FINANCIAL REPORTING IN CENTRAL GOVERNMENT
Session 1: Central Government and Central Government Financial System of Ghana
Session 2: IPSAS 9 Revenue from Exchange Transaction; and IPSAS 23 Revenue from Non-Exchange Transaction
Session 3: Revenue and Expenditure recognition in the Public Sector
Session 4: The Consolidated Fund and Final Accounts for the Central Government
Session 5: Preparation of accounts for Ministries, Departments and Agencies.
Session 6: Worked examples on Central Government Final Accounts
One of the pillars of a good financial management system is financial reporting. Financial reporting enhances transparency and accountability when it comes to the use of financial resources in the central government.
The central government comprises the national government (the legislative, the executive and the judicial branches), and all other entities or institutions controlled by the government.
Unit Objectives On completion of this unit, you should be able to:
- Explain the central government financial system of Ghana.
- Outline some of the functions of the key finance officers and institutions of the Central government.
- Explain the various sources of government revenue and the main classes of government expenditure.
- Prepare consolidated financial statements for the central government
- Prepare financial statements for Ministries, Departments and Agencies.
CENTRAL GOVERNMENT AND CENTRAL GOVERNMENT FINANCIAL SYSTEM OF GHANA
Welcome to session one of unit three. Let us look at the central government financial systems in Ghana. Objectives at the end of this session, you should be able to: a. Explain the components of the Central Government Public Fund. b. Identify and explain the central government financial system of Ghana.
Now read on…
Central government means units of government that exercise authority over the economy of the country. The central government funds are mainly controlled and managed by the Ministry of Finance, Bank of Ghana, Controller and Accountant General, Auditor General, Internal Audit Service and the Public Account Committee under the Parliament.
These institutions form the major financial control institutions of the Central Government Financial System. For the purpose of our study, we will concentrate on the Ministry of Finance and the Controller and Accountant General since they play a significant role in the central government’s financial reporting by managing and controlling the public fund.
Public Fund Public fund is the fund into which all revenue raised and received by, for or on behalf of the Government, are paid into. It includes all revenue (tax and non-tax), grants, loans, bonds, debentures and any other securities received by, or on account of, or payable to, or deposited with the government or any ministry by any officer of government in his capacity as such or any person on behalf of the Government.
Article 175 of the 1992 Constitution provides that the public funds of Ghana shall consist of:
- Consolidated Fund,
- Contingency Fund,
- Other funds as may be established by or under the authority of Act of Parliament.
Consolidated Fund This fund has its existence from the 1992 Constitution (Article 175, 176 and 178). It is a general fund of government into which all receipts are paid into and out of which all withdrawals, except those that are charged on other funds, are made from in accordance with the Constitution.
Thus there shall be paid into the consolidated fund (Article 176):
- All revenues or other money raised or received for the purposes of, or on behalf of, the Government; and
- Any other amounts of money raised or received in trust for, or on behalf of, the Government
The revenues or other money that shall be paid into the consolidated fund do not include:
- revenues or other money that are directed by an Act of Parliament to be paid into some other fund established for specific purposes; and
- revenues retained by a government department that received them for the purposes of defraying the expense of that department.
Withdrawal (expenditure) from the consolidated fund There is a strict restriction on withdrawal from the consolidated fund. According to Article 178 of the 1992 Constitution, there are only two conditions for withdrawal from the consolidated fund.
- Where the withdrawal is made to meet expenditure that is charged on the fund by the constitution or by an act of parliament (statutory expenditure).
- Where the withdrawal of this money has been authorized (discretional expenses).
Means of authorizing a withdrawal from the consolidated fund
- By an Appropriation Act passed by parliament to approve budget estimates of government.
- By a supplementary estimate approved by resolution of Parliament passed for that purpose
- By a provisional appropriation or vote on the account which allows for spending prior to the approval of the budget, (under Article 179 & 180)
- By rules or regulation made by parliament in respect of trust monies paid into the consolidated fund, No money shall be withdrawn from any public fund, other than the consolidated fund and the contingency fund, unless the issue of those money has been authorized by or under the authority of an Act of Parliament.
This is a fund established to account for the urgent or unforeseen need for which no other provision exists to meet the need. The unforeseen circumstances may include social disorder, natural disaster and other similar events. Advances made from the fund should be replaced as soon as possible by presenting a supplementary estimate to parliament to that effect.
