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Antonella Risi
We will now turn our attention to the last session of this workshop—Dealing with Expenses. In this session, we will look at three standards: IPSAS 42, Appendix A of IPSAS 19 and IPSAS 48. IPSAS 42 provides guidance on the accounting for social benefits. IPSAS 19, or Appendix A of IPSAS 19, provides guidance on collective and individual services. The delivery of social benefits to the public is a primary objective of most governments, and accounts for a large portion of their expenditure. In addition to social benefits, governments also provide services—for example, healthcare and defence. Such services are outside the scope of social benefits, and instead they are covered by the guidance on collective and individual services, which can be found in Appendix A of IPSAS 19, the Provisions, Contingent Liabilities and Contingent Assets standard. And the last standard we will look at is IPSAS 48, the Transfer Expenses standard. This was issued in May 2023 and has an effective date of January 1, 2026. Earlier adoption is permitted. Transfer expenses are a common transaction for most governments, and for some entities account for a large portion of their expenditure.
Iman Sheikh
Thank you Antonella. Before we begin, I wanted to highlight that IPSAS 42 is a public sector specific standard; there is no IFRS equivalent. So what are social benefits? Examples of Social Benefits include: Unemployment Benefits, State Retirement Pensions and Disability Pensions. More specifically, social benefits are cash transfers (including transfers in the form of cash equivalents, for example pre-paid debit cards) provided to individuals and/ or households. Social benefits are only provided when eligibility criteria (to receive a social benefit payment when it is next paid) are met. For example, a government may provide unemployment benefits to ensure that the needs of those whose income during periods of unemployment would otherwise be insufficient are met.
Although the unemployment benefit scheme potentially covers the population as a whole, unemployment benefits are only paid to those who are unemployed, i.e. those who meet the eligibility criteria. The assessment of whether a benefit is provided to mitigate the effect of social risks is made by reference to society as a whole. The benefit does not need to mitigate the effect of social risks for each recipient. An example is where a government pays a retirement pension to all those over a certain age, regardless of income or wealth, to ensure that the needs of those whose income after retirement would otherwise be insufficient are met. Such benefits satisfy the criteria that they are provided to mitigate the effect of social risks. Social risks relate to the characteristics of individuals and/or households–for example, age, health, poverty, and employment status. The nature of a social risk is that it relates directly to the characteristics of an individual and/or household. The circumstances that lead to an unplanned or undesired event arise from the characteristics of the individuals and/or households. This distinguishes social risks from other risks, where the circumstances that lead to an unplanned or undesired event arise from something other than the characteristics of an individual or household. For example, unemployment benefits are social benefits because the circumstances covered by the unemployment benefit arise from characteristics of the individuals and/or households – in this case a change in an individual’s employment status. By contrast, aid provided immediately following an earthquake is not a social benefit. Because the risk relates to geography rather than individuals and/or households, this risk is not a social risk.
IPSAS 42 permits two approaches to accounting for social benefits. The general approach is expected to apply to most social benefits; and for many governments will be the only approach that they use. The insurance approach is an optional approach, and IPSAS 42 only permits its use when specified criteria are met. Because entities will generally apply the general approach, this presentation focuses on this approach. The general approach includes a single recognition point for all social benefits and follows the principles in the Conceptual Framework for recognizing a liability. The key factor in determining when a liability for a social benefit arises is identifying the past event. Under the general approach, the past event that gives rise to a liability is the satisfaction by the beneficiary of all eligibility criteria for the provision of the next social benefit. The satisfaction of eligibility criteria for each social benefit payment is a separate past event.
Antonella Risi
You mentioned eligibility criteria, what is an example of an eligibility criterion?
Iman Sheik
Being alive at the point at which the eligibility criteria are required to be satisfied may be an eligibility criterion, whether explicitly stated or implicit. This depends on the characteristics of each individual social benefit scheme. Other ongoing eligibility criteria may be relevant for some social benefit schemes. For example, many unemployment benefits are only payable while the individual remains resident in the jurisdiction; residence is an ongoing eligibility criterion.
Antonella Risi
Can we look at some social benefit recognition examples?
