabilities, resources for taxes received prior to the occurrence of the taxable event are recognized as an asset and a liability or advance receipts because the event that gives rise to the entities entitlement to the taxes has not occurred and the criteria for recognition of taxation revenue have not been satisfied, notwithstanding that the entity has already received an inflow of resources. Advanced receipts and respective taxes are not fundamentally different from other advanced receipts. So a liability is recognized until the taxable event occurs. When the taxable event occurs, the liability is just discharged and the revenue is recognized.
Taxation revenue is determined at a gross amount. It is not reduced for expenses paid through the tax system. Expenses paid through the tax system are amounts that are available to beneficiaries regardless of whether or not they pay taxes. Tax expenditures are foregone revenue, not expenses, and do not give rise to inflow or act outflow of resources. That is, they do not give rise to assets, liabilities, revenue or expenses of the taxing government. Some taxes are levied for specific purposes. Generally, taxes levied for a specific purpose do not create a performance obligation that requires a liability to be recognized. If the government is required to recognize a liability relating to assets recognized as a consequence of a specific purpose tax levy, it does not recognize revenue until the performance obligation is satisfied and the liability is reduced. However, in most cases, taxes levied for specific purposes are not expected to give rise to a liability because the specific purposes are not a part of a binding arrangement and the government does not have a compliance obligation. If the resources are not used for the intended purpose, the taxpayer cannot enforce the repayment of the amounts nor enforce the use of the resources for the intended purpose.
IPSAS 47 uses a five-step model for recognizing revenue. This five-step model is based on a five-step model that is used in IFRS 15 adapted for the public sector. A key difference between the model in IPSAS 47 and the model in IFRS 15 is that the compliance obligations in IPSAS 47 are broader than the concept of promises in IFRS 15. Compliance obligations are not limited to transfers of goods and services. Compliance obligations reflect that an entities obligation in a binding arrangement requires the entity to either use resources internally or a distinct good or service, or transfer a distinct good or service to an external party, such as a purchaser or a third-party beneficiary. This definition is intended to encapsulate the concept as presented in IFRS 15, but revised to better capture public sector transactions arising from binding arrangements where an entity does not transfer distinct goods or services to an external party.
On this slide and the next one, we have some important definitions related to revenue with binding arrangements. These IPSAS 47 terms are equivalent to those used in IFRS 15 and are key to understanding how to account for revenue transactions with binding arrangements. The most significant difference from IFRS 15 relates to compliance obligations as we discussed in the previous slide. Under IPSAS 47, compliance obligations also include promises to use resources internally to carry out specified activities or to achieve specified outcomes.
On this slide, we have some more important definitions related to revenue with binding arrangements. These IPSAS 47 terms are equivalent to those used in IFRS 15 and are key to understanding how to account for revenue transactions with binding arrangements.
An entity will have initially identified whether a revenue transaction involves a binding arrangement or not. Having determined that the transaction involves a binding arrangement, the entity needs to confirm that the binding arrangement meets the criteria to be accounted for using the binding arrangement accounting model and whether the arrangement should be combined with other binding arrangements. For an entity to account for a binding arrangement using the binding arrangement accounting model, all of the following criteria need to be met:
- The parties to the binding arrangement must have approved the binding arrangements. They may do this in writing, orally or in accordance with other customary practices, and the parties must also be committed to performing their respective obligations.
- The entity can identify each party’s rights under the binding arrangement.
- The entity can identify payment terms for the satisfaction of each identified compliance obligation. In complex transactions, there may be some overlap with Step 2 in identifying compliance obligations.
- The binding arrangement has economic substance. That is, the risk, timing or amount of the entities future cash flows or service potential is expected to change as a result of the binding arrangement.
- It is probable that the entity will collect the consideration to which it will be entitled for satisfying its compliance obligations in accordance with the terms of the binding arrangement.
In evaluating whether collectability of an amount of consideration is probable, an entity needs to consider only the resource provider’s ability and intention to pay the amount of consideration when it is due. If a binding arrangement meets these criteria at the inception of the binding arrangement, an entity does not reassess the criteria unless there is indication of a significant change in the facts or circumstances.