The contingency fund is resourced from the money voted by parliament for that purpose. For withdrawals to be made from this fund, the President must make a request through the public finance committee of parliament. 1.5 Other Public Funds The other funds established by or under an Act of Parliament include 1. District Assembly Common fund 2. Road Fund 3. Ghana Education Trust Fund 4. Venture Capital Trust Fund 5. Petroleum related Funds 6. Ghana Infrastructure Fund
District Assembly Common Fund (DACF)
It was established by the District Assembly Common Fund Act 1993, (Act 455) under Article 242. The purpose of this fund is to provide resources to support the developmental activities of the local government. It is a fund created to channel resources from the central government to the local governments for development. It is administered by the DACF Administrator appointed by the president.
Sources of money for the fund
- Quarterly transfer of a minimum of 5% of Total tax revenue into the fund
- Income from investment of the fund
- Donations and grants
Expenditure charged on the DACF
- Disbursement to MMDAs/MPs
- Disbursement to RCCs
- Administrative expenses
This fund is established by the Road Fund Act 1997, Act 536. The objective of this Fund is to finance routine, periodic maintenance and rehabilitation of public roads in the country and to assist the MMDAs in the performance of their functions relevant to public roads under any enactment.
Sources of money for the fund
- the proportion of government levy on petrol, diesel and refined fuel oil
- bridge, ferry and road tolls collected by the Authority;
- vehicle License and inspection fees;
- international transit fees, collected from foreign vehicles entering the country; and
- such monies as the Minister responsible for Finance may determine in consultation with the Minister of road and transport with the approval of Parliament Expenditure charged on the Road Fund
- routine and periodic maintenance of road and related facilities;
- upgrading and rehabilitation of roads;
- road safety activities;
- selected road safety projects; and
- other relevant matters as may be determined by the Board. 5.3 Ghana Education Trust Fund (GET Fund) This fund was established by Ghana Education Trust Fund Act, 2000 (Act 581) to provide finance to supplement the provision of education at all levels by the Government. It provides funds for the development and maintenance of essential academic facilities and infrastructure in public educational institutions.
Sources of money for the fund
- 5% of VAT transferred from the consolidated fund monthly
- money allocated by parliament iii. Donations, grants and gifts
- Income from investment
Expenditure charged on the GET Fund
- Educational infrastructure in public educational institutions
- Scholarships to students
- Student loans scheme
- Faculty development and research
- Allowances of the board members
- Other educational activities as approved by the minister of education. 5.4 Venture Capital Trust Fund (VCTF) It is established by the VCTF Act 2004, Act 680. The objective of the Trust Fund is to provide financial resources for the development and promotion of venture capital financing for Small and Medium Enterprises (SMEs) in some sectors of the economy as shall be specified from time to time
Sources of money for the fund
- the equivalent of twenty-five per cent of the proceeds of the National Reconstruction Levy with effect from the 2003 financial year (defunct);
- fees and other monies earned by the Fund in pursuance of its functions under this Act;
- Investment income from investment made by the Board;
- grants, donations, gifts, and other voluntary contributions to the Fund;
- other money or property that may in any manner become lawfully payable and vested in the Board for the Fund; and
- such other monies as the Minister with the approval of Parliament may determine.
Expenditure charged on VCTF
- the provision of credit and equity financing to eligible venture capital financing companies to support SMEs which qualify for equity and quasi equity financing;
- the provision of monies to support other activities and programs for the promotion of venture capital financing, as the Board may determine, in consultation with the Minister. 5.5 Petroleum Related Funds Under the Petroleum revenue management Act 2011 (Act 815) three funds are created: a) Petroleum Holding Fund: established to receive and disburse petroleum revenues due to the state b) Stabilization fund: established to cushion the impact of public expenditure capacity during the period of an unanticipated petroleum revenue shortfall.
- c) Heritage Fund: established to provide an endowment to support the development for the future generations when the petroleum resources have been depleted.
1.5.6 Ghana Infrastructure fund The objective of the fund is to mobilize and provide financial resources to manage, coordinate and invest in a diversified portfolio of infrastructure projects in Ghana for national development.
Self-Assessment Questions Exercise
- Differentiate between the Consolidated Fund and the Contingency Fund.
- According to Article 178 of the 1992 Constitution, state the two conditions for withdrawal from the consolidated fund.
3.List three sources of money for the District Assembly Common Fund.
- Explain three means of authorizing a withdrawal from the consolidated fund.