Iman Sheikh
The recognition examples are examples of when a beneficiary may first satisfy all the eligibility criteria for the provision of the next social benefit. To continue to receive the social benefit, beneficiaries would need to continue to satisfy the eligibility criteria. Some social benefits include a waiting period as part of the eligibility criteria. For example, some unemployment benefits are paid after an individual has been unemployed for a set amount of time, say 14 days. Where there is this type of waiting period, the eligibility criteria are only satisfied once the individual has been unemployed for the specified period.
Antonella Risi
Great, thank you! Now that you have covered recognition, can you walk us through the measurement of these expenses?
Iman Sheikh
Sure – let’s look at when expenses are recognized and when liabilities are recognized when it comes to social benefits. When it comes to the Measurement of Expenses the entity recognizes an expense for a social benefit scheme, measured at the amount of the next payment following satisfaction of the eligibility criteria. Discounting of the expense will not be required for most social benefits, because the next payment will usually be made within twelve months. Where the entity makes a social benefit payment prior to all eligibility criteria for the next payment being satisfied, it measures the payment in advance (or expense recognized where the payment is irrecoverable) at the amount of the cash transferred. When we talk about the Measurement of Liabilities, under IPSAS 42, the liability for a social benefit scheme is measured at the best estimate of the costs that the entity will incur in fulfilling the present obligations represented by the liability. In this context, “costs” means the social benefit payments to be made (i.e., the cash transfers).
The costs do not include other elements such as administrative costs and bank charges. Because the satisfaction of eligibility criteria for each social benefit payment is a separate past event, the liability is for the next payment only. Consequently, liabilities in respect of social benefits will usually be short-term liabilities. As a result, an entity will often know the amounts involved without needing to make estimates. Similarly, because liabilities in respect of social benefits will usually be short-term liabilities, discounting will not be required for most social benefits. Where a liability has yet to be settled, the liability is reviewed at each reporting date, and adjusted to reflect the current best estimate of the social benefit payment required to fulfill the liability.
As with all other transactions, there are disclosure requirements related to social benefits. Some of these requirements are listed on the slide, and include characteristics of social benefits; demographics, economic and other external factors that influence the level of expenditure, the total expenditure related to a social benefit scheme, and a description of any significant amendments to social benefit schemes, Amongst other requirements.
Antonella Risi
Thank you Iman for taking us through IPSAS 42, Social Benefits. Now we will take a look at collective and individual services.
Iman Sheikh
Let me provide a bit of background first. When IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets, was first issued, provisions and contingent liabilities arising from social benefits were excluded from the scope of the Standard. IPSAS 42, Social Benefits, amended IPSAS 19, to bring within the scope of IPSAS 19 collective and individual services. A key issue addressed by the amendments to IPSAS 19 is whether a provision arises in respect of those transactions.
Let’s take a closer look at collective services – shall we? The provision of a collective service to one individual does not reduce the amount available to other individuals; there is no rivalry in the consumption of collective services. Consumption of collective services is usually passive and does not require the explicit agreement or active participation of those benefiting from the service.
Antonella Risi
can you provide some examples of a collective service?
Iman Sheikh
Sure! Examples of collective services include defense and street lighting.
Antonella Risi
Thank you. And can you give us an example of individual services?
Iman Sheikh
Examples of individual services include universal health care and education. The provision of an individual service to one individual may reduce the amount available to other individuals, or may delay the receipt of those services by some individuals. Consumption of individual services requires the explicit agreement or active participation of those benefiting from the service. Goods or services provided by a public sector entity on commercial terms do not address the needs of society as a whole, and therefore do not satisfy the definition of individual services.
This slide provides a quick summary of what we discussed. Key point to note is that social benefits involve a cash transfer, whereas collective and individual services involve the provision of services.
Antonella Risi
Now that we have looked at what collective and individual services are, can you walk us through how collective services and individual services are accounted for?
Iman Sheikh
Sure. The key point here is that collective and individual services are considered to be ongoing activities of the public sector entity that delivers the services. Paragraph 26 of IPSAS 19 states that “no provision is recognized for costs that need to be incurred to continue an entity’s ongoing activities in the future”. Consequently, no provision is recognized for the intention to deliver collective services or individual services in the future. Expenses are recognized as the services are delivered, in accordance with other IPSAS. In delivering collective services, a public sector entity acquires resources and incurs expenses through contractual and other binding arrangements. Examples include the salaries paid to defense staff, the electricity used in delivering street lighting, the acquisition of non-current assets used in delivering those services, and the purchase of collective services from a third-party provider.