IPSAS 47 requires two or more binding arrangements to be combined and accounted for as one arrangement where this reflects the economic substance of the binding arrangement. This can occur when the arrangements are entered into or at or near the same time and as a result the agreements are interrelated. IPSAS 47 includes criteria for determining whether binding arrangements should be combined. A modification to a binding arrangement is a change in the scope or consideration, or both, of a binding arrangement that is approved by the parties. A modification to a binding arrangement exists when the parties approve a modification that either creates new or changes existing enforceable rights and obligations of parties involved.
Modifications are accounted for as a separate binding arrangement. If both of the following conditions are present:
- The scope increases because of the addition of distinct promises.
- The consideration increases by the amount of consideration that reflects the entity’s standalone values of the additional promises.
Otherwise, account for the remaining promises either as if there was a termination of the existing binding arrangement and the creation of a new binding arrangement, or as if it were part of an existing binding arrangement if the remaining promises are not distinct and therefore form part of a single compliance obligation that is partially satisfied.
Let’s now look at Step 2, which is Identifying Compliance Obligations. A compliance obligation is an entity’s promise in a binding arrangement to either use resources internally or to transfer a distinct good or service to a purchaser or a resource provider or a third-party beneficiary. The objectives of a compliance obligation may be incremental to the entity service delivery objectives or additional objectives in which the entity is engaged through the binding arrangement.
An entity identifies as a compliance obligation each promise to use resources internally or transfer to an external party or parties, such as the purchaser or resource provider or a third-party beneficiary, either as a good or service or a bundle of goods or services that is distinct, or a series of distinct goods and services that are substantially the same in characteristics and risks and that have the same pattern of use. A binding arrangement has at least one compliance obligation because its enforceability holds the entity accountable for satisfying its obligations in the arrangement, for which the entity has little or no realistic alternative to avoid. A compliance obligation is a unit of account in a revenue transaction with a binding arrangement that represents a distinct promise or group of promises to which recognition criteria and measurement concepts are applied. If a promised good or service is distinct, an entity shall combine the good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. In some cases, that would result in the entity accounting for all of the goods and services promised in the binding arrangements as a single compliance obligation.
Let's now look at Step 3, determining the transaction consideration. Determination of the transaction consideration for many binding arrangements will be straightforward as a total amount receivable will be specified in the binding arrangement and there will be no significant financing component. Where this is not the case, the transaction consideration will need to be estimated. An entity needs to consider the terms of the binding arrangement and its customary practices to determine the transaction consideration. The transaction consideration is the amount of resources to which the entity expects to be entitled in the binding arrangement for satisfying its compliance obligations. This excludes any amounts collected on behalf of third parties—for example, some sales taxes.
The nature and timing and amount of consideration affect the estimate of the transaction consideration. When determining the transaction consideration, an entity shall consider the effects of all of the following: Variable consideration, such as incentives and penalties; Constraining estimates of variable consideration; The existence of a significant financing component; Non-cash consideration; and Consideration payable to a resource provider.
Now let’s look at Step 4. This step involves allocating the transaction consideration to compliance obligations. Allocating the transaction consideration to compliance obligations in a binding arrangement is an important step, as it determines how much revenue is earned for satisfying each compliance obligation. This also determines the timing of revenue recognition, as compliance obligations may be satisfied at different points in time. For many entities, the binding arrangement will be straightforward. Where a binding arrangement has only one compliance obligation, the total transaction consideration relates to that compliance obligation, and no further allocation is required.
When allocating the transaction consideration to compliance obligations, an entity’s objective is to allocate to each compliance obligation the amount of the transaction consideration that reflects what the entity expects to be entitled to for satisfying each compliance obligation. In other words, the entity is seeking to determine how much it should earn as revenue for satisfying each compliance obligation. To meet this objective, an entity will need to use an appropriate basis for allocating the transaction consideration to each compliance obligation. IPSAS 47 specifies the basis that is to be used. Entities need to allocate the transaction consideration to each compliance obligation identified in the binding arrangement on a relative standalone value basis that is a proportion to the standalone basis of each compliance obligation.
A standalone value of a good or service is the price of a good or service that is required to be used internally or provided separately to a purchaser or third-party beneficiary. The best evidence of a standalone value will be the observable price of a good or service when the entity provides that good or service separately, in similar circumstances and to similar resource providers.