IPSAS 9 AND IPSAS 23
In this session, two International Public Sector Accounting Standards will be reviewed. The first one, IPSAS 9: Revenue from Exchange Transactions, prescribes the accounting treatment of revenue arising from exchange transactions and events. IPSAS 23: Revenue from Non-Exchange Transactions deals with issues that need to be considered in recognizing and measuring revenue from non-exchange transactions, including the identification of contributions from owners.
Objectives by the end of this session, you should be able to:
- a) explain the accounting treatment of revenue arising from exchange transactions and events
- b) recognize and measure revenue from non-exchange transactions.
Now you can read on…
IPSAS 9: Revenue from Exchange Transactions
– Objective and Scope The objective of this Standard is to prescribe the accounting treatment of revenue arising from exchange transactions and events. The main issue in accounting for revenue is determining when to recognize revenue. Revenue is recognized when it is probable that future economic benefits or service potential will flow to the entity, and these benefits can be measured reliably.
IPSAS 9 identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognized. 2.1.1 Scope
- a) An entity which prepares and presents financial statements under the accrual basis of accounting should apply this Standard in accounting for revenue arising from the following exchange transactions and events:
- The rendering of services;
- The sale of goods; and
iii. The use by others of entity assets yielding interest, royalties and dividends.
- b) This Standard applies to all public sector entities other than Government Business Enterprises.
- c) This Standard does not deal with revenue arising from non-exchange transactions.
- d) Public sector entities may derive revenues from the exchange or non-exchange transactions.
(An exchange transaction is one in which the entity receives assets or services, or has liabilities extinguished, and directly gives equal value to the other party in exchange.) Example of exchange transactions include the purchase or sale of goods and services; or the lease of property, plant and equipment at market rates
- e) Substance over form: in distinguishing between exchange and non-exchange revenues, substance rather than the form of the transaction should be considered.
- f) The rendering of services typically involves the performance by the entity of an agreed task over an agreed period of time. The services may be rendered within a single period, or over more than one period. Examples of services rendered by public sector entities for which revenue is typically received in an exchange may include the provision of housing, management of water facilities, management of toll roads and management of transfer payments.
- g) Goods includes goods produced by the entity for the purpose of sale, such as publications and goods purchased for resales such as merchandise or land and other property held for resale.
- h) The use of others of entity assets gives rise to revenue in the form of:
- interest – charges for the use of cash or cash equivalents, or amounts due to the entity;
- royalties – charges for the use of long-term assets of the entity, for example, patents, trademarks, copyrights and computer software; and
- dividends – distributions of surpluses to holders of equity investment in proportion to their holdings
This standard does not deal with revenues arising from:
- Lease agreements (IPSAS 13 Leases)
- Dividends or similar distributions arising from investments that are accounted for under the equity method (IPSAS 36, Investment in Associates and Joint Ventures)
- Gains from Sale of Property, Plant and Equipment (IPSAS 17, Property, Plant and Equipment) iv. Insurance Contracts
- Changes in the fair value of financial assets and financial liabilities or their disposal (IPSAS 29, Financial Instruments: Recognition and Measurement);
- Changes in the value of other current assets
- Agricultural activity (IPSAS 27 Agriculture)
- The extraction of mineral ores
Definitions The following terms are used in this standard
a)Exchange Transactions: These are transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (in the form of cash, goods, services or use of assets) to another entity in the exchange.
- b) Fair Value: It is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
- c) Non-Exchange transactions: These are transactions that do not exchange transactions.
- d) Revenue: Revenue includes only the gross inflows of economic benefits or service potential received and receivable by the entity on its own account.
Amounts collected as an agent of the government or another government organization or on behalf of other third parties, for example, the collection of telephone and electricity payments by the post office on behalf of entities providing such services, are not economic benefits or service potential which flow to the entity and do not result in increases in assets or decreases in liabilities. Therefore, they are excluded from revenue.
Similarly, in a custodial or agency relationship, the gross inflows of economic benefits or service potential include amounts collected on behalf of the principal and which do not result in increases in net assets/equity for the entity.
Measurement of Revenue should be measured at the fair value of the consideration received or receivable. The amount of revenue arising on a transaction is usually determined by agreement between the entity and the purchaser or user of the asset or service.
It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity.
When goods or services are exchanged or swapped for goods or services that are of a similar nature and value, the exchange is not regarded as a transaction that generates revenue. When goods are sold or series are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction that generates revenue.
Revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.
IPSAS 9 AND IPSAS 23
Identification of the Transaction The recognition criteria are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.
For example, when the price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed.
Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the effect cannot be understood without reference to the series of transactions as a whole.