Similarly, the delivery of individual services is an ongoing activity of the public sector entity that provides the services. The delivery of individual services results in the public sector entity acquiring resources and incurring expenses through contractual and other binding arrangements. For both, collective services and individual services, contractual and other binding arrangements would be accounted for in accordance with other IPSAS. These arrangements may give rise to a liability, but the liability arises from the contract or binding arrangement, not the promise to provide collective services.
The public sector entity uses the resources acquired to deliver individual services. Where individuals access these services, the entity may have a number of future obligations relating to the delivery of these individual services. However, these obligations are not present obligations and do not give rise to a liability. As with collective services, no provision is recognized for the intention to deliver individual services prior to individuals and/or households accessing the services. And that is the end of my presentation on the two expense standards.
Camila Santos
Now let’s take a look at IPSAS 48, Transfer Expenses. This standard was issued in May 2023 and has an effective date of January 1, 2026 with early option being permitted. Transfer expenses are a common transaction from most governments, and for some entities account for a large proportion of their expenditure.
Let’s take a look at some very important definitions first. A transfer expense is similar to a non-exchange transaction as defined in IPSAS 12, the Inventory Standard, which states that non-exchange transactions are transactions where an entity either receives value from another entity without directly giving approximately equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange.
Public sector entities may receive value or provide value in a non-exchange transaction. The difference, other than the fact that a transfer expense only covers the expense side of the transaction, is that in a transfer expense the transferor does not receive anything in exchange for providing a transfer. Non-exchange expenses include transfer expenses but also include transactions where the transferor receives something of lower value in return. In IPSAS 48, the transferor is referred to as the transfer provider. The receipt of the transfer is the transfer recipient, who may be obligated to transfer goods or service to the third-party beneficiaries.
Transfer rights and transfer obligations result from a transfer expense transaction with a binding arrangement as defined in IPSAS 47, Revenue. Where the transaction involves two public sector entities, the counterparty will account for the transaction under IPSAS 47 as previously discussed in this workshop, which includes equivalent terms for recipient. For example, the obligation referred to in the definition of a transfer right is defined as a compliance obligation in IPSAS 47.
The existence or absence of a binding arrangement is used to determine how to account for a transfer expense. While the concept of a binding arrangement is prevalent throughout IPSAS literature, applying the concept to transfer expenses relies on the understanding how a binding arrangement can be enforced. The importance of enforceability can be seen in the definition, which also can be found in IPSAS 47, because it’s the same definition used in the accounting for revenue.
As you can see on this slide, binding arrangement is an arrangement that confers both rights and obligations enforceable through legal or equivalent means on the parties to the arrangement. Enforceability is a key feature of the definition. If an arrangement cannot be enforced by both parties, the arrangement is not binding, and the transfer expense transaction is accounted for as a transfer expense without a binding arrangement.
An entity uses judgment to consider all relevant factors in their jurisdiction and specific transactions to assess whether enforceability exists in its transfer expense arrangement. Enforceability can arise from various mechanisms to hold the parties accountable to fulfill each of their respective obligations by compelling them to fulfill their obligations or phased imposed consequences and be through legal or equivalent means in the public sector.
Equivalent means, which include executive authority and cabinet or ministerial directives, capture enforcement outside the judicial system that is similar to the force of law.
An arrangement is enforceable by another party if the agreement includes distinct rights and obligations for each involved party, and remedies for non-completion by either party, which can be enforced through the identified enforcement mechanisms. In determining whether an arrangement is enforceable, the 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 the specified terms and conditions of the arrangement and the satisfaction of the other party’s states obligation. An entity’s intentions regarding enforcement are not considered in assessing whether the arrangement is enforced.
When a transfer expense arises from a transaction without a binding arrangement, the entity would need to first consider if it has a constructive or legal obligation related to the transfer. If so, the entity recognizes an expense and a provision under IPSAS 19. The subsequent transfer of resources to transfer recipients settles the provision. And if there’s no constructive or legal obligation, the entity derecognizes the assets to be transferred and recognize our transfer expense when it seems to control the resources. These will usually be when the entity transfers the resources, the transfer recipient.