If a standalone value is not directly observable, an entity must estimate it. The estimate should allocate the transaction consideration in line with the objectives discussed in the prior slide. Suitable methods for estimating the standalone value of a good or service include the following: Adjusted market assessment approach, the Expected cost approach and the Residual approach. These methods are detailed in IPSAS 47.
Variable consideration that is promised in a binding arrangement may be attributable to the entire binding arrangement or to specific parts of the binding arrangement, that is, some, but not all of the compliance obligations.
An entity should allocate a variable amount and subsequent changes to that amount entirely to the compliance obligation if both of the following criteria are met:
- The terms of the variable payment relate specifically to the entity’s efforts to satisfy the compliance obligation.
- Allocating the variable amounts of consideration entirely to the compliance obligation is consistent with the allocation objective discussed above.
Any variable consideration that is not allocated on this basis is allocated using the method discussed on a relative standalone value basis that we discussed previously.
Now let’s look at Step 5, which is a step of recognizing revenue. Recognition of a revenue transaction with a binding arrangement does not begin until one party has begun to satisfy its obligations under the binding arrangement. This might be the entity beginning to satisfy compliance obligations or the resource provider transferring resources to the entity. Until this point, the binding arrangement is fully unsatisfied, and the entity does not recognize any asset, liability or revenue associated with the binding arrangement unless the binding arrangement is onerous. When an entity receives an inflow of resources from a binding arrangement that meets the definition of and recognition criteria for an asset, the entity recognizes revenue for any satisfied compliance obligation in respect of the same inflow and a liability, a binding arrangement liability, for any unsatisfied compliance obligations in respect of the same inflow.
The timing of revenue recognition is determined by the nature of their requirement in the binding arrangement and their settlement. An entity shall recognize revenue from a transaction with a binding arrangement when or as the entity satisfies a compliance obligation. This means that the entity may recognize revenue prior to receiving resources from the resource provider.
In such cases, the entity recognizes revenue and an asset—for example, a receivable, for any amounts already due. When the entity recognizes revenue, it shall also reduce the carrying amount of any related liability—that is, the liability recognized when the entity received resources prior to satisfying the compliance obligation by an equal amount.
IPSAS 47 uses the terms “binding arrangement asset” and “binding arrangement liability,” but does not prohibit an entity from using alternative descriptions in the statement of financial position for those items. If an entity uses an alternative description for the binding arrangement asset, that entity shall provide sufficient information for user of the financial statements to distinguish between receivables and the binding arrangement asset.
For each compliance obligation identified at the inception of the binding arrangement, the entity must determine whether it satisfies the compliance obligation over time or at a point in time. Unless the entity can show that it satisfies a compliance obligation over time, the obligation is satisfied at a point in time. This is an important factor in determining when revenue should be recognized. IPSAS 47 sets out the criteria for making that determination. These factors vary depending on the nature and compliance of the compliance obligation.
If an entity has determined that a compliance obligation is satisfied at a point in time, it will need to determine when that point has occurred. This will determine when the entity recognizes revenue. Where compliance obligation is satisfied over time, an entity recognizes revenue over time by measuring its progress towards complete satisfaction of the compliance obligation. The entity should apply a single method of measuring progress for each compliance obligation satisfied over time and should apply the method consistently to similar compliance obligations and in similar circumstances.
At the end of each reporting period, an entity shall re-measure its progress towards complete satisfaction of the compliance obligation satisfied over time. Appropriate methods of measuring progress include output methods and input methods. In determining the appropriate method for measuring progress, an entity will need to consider the nature of the entity’s promise and whether the terms of that binding arrangement specify the activities or expenditures an entity is to perform or incur, respectively.
As circumstances change over time, the entity should update its measure of progress to reflect any changes in the satisfaction of the compliance obligation. These changes to an entity’s measure of progress are accounted for as a change in accounting estimate.