For example, an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together
Rendering of Services When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction should be recognized by reference to the stage of completion of the transaction at the reporting date.
The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:
- a) The amount of revenue can be measured reliably;
- b) It is probable that the economic benefits or service potential associated with the transaction will flow to the entity;
- c) The stage of completion of the transaction at the reporting date can be measured reliably; and
- d) The costs incurred for the transaction and the costs to complete the transaction can be measured reliably Revenue is recognized only when it is probable that the economic benefits or service potential associated with the transaction will flow to the entity.
However, when an uncertainty arises about the collectability of an amount already included in revenue, the uncollectable amount, or the amount in respect of which recovery has ceased to be probable, is recognized as an expense, rather than as an adjustment of the amount of revenue originally recognized.
An entity is generally able to make reliable estimates after it has agreed to the following with the other parties to the transaction:
- a) Each party’s enforceable rights regarding the service to be provided and received by the parties;
- b) The consideration to be exchanged; and
- c) The manner and terms of the settlement.
When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue should be recognized only to the extent of the expenses recognized that are recoverable.
During the early stages of a transaction, it is often the case that the outcome of the transaction cannot be estimated reliably. Nevertheless, it may be probable that the entity will recover the transaction costs incurred.
Therefore, revenue is recognized only to the extent of costs incurred that are expected to be recoverable. As the outcome of the transaction cannot be estimated reliably, no surplus is recognized.
When the outcome of a transaction cannot be estimated reliably and it is not probable that the costs incurred will be recovered, revenue is not recognized and the costs incurred are recognized as an expense. When the uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, revenue is recognized.
Sale of goods Revenue from the sale of goods should be recognized when all the following conditions have been satisfied:
- a) The entity has transferred to the purchaser the significant risks and rewards of ownership of the goods;
- b) The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
- c) The amount of revenue can be measured reliably;
- d) It is probable that the economic benefits or service potential associated with the transaction will flow to the entity; and
- e) The costs incurred or to be incurred in respect of the transaction can be measured reliably.
In most cases, the transfer of the risks and rewards of ownership coincides with the transfer of the legal title or the passing of possession to the purchaser. This is the case for most sales. However, in certain other cases, the transfer of risks and rewards of ownership occurs at a different time from the transfer of legal title or the passing of possession.
If the entity retains significant risks of ownership, the transaction is not a sale and revenue is not recognized. An entity may retain a significant risk of ownership in a number of ways. Examples of situations in which the entity may retain the significant risks and rewards of ownership are:
- a) When the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions;
- b) When the receipt of the revenue from a particular sale is contingent on the derivation of revenue by the purchaser from its sale of the goods (for example,
where a government publishing operation distributes educational material to schools on a sale or return basis);
- c) When the goods are shipped subject to installation and the installation is a significant part of the contract which has not yet been completed by the entity; and
- d) When the purchaser has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return.
If an entity retains only an insignificant risk of ownership, the transaction is a sale and revenue is recognized. For example, a seller may retain the legal title to the goods solely to protect the collectability of the amount due. 2.2.4 Interest, Royalties and Dividends Revenue arising from the use by others of entity assets yielding interest, royalties and dividends should be recognized when:
- a) It is probable that the economic benefits or service potential associated with the transaction will flow to the entity; and
- b) The amount of revenue can be measured reliably. Revenue should be recognized using the following accounting treatments:
- a) Interest should be recognized on a time proportion basis that takes into account the effective yield on the asset;
- b) Royalties should be recognized as they are earned in accordance with the substance of the relevant agreement; and
- c) Dividends or their equivalents should be recognized when the shareholder’s or the entity’s right to receive payment is established. Disclosure an entity should disclose:
- a) The accounting policies adopted for the recognition of revenue including the methods adopted to determine the stage of completion of transactions involving the rendering of services;
- b) The amount of each significant category of revenue recognized during the period including revenue arising from:
- The rendering of services;
- The sale of goods;
- Royalties; and v. Dividends or their equivalents; and
- c) The amount of revenue arising from exchanges of goods or services included in each significant category of revenue
Recognition of Revenue Recognition of revenue under this standard is grouped into Rendering of services; Sale of goods; and Interest, Royalties and Dividends. 2.3.1 Rendering of Services
- a) Housing: Rental income from the provision of housing is recognized as the income is earned in accordance with the terms of the tenancy agreement.
- b) School transport: Revenue from fares charged to passengers for the provision of school transport is recognized as the transport is provided.
- c) Management of toll roads: Revenue from the management of toll roads is recognized as it is earned based on the usage of the roads.
