IPSASB Exposure Draft on Revenue without Performance Obligations (ED 71):

What is revenue without performance obligations?

The International Public Sector Accounting Standards Board (IPSASB) issued two Exposure Drafts for comment in February 2020 on revenue, being Revenue with Performance Obligations (ED 70) andRevenue without Performance Obligations (ED 71). 

Why a revenue recognition approach based on whether transactions have performance obligations or not?

The IPSASB became aware of constituents’ concerns regarding the application of IPSAS 23 on Revenue from Non-Exchange Transactions (Taxes and Transfers). These concerns include difficulty in making the distinction between exchange and non-exchange transactions. “Exchange” transactions are where entities directly exchange resources of approximately equal value. Constituents find it hard to determine when approximately equal value has been exchanged. 

The IPSASB issued ED 71 as an update to IPSAS 23. ED 71 (along with ED 70) changes the revenue recognition approach from “exchange” or “non-exchange”, to transactions “with performance obligations” or “without performance obligations”. ED 71 establishes principles for the recognition of revenue from transactions without performance obligations and provides guidance on the application of those principles to the major sources of revenue for public sector entities, such as taxes and transfers.

What is important to understand when assessing the scope of ED 71?

ED 70 and ED 71 are meant to address all revenue transactions. Only revenue transactions from binding arrangements with performance obligations are in the scope of ED 70. Therefore, all other revenue transactions are in the scope of ED 71. 

Two types of revenue transactions are dealt with in ED 71:

(a) Transactions from binding arrangements without performance obligations, but with present obligations.

(b) Transactions without a binding arrangement.

Different accounting treatment is proposed for (a) and (b) above. It is therefore important to understand the definitions of binding arrangement and performance obligation in ED 70, and what is meant with present obligations in ED 71. See the article on What is revenue from a binding arrangement? [Add link to article published on 6 April 2020] where the scope of ED 70 is discussed.(a) Transactions from binding arrangements without performance obligations, but with present obligations

A present obligation is explained in ED 71 as “…a binding obligation resulting in an outflow of resources which an entity has little or no realistic alternative to avoid”. Present obligations can only arise from binding arrangements, i.e. arrangements from which both parties have rights and both parties have obligations. 

To explain the scope of ED 70 compared to ED 71, ED 71 notes that performance obligations are a type of present obligation. The key distinction between a performance obligation and a present obligation is that a performance obligation requires a transfer recipient to transfer distinct goods or services to either a purchaser or a third-party beneficiary. A present obligation does not have this requirement. ED 71 only focuses on present obligations that are not performance obligations, as illustrated in diagram 1:

Diagram 1: Performance obligations as a type of present obligation

The proposed accounting treatment for transactions without performance obligations but with present obligations is discussed in a subsequent article on What is a present obligation in the context of recognising revenue? that will be published on the 11th of May.

(b) Transactions without a binding arrangement

All revenue transactions that are not in ED 70, i.e. from binding arrangements with performance obligations, or in (a) above, i.e. from binding arrangements with present obligations, are transactions without binding arrangements. The IPSASB considers that present obligations can only arise from binding arrangements as in the absence of a binding arrangement, there is no enforceability of the transaction.

Because the definition of a binding arrangement in ED 70 requires both parties to have rights and both parties to have obligations, arrangements where one party has rights and another party has obligations are not considered a “binding arrangement” as defined, even if the arrangement is a contract or arises from legislation or similar means. Examples of transactions without binding arrangements include bequests, fines and donations. Taxes are also included in this category although ED 71 deals with the accounting for taxes separately.

The accounting implication in ED 71 for transactions without binding arrangements, including taxes, is that revenue is recognised immediately when an entity recognises an asset, and for taxes, when the taxable event occurs. This may result in a change in the timing of revenue recognition for certain transactions with conditions where revenue recognition is currently delayed in IPSAS 23. See upcoming article on What is a present obligation in the context of recognising revenue?.

The Standards of GRAP dealing with revenue transactions are aligned to the existing IPSAS, including GRAP 23 on Revenue from Non-exchange Transactions (Taxes and Transfers). The Board would need to consider whether to align with any new or revised IPSAS that are issued. The differences in proposed accounting will need to be explored and discussed in responding to the IPSASB.

Where can the EDs be accessed and how can you provide comment?

The EDs have been published on the ASB’s website and can be accessed here: https://www.asb.co.za/comment-on-proposals/. The EDs are as follows:

• ED 181 on IPSASB Exposure Draft on Revenue with Performance Obligations (ED 70)

• ED 182 on IPSASB Exposure Draft on Revenue without Performance Obligations (ED 71)

• ED 183 on IPSASB Exposure Draft on Transfer Expenses (ED 72)

Comment can be submitted to the Secretariat of the ASB at info@asb.co.za.