Where an entity receives resources before it has satisfied its compliance obligations, it will measure those assets at the amount of the consideration received. This is straightforward for cash receipts unless the binding arrangements has a significant financing component. However, if the asset received is a non-cash asset, the entity will need to measure the asset at its current value. Current value is defined in IPSAS 46, the Measurement Standard, and may be the fair value or the current operational value, depending on the purpose for which the entity will hold the asset. After initial recognition, receivable assets within the scope of IPSAS 41 and are measured as financial assets. Some receivable assets may not fall within the scope of IPSAS 41 because they do not arise from contracts. In this case, the receivable asset from the binding arrangement is accounted for on the same basis as a financial asset applying the requirements of IPSAS 41 to the asset by analogy. Where an entity recognizes a liability under the binding arrangement, the liability is measured in accordance with IPSAS 19. In general, the measurement of assets and liabilities for revenue transactions with binding arrangements is the same as those without binding arrangements. However, revenue transactions with binding arrangements may have additional factors that need to be considered, such as significant financing components or estimating variable consideration for binding arrangement assets and receivables. When or as a compliance obligation is satisfied and an entity recognizes revenue, it is measured at the amount of the transaction consideration that is allocated to the compliance obligation. This amount excludes variable consideration that is constrained in accordance with IPSAS 47.
Variable consideration is constrained when the likelihood that a significant reversal in the amount of the cumulative revenue recognized will not occur when the uncertainty is subsequently resolved is less than highly probable. When a compliance obligation is satisfied at a point in time, the revenue recognized is measured at the full amount of the transaction consideration allocated to the compliance obligation. Where a compliance obligation is satisfied over time, the revenue recognized is measured at the transaction consideration allocated to the compliance obligation adjusted for the proportion of the compliance obligation that has been satisfied.
Determining the Transaction Consideration is Step 3 of the five-step model and has been covered earlier in this module. Allocating the transaction consideration to the compliance obligations is Step 4 of the five-step model and has been covered earlier in the module as well. As well as recognizing and measuring the revenue from a transaction with binding arrangements, an entity will also need to account for the costs associated with that binding arrangement. These costs are also addressed in IPSAS 47.
The activities then an entity undertakes to satisfy a compliance obligation may result in outputs that meet the definition of an asset. Entities may apply other IPSAS to recognize an asset, if relevant. For example, an entity may acquire or produce training materials that meet the definition of inventory under IPSAS 12. Similarly, an entity may satisfy a compliance obligation by carrying out research and producing a report that meets the definition of an intangible asset under IPSAS 31.
Where the costs incurred in fulfilling a binding arrangement within the scope of another IPSAS, an entity shall account for those costs in accordance with the applicable IPSAS. Where the costs incurred in fulfilling a binding arrangement not within the scope of another IPSAS, the entity applies IPSAS 47 in accounting for those costs. Under IPSAS 47, the entity should recognize a binding arrangement asset only where the criteria listed on this slide are met. If the entity does not meet the criteria, the costs are recognized as an expense. After the binding arrangement asset is recognized, it should be amortized on a systematic basis that is consistent with the satisfaction of the compliance obligation to which it relates. If the compliance obligation is recognized at a point in time, the binding arrangement asset will be fully amortized at that point. If the compliance obligation is satisfied over time, the binding arrangement asset will also be amortized over time on a similar basis.
IPSAS 47 includes application guidance to assist entities with the application of the principles in IPSAS 47 to specific transactions that are encountered in the public sector. We will start by taking a look at capital transfers and cover the most common types of transactions on the next few slides. A capital transfer arises from a binding arrangement and imposes at least one compliance obligation on the entity. Revenue from a capital transfer is recognized on the same basis as other revenue from a transaction with a binding arrangement. That is, revenue is recognized as compliance obligations are satisfied. Some capital transfer transactions may include compliance obligations for subsequent operation of the asset. Such compliance obligations would not meet the definition of a capital transfer. Any compliance obligation related to the portion of the asset will be a separate compliance obligation and are accounted for in the same way as any other compliance obligation.
Services in-kind are services provided by individuals to public sector entities for no consideration. Some public sector entities may receive services in-kind, and some examples of where this may occur are provided in the slide. An entity may, but is not required to, recognize services in-kind as revenue and as an asset. Services in-kind may meet the definition of an asset because the entity controls the resource from which future economic benefits or service potential are expected to flow. These assets are, however, immediately consumed, and a transaction of equal value is also recognized to reflect the consumption of these services in-kind.