- d) Processing of court cases: Revenue from the processing of court cases can be recognized either by reference to the stage of completion of the processing or based on the periods during which the courts are in session.
- e) Management of facilities, assets or services: Revenue from the management of facilities, assets or services is recognized over the term of the contract as the management services are provided.
- f) Science and technology research: Revenue received from clients from contracts for undertaking science and technology research is recognized by reference to the stage of completion on individual projects.
- g) Installation fees: Installation fees are recognized as revenue by reference to the stage of completion of the installation unless they are incidental to the sale of a product in which case they are recognized when the goods are sold.
- h) Servicing fees included in the price of the product: When the selling price of a product includes an identifiable amount for subsequent servicing (for example, after-sales support and product enhancement on the sale of software), that amount is deferred and recognized as revenue over the period during which the service is performed. The amount deferred is that which will cover the expected costs of the services under the agreement, together with a reasonable return on those services.
- i) Insurance agency commissions: Insurance agency commissions received or receivable which do not require the agent to render further service are recognized as revenue by the agent on the effective commencement or renewal dates of the related policies. However, when it is probable that the agent will be
required to render further services during the life of the policy, the commission, or part thereof, is deferred and recognized as revenue over the period during which the policy is in force.
- j) Financial service fees: The recognition of revenue for financial service fees depends on the purposes for which the fees are assessed and the basis of accounting for any associated financial instrument. The description of fees for financial services may not be indicative of the nature and substance of the services provided.
Therefore, it is necessary to distinguish between fees which are an integral part of the effective yield of a financial instrument, fees which are earned as services are provided, and fees which are earned on the execution of a significant act.
- k) Admission fees: Revenue from artistic performances, banquets and other special events are recognized when the event takes place. When a subscription to a number of events is sold, the fee is allocated to each event on a basis which reflects the extent to which services are performed at each event.
- l) Tuition fees: Revenue is recognized over the period of instruction.
- m) Initiation, entrance and membership fees: Revenue recognition depends on the nature of the services provided. If the fee permits only membership, and all other services or products are paid for separately, or if there is a separate annual subscription, the fee is recognized as revenue when no significant uncertainty as to its collectability exists.
If the fee entitles the member to services or publications to be provided during the membership period or to purchase goods or services at prices lower than those charged to non-members, it is recognized on a basis that reflects the timing, nature and value of the benefits provided.
- n) Franchise or concession fees: Franchise or concession fees may cover the supply of initial and subsequent services, equipment and other tangible assets, and know-how. Accordingly, franchise or concession fees are recognized as revenue on a basis that reflects the purpose for which the fees were charged.
- o) Fees from the development of customized software: Fees from the development of customized software are recognized as revenue by reference to the stage of completion of the development, including completion of services provided for post-delivery service support.
Sale of Goods a) “Bill and hold” sales, in which delivery is delayed at the purchaser’s request but the purchaser takes the title and accepts billing Revenue is recognized when the purchaser takes title, provided:
- It is probable that delivery will be made;
- The item is on hand, identified and ready for delivery to the purchaser at the time the sale is recognized;
- The Purchaser specifically acknowledges the deferred delivery instructions; and
- The usual payment terms apply.
Revenue is not recognized when there is simply an intention to acquire or manufacture the goods in time for delivery.
- b) Goods shipped subject to conditions:
- Installation and inspection: Revenue is normally recognized when the purchaser accepts delivery, and installation and inspection are complete. However, revenue is recognized immediately upon the purchaser’s acceptance of delivery when: a. The installation process is simple in nature or b. The inspection is performed only for purposes of the final determination of contract prices.
- On approval when the purchaser has negotiated a limited right of return: If there is uncertainty about the possibility of a return, revenue is recognized when the shipment has been formally accepted by the purchaser or the goods have been delivered and the time period for rejection has elapsed.
iii. Consignment sales under which the recipient (purchaser) undertakes to sell the goods on behalf of the shipper (seller): Revenue is recognized by the shipper when the goods are sold by the recipient to a third party.
- Cash on delivery sales: Revenue is recognized when delivery is made and cash is received by the seller or its agent.
- c) Layaway sales under which the goods are delivered only when the purchaser makes the final payment in a series of instalments: Revenue from such sales is recognized when the goods are delivered. However, when experience indicates that most such sales are consummated, revenue may be recognized when a significant deposit is received provided the goods are on hand, identified and ready for delivery to the purchaser.