Where an entity recognizes an expense and a provision, the entity measures the provision both initially and subsequently in accordance with IPSAS 19. The expense is measured at the same amount as the provision. The entity may, therefore, need to adjust the estimate of the provision at the end of the reporting date and may need to adjust the carrying amount to reflect the time value of money. The contra entry to any adjustment is to surplus our deficit. When the entities subsequently transfer resources, this reduces or extinguishes the provision. Where an entity recognizes an expense at the date, it loses control of the resources, which is usually when it transferred those resources to the transfer recipient. The entity measures the expense at the carrying amount of the resource transferred.
In many cases, the resources that are transferred will be cash, and expenses are measured at the amount of the cash transferred. In other cases, the resources may be a non-current asset, inventory or services. The expenses measured at the carrying amount of resources transferred. In the case of services, this will be the cost of providing the services. The resources transferred are derecognized in accordance with the relevant standard.
IPSAS 48 requires an entity to identify its distinct transfer rights in binding arrangements. Transfer rights are a right to have the transfer recipient satisfy an obligation that is separate from the satisfaction of other obligations in the binding arrangement, or a series of rights to have the transfer recipient satisfy its obligations that have substantially the same characteristics and risks and that have the same pattern of satisfaction. Transfer rights provide the basis of the timing of recognition for transfer expenses. IPSAS 48 requires transfer expenses with binding arrangements to be recognized as or when a transfer right is extinguished and therefore requires the entity to allocate the transfer consideration to transfer rights. Transfer rights are units of account when accounting for transfer expenses, in the same way that a transfer recipient’s compliance obligation are units of account when accounting for revenue in accordance with IPSAS 47. A transfer right is identified as this distinct right that can be enforced separately from other rights in the binding arrangement. Typically, from the entity’s perspective, whether a transfer right is distinct will be evident from the negotiations of the binding arrangement.
The entity may need to aggregate related rights until the aggregation produces a distinct right that can be enforced separately. This aggregation is identified as a transfer right. In some binding arrangements, it may not be possible to identify aggregations of rights to have the transfer recipient satisfy its obligations that are distinct. In such a case, the entity identifies the binding arrangement as a single transfer right. The resources, for instance, are derecognized in accordance with the relevant standard.
A binding arrangement gives an entity, the transfer provider, one or more transfer rights and imposes one or more transfer obligations on the entity. These transfer rights and obligations meet the Conceptual Framework definition of an asset and liabilities, respectfully. At the inception of a binding arrangement, and when the binding arrangement is wholly satisfied, an entity shall not recognize any assets, liabilities or expenses associated with the binding arrangement. The transfer rights and transfer obligations under a wholly unsatisfied binding arrangement are interdependent and inseparable.
The combined transfer rights and transfer obligations constitute a single asset or liability that is measured at zero. A binding arrangement is wholly unsatisfied if both of the following criteria are met: (1) The entity has not yet paid and is not yet obligated to pay any consideration to the transfer recipient for the transfer recipient satisfying any of its compliance obligations in the binding arrangement, and (2) The transfer recipient has not started satisfying any of its compliance obligations in the binding arrangement. After the inception of the binding arrangement, two scenarios can occur: Either the entity transfers resources prior to the transfer recipient starting to fulfill its obligations, or the transfer recipient starts to fulfill its obligation and becomes entitled to receive resources prior to the entity transferring the resources.
An entity needs to consider the terms of the binding arrangement to determine the transfer consideration. The transferring consideration is the total carry amount of the resources, which an entity has transferred or is obligated to transfer to the transfer recipient in accordance with the binding arrangement. This includes the effects of variable consideration. When an entity transfers resources to a transfer recipient prior to the transfer recipient starting to satisfy its obligation, the entity shall add recognition measured the resulting transfer right asset at the total carrying amount of the resources, which have been transferred in accordance with the binding arrangement. When a transfer expenses, it’s recognized from distinguishment of a transfer right, the transfer expenses is measured by the amount of the transfer consideration that is allocated to the extinguished transfer right.