For example, a public school that receives volunteer services from teachers aids, the fair value of which can be reliably measured, may recognize an increase in an asset and revenue and a decrease in an asset and an expense. More usually, the entity will recognize revenue and an expense for the consumption of services in-kind. However, services in-kind may be used to construct an asset, in which case the amount recognized in respect of the services in-kind is included in the cost of the asset being constructed. Some services in-kind do not meet the definition of an asset because the entity has insufficient control over the services provided.
In other circumstances, the entity may have control over the services in-kind but may not be able to measure them reliably, so they fail to satisfy their criteria for recognition as an asset. IPSAS 47 does not require the recognition of services in-kind but does strongly encourage the disclosure of qualitative information on the nature and type of services in-kind received during the reporting period.
Next, we’ll take a look at concessionary loans. Concessionary loans are loans received by an entity at below market terms. The portion of a loan that is repayable, along with any interest payments, is accounted for in accordance with IPSAS 41. An entity considers whether any differences between the transaction consideration, such as the loan proceeds and the fair value of the loan on initial recognition, is revenue that should be accounted for in accordance with IPSAS 47. Where an entity determines that the difference between the transaction consideration or loan proceeds and the fair value of the loan on initial recognition is revenue, the entity recognizes the difference as revenue except if a compliance obligation exists. Where the terms of the loan result in a compliance obligation, it is recognized as a binding arrangement liability. As the entity satisfies the compliance obligation, the binding arrangement liability is reduced and the revenue is recognized.
When either party to a binding arrangement has performed, an entity shall present the binding arrangements in the statement of financial position as a binding arrangement asset or a binding arrangement liability, depending on the relationship between the entity’s performance and the resource provider’s transfer of consideration. If a resource provider transfers resources before the entity satisfies its compliance obligation, the entity should present a binding arrangement liability in the statement of financial position to represent the position on the binding arrangement. A binding arrangement liability is an entity’s obligation to satisfy a compliance obligation for which the entity has received consideration from the resource provider.
If an entity satisfies a compliance obligation before the transfer of consideration is received, the entity should present a binding arrangement asset in the statement of financial position to represent the position on the binding arrangement. The binding arrangement asset will exclude amounts due, which should be presented separately as a receivable. A binding arrangement asset is an entity’s right to the consideration for satisfying its compliance obligation when that right is conditioned on something other than the passage of time. An entity shall present any unconditional rights to consideration separately as a receivable.
Antonella Risi
Iman, before you go to the next slide, can you help me understand the concept of unconditional rights to consideration?
Iman Sheikh
For sure! So, unconditional rights to consideration are when an entity such as a government or a public sector organization has a right to receive payment or consideration that is unconditional, meaning the entity does not have to do anything further to earn that payment except wait for it. It must show this right separately in its financial statements.
Antonella Risi
Thank you for clarifying that for me, Iman. I really appreciate it.
Iman Sheikh
No problem. IPSAS 47 includes a disclosure objective. Disclosure is made by an entity should aim to fulfill this objective. The broad categories of information that will need to be disclosed to meet the objective are shown in the slide. Some information required by IPSAS 47 can be disclosed either on the face of the financial statements or in the notes, while other information should be disclosed in the notes. IPSAS 47 includes more detailed disclosure requirements, including specific disclosure requirements for revenue without binding arrangements and revenue with binding arrangements, and that takes us to the end of the revenue module.
Antonella Risi
Before we end, we did want to highlight a few resources that may be helpful to you. This slide contains a link to the IPSASB's website that includes information on IPSASB as well as the work they're doing. The slide also contains links to both the digital version of IPSASB Handbook and the PDF version. The handbook will provide you detailed guidance and requirements on the standards highlighted during this workshop. And lastly, if you're interested in PSAB's international strategy or its responses to IPSASB’s documents for comment, please feel free to visit PSAB's International Activities page. The link is also on the slide.
Thank you all very much for attending this workshop. We hope you found it helpful and that it provided you with insights on some of the IPSASB standards related to the various items we discussed on this module. We wish you a great rest of the day. Thank you.