- d) Orders when payment (or partial payment) is received in advance of delivery for goods not presently held in inventory, for example, the goods are still to be manufactured or will be delivered directly to the customer from a third party: Revenue is recognized when the goods are delivered to the purchaser.
- e) Sale and repurchase agreements (other than swap transactions) under which the seller concurrently agrees to repurchase the same goods at a later date, or when the seller has a call option to repurchase, or the purchaser has a put option to require the repurchase, by the seller, of the goods:
The terms of the agreement need to be analyzed to ascertain whether, in substance, the seller has transferred the risks and rewards of ownership to the purchaser and hence revenue is recognized. When the seller has retained the risks and rewards of ownership, even though the legal title has been transferred, the transaction is a financing arrangement and does not give rise to revenue.
- f) Sales to intermediate parties, such as distributors, dealers or others for resale: Revenue from such sales is generally recognized when the risks and rewards of ownership have passed. However, when the purchaser is acting, in substance, as an agent, the sale is treated as a consignment sale.
- g) Subscriptions to publications and similar items: When the items involved are of similar value in each time period, revenue is recognized on a straight-line basis over the period in which the items are dispatched. When the items vary in value from period to period, revenue is recognized on the basis of the sales value of the item dispatched in relation to the total estimated sales value of all items covered by the subscription.
- h) Instalment sales, under which the consideration is receivable in instalments: Revenue attributable to the sales price, exclusive of interest, is recognized at the date of sale. The sale price is the present value of the consideration, determined by discounting the instalments receivable at the imputed rate of interest. The interest element is recognized as revenue as it is earned, on a time proportion basis that takes into account the imputed rate of interest.
- i) Real estate sales: Revenue is normally recognized when legal title passes to the purchaser. However, in some jurisdictions, the equitable interest in a property may vest in the purchaser before legal title passes and therefore the risks and rewards of ownership have been transferred at that stage.
In such cases, provided that the seller has no further substantial acts to complete under the contract, it may be appropriate to recognize revenue. In either case, if the seller is obliged to perform any significant acts after the transfer of the equitable and/or legal title, revenue is recognized as the acts are performed.
An example is a building or other facility on which construction has not been completed.
Interest, Royalties and Dividends Fees and royalties paid for the use of an entity’s assets (such as trademarks, patents, software, music copyright, record masters and motion picture films) are normally recognized in accordance with the substance of the agreement.
As a practical matter, this may be on a straight-line basis over the life of the agreement, for example, when a licensee has the right to use certain technology for a specified period of time.
An assignment of rights for a fixed fee or non-refundable guarantee under a non-cancellable contract which permits the licensee to exploit those rights freely and the licensor has no remaining obligations to perform is, in substance, a sale.
An example is a licensing agreement for the use of software when the licensor has no obligations subsequent to delivery. Another example is the granting of rights to exhibit a motion picture film in markets where the licensor has no control over the distributor and expects to receive no further revenues from the box office receipts. In such cases, revenue is recognized at the time of sale.
Revenue from Non-Exchange Transactions (Taxes and Transfers) The objective of this Standard is to prescribe requirements for the financial reporting of revenue arising from non-exchange transactions, other than non-exchange transactions that give rise to an entity combination.
The Standard deals with issues that need to be considered in recognizing and measuring revenue from non-exchange transactions including the identification of contributions from owners.
Scope an entity which prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting for revenue from non-exchange transactions. This Standard does not apply to an entity combination that is a non-exchange transaction.
- a) Conditions on transferred assets: These are stipulations that specify that the future economic benefits or service potential embodied in the asset is required to be consumed by the recipient as specified or future economic benefits or service potential must be returned to the transferor.
- b) Control of an asset: Control of an asset arises when the entity can use or otherwise benefit from the asset in the pursuit of its objectives and can exclude or otherwise regulate the access of others to that benefit. Exchange transactions are
transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in the exchange.
- c) Expenses paid through the tax system: are amounts that are available to beneficiaries regardless of whether or not they pay taxes.
- d) Fines are economic benefits or service potential received or receivable by public sector entities, as determined by a court or other law enforcement body, as a consequence of the breach of laws or regulations.
- e) Non-exchange transactions are transactions that do not exchange transactions. In a non-exchange transaction, 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.
- f) Restrictions on transferred assets are stipulations that limit or direct the purposes for which a transferred asset may be used but do not specify that future economic benefits or service potential is required to be returned to the transferor if not deployed as specified.
- g) Stipulations on transferred assets are terms in-laws or regulation, or a binding arrangement, imposed upon the use of a transferred asset by entities external to the reporting entity.