When the transfer of recipient has satisfied its compliance obligation and the entity has not yet transferred its resources as required by the binding arrangement, the entity measures its transfer obligation liability at the total carrying amount of the resources, which then it is obligated to transfer in accordance with binding arrangement. This will be the same amount as the transfer expenses recognized at the same time. Some binding arrangements may involve the transfer of variable consideration. Transfer consideration may vary due to discounts, rebates, refunds, credits, incentives, performance bonus penalties, and similar items. Under IPSAS 48, variable consideration is measured using the same requirements as the measurement of provisions in IPSAS 19.
When a binding arrangement involves multiple distinct transfer rights, the transfer considerations need to be allocated to each distinct transfer right. This determines the amount that the entity will recognize as a transfer expense for each transfer right. The transfer consideration is allocated to each distinct transfer right to reflect its standalone consideration. IPSAS 48 defines the standalone consideration as the amount that an entity intends to compensate the transfer recipient for satisfying each of its obligations. The transfer consideration allocated to each distinct transfer right is also adjusted for amounts of variable consideration—that is, incentives, performance, bonus payouts, and similar items. Variable consideration may be attributable to the entire binding arrangement or to specific transfer rights. When the variable consideration can be identified with one or more transfer rights, the variable consideration is allocated to those transfer rights alone. Or when the variable consideration cannot be identified with one or more transfer rights, the entity allocates the variable consideration to all the transfer rights proportionately to their share of the transfer considerations, excluding variable consideration that cannot be identified with one or more transfer rights.
After the recognition of a transfer right asset by the entity, the transfer recipient may become unable or unwilling to satisfy its obligations under the binding arrangement. The accounting treatment will depend on the terms of the binding arrangement, the legal system in jurisdiction and any other circumstances. Where an entity has an enforceable and unconditional right to the receipt of cash or other financial assets, that is a right to a refund, the entity derecognizes the transfer right assets and recognizes the financial asset. Subsequent to its recognition, the entity shall measure the financial asset in accordance with IPSAS 41. Where the entity cannot recognize the financial asset, that is the entity does not have a right to refund, the entity shall assess the transfer right assets for impairment in accordance IPSAS 21, Impairment of Non-Cash-Generating Assets. A modification to a binding arrangement is a change in the rights and obligations of a binding arrangement that is approved by the parties to the binding arrangement. A modification to a binding arrangement exists when the parties to a binding arrangement approve a modification that either creates new enforceable rights and obligations or changes that existing enforceable rights and obligations of the parties to the binding arrangement.
An entity accounts for a modification to a binding arrangement as a separate binding arrangement if both of the following conditions exist: The scope of the binding arrangement increases, providing an entity with one or more additional transfer rights because the transfer recipient accepts one or more additional obligations or an increase in one or more existing obligations; and The transfer consideration increases by an amount that is intended to reflect the value of the additional transfer rights by compensating the transfer recipients for the additional or increased obligations assumed.
If both conditions are not met, an entity accounts for the modification to the binding arrangement as if it were part of the original binding arrangement. The entity determines the accumulated transfer expense to be recognized as at the date of the modification by revising its estimates of the transfer consideration and the amount of the transfer consideration allocated to extinguished and unextinguished transfer rights. The difference between the accumulated transfer expenses determined as at the date of the modification and the accumulated transfer expense previously recognized is recognizing surplus or deficit as an additional expense or a reduction in expense as at the date of the modification.
As required by IPSAS 1, an entity has to present an analysis of expenses, using a classification based on the nature of expenses or their function within the entity. In the context of transfer expenses, the analysis of expenses by nature results in the presentation of transfer expenses as a separate line item, while the analysis of expenses by function results in the allocation of transfer expenses to the various programs or purpose for which the transfers were made.
In addition to the analysis of expenses, an entity is required to provide qualitative and quantitative information on the significant transfer arising from transactions with and without binding arrangements to enable users to understand how the entity’s resources are spent on its program activities and services. Disclosures may also be required under other standards. For example, a transfer obligation liability will be a financial liability if the transfer is to be made in cash and the disclosure requirements in IPSAS 30, Financial Instruments Disclosures, will apply. And that takes us to the end of this session.
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.