- h) Tax expenditures are preferential provisions of the tax law that provide certain taxpayers with concessions that are not available to others.
- i) The taxable event is the event that the government, legislature or other authority has determined will be subject to taxation.
- j) Taxes are economic benefits or service potential compulsorily paid or payable to public sector entities, in accordance with laws and or regulations, established to provide revenue to the government. Taxes do not include fines or other penalties imposed for breaches of the law.
- k) Transfers are inflows of future economic benefits or service potential from no exchange transactions, other than taxes.
Non-Exchange Transactions in these transactions an entity will receive resources and provide no or nominal consideration directly in return. These are clearly non-exchange transactions.
For example, taxpayers pay taxes because the tax law mandates the payment of those taxes. Whilst the taxing government will provide a variety of public services to taxpayers, it does not do so in consideration for the payment of taxes.
There is a further group of non-exchange transactions where the entity may provide some consideration directly in return for the resources received, but that consideration does not approximate the fair value of the resources received.
In these cases, the entity determines whether there is a combination of exchange and non-exchange transactions, each component of which are cognized separately.
There are also additional transactions where it is not immediately clear whether they are exchange or non-exchange transactions. In these cases, an examination of the substance of the transaction will determine if they are exchange or non-exchange transactions.
For example, the sale of goods is normally classified as an exchange transaction. If, however, the transaction is conducted at a subsidized price, that is, a price that is not approximately equal to the fair value of the goods sold, that transaction falls within the definition of a non-exchange transaction.
In determining whether the substance of a transaction is that of a non-exchange or an exchange transaction, professional judgment is exercised. In addition, entities may receive trade discounts, quantity discounts, or other reductions in the quoted price of assets for a variety of reasons.
These reductions in price do not necessarily mean that the transaction is a non-exchange transaction
Revenue comprises gross inflows of economic benefits or service potential received and receivable by the reporting entity, which represents an increase in net assets/equity, other than increases relating to contributions from owners.
Amounts collected as an agent of the government or another government organization or other third parties will not give rise to an increase in net assets or revenue of the agent.
This is because the agent entity cannot control the use of, or otherwise benefit from, the collected assets in the pursuit of its objectives.
Where an entity incurs some cost in relation to revenue arising from a non-exchange transaction, the revenue is the gross inflow of future economic benefits or service potential, and any outflow of resources is recognized as a cost of the transaction.
For example, if a reporting entity is required to pay delivery and installation costs in relation to the transfer of an item of plant to it from another entity, those costs are recognized separately from revenue arising from the transfer of the item of plant. Delivery and
installation costs are included in the amount recognized as an asset, in accordance with IPSAS 17, “Property, Plant and Equipment.
Stipulations Assets may be transferred with the expectation and or understanding that they will be used in a particular way and, therefore, that the recipient entity will act or perform in a particular way.
Where laws, regulations or binding arrangements with external parties impose terms on the use of transferred assets by the recipient, these terms are stipulations as defined in this IPSAS. A key feature of stipulations, as defined in this Standard, is that an entity cannot impose a stipulation on itself, whether directly or through an entity that it controls.
Stipulations relating to a transferred asset may be either conditions or restrictions. While conditions and restrictions may require an entity to use or consume the future economic benefits or service potential embodied in an asset for a particular purpose (performance obligation)
on initial recognition, only conditions require that future economic benefits or service potential be returned to the transferor in the event that the stipulation is breached (return obligation). Stipulations are enforceable through legal or administrative processes.
If a term in laws or regulations or other binding arrangements is unenforceable, it is not a stipulation as defined by this Standard. Constructive obligations do not arise from stipulations. IPSAS 19, “Provisions, Contingent Liabilities and Contingent
Conditions on Transferred Assets Conditions on transferred assets (hereafter referred to as conditions) require that the entity either consume the future economic benefits or service potential of the asset as specified or return future economic benefits or service potential to the transferor in the event that the conditions are breached.
Therefore, the recipient incurs a present obligation to transfer future economic benefits or service potential to third parties when it initially gains control of an asset subject to a condition.
This is because the recipient is unable to avoid the outflow of resources as it is required to consume the future economic benefits or service potential embodied in the transferred asset in the delivery of particular goods or services to third parties or else to return to the transferor future economic benefits or service potential. Therefore, when a recipient initially recognizes an asset that is subject to a condition, the recipient also incurs a liability.
As an administrative convenience, a transferred asset, or other future economic benefits or service potential, maybe effectively returned by deducting the amount to be returned from other assets due to be transferred for other purposes. The reporting entity’s
financial statements will still recognize the gross amounts in its financial statements, that is, the entity will recognize a reduction in assets and liabilities for the return of the asset under the terms of the breached condition, and will reflect the recognition of assets, liabilities and or revenue for the new transfer.
Restrictions on Transferred Assets Restrictions on transferred assets (hereafter referred to as restrictions) do not include a requirement that the transferred asset or other future economic benefits or service potential is to be returned to the transferor if the asset is not deployed as specified.
Therefore, gaining control of an asset subject to a restriction does not impose on the recipient a present obligation to transfer future economic benefits or service potential to third parties when control of the asset is initially gained.
Where a recipient is in breach of a restriction, the transferor, or another party, may have the option of seeking a penalty against the recipient, by, for example, taking the matter to a court or other tribunal, or through an administrative process such as a directive from a government minister or other authority, or otherwise.
Such actions may result in the entity being directed to fulfil the restriction or face a civil or criminal penalty for defying the court, other tribunal or authority. Such a penalty is not incurred as a result of acquiring the asset but as a result of breaching the restriction.
Substance over Form
In determining whether a stipulation is a condition or a restriction it is necessary to consider the substance of the terms of the stipulation and not merely its form. The mere specification that, for example, a transferred asset is required to be consumed in providing goods and services to third parties or be returned to the transferor is, in itself, not sufficient to give rise to a liability when the entity gains control of the asset.
In determining whether a stipulation is a condition or restriction, the entity considers whether a requirement to return the asset or other future economic benefits or service potential is enforceable and would be enforced by the transferor.
If the transferor could not enforce a requirement to return the asset or other future economic benefits or service potential, the stipulation fails to meet the definition of a condition and will be considered a restriction.
If past experience with the transferor indicates that the transferor never enforces the requirement to return the transferred asset or other future economic benefits or service potential when breaches have occurred, then the receiving entity may conclude that the stipulation has the form but not the substance of a condition, and is, therefore, a restriction.
Taxes are the major source of revenue for many governments and other public sector entities. Taxes are defined as economic benefits compulsorily paid or payable to public sector entities, in accordance with laws or regulation, established to provide revenue to the government, excluding fines or other penalties imposed for breaches of laws or regulation.
Non-compulsory transfers to the government or public sector entities such as donations and the payment of fees are not taxes, although they may be the result of non-exchange transactions. A government levies taxation on individuals and other entities, known as taxpayers, within its jurisdiction by use of its sovereign powers.
Tax laws and regulations can vary significantly from jurisdiction to jurisdiction, but they have a number of common characteristics. Tax laws and regulations establish a government’s right to collect the tax, identify the basis on which the tax is calculated, and establish procedures to administer the tax, that is, procedures to calculate the tax receivable and ensure payment is received.
Tax laws and regulations often require taxpayers to file periodic returns to the government agency that administers a particular tax.
The taxpayer generally provides details and evidence of the level of activity subject to tax, and the amount of tax receivable by the government is calculated. Arrangements for receipt of taxes vary widely but are normally designed to ensure that the government receives payments on a regular basis without resorting to legal action.
Tax laws are usually rigorously enforced and often impose severe penalties on individuals or other entities breaching the law.
Advance receipts, being amounts received in advance of the taxable event, may also arise in respect of taxes.
Initial Analysis of the Inflow of Resources from Non-Exchange Transactions An entity will recognize an asset arising from a non-exchange transaction when it gains control of resources that meet the definition of an asset and satisfy the recognition criteria.
In certain circumstances, such as when a creditor forgives a liability, a decrease in the carrying amount of a previously recognized liability may arise.
In these cases, instead of recognizing an asset, the entity decreases the carrying amount of the liability. In some cases, gaining control of the asset may also carry with its obligations that the entity will recognize as a liability.
Contributions from owners do not give rise to revenue, so each type of transaction is analyzed and any contributions from owners are accounted for separately. Consistent with the approach set out in this
Standard, entities will analyze non-exchange transactions to determine which elements of general-purpose financial statements will be recognized as a result of the transactions.
Recognition of Assets are defined in IPSAS 1, “Presentation of Financial Statements” as resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity.
An inflow of resources from a non-exchange transaction, other than services in kind, that meets the definition of an asset shall be recognized as an asset when, and only when: a) It is probable that the future economic benefits or service potential associated with the asset will flow to the entity, and b) The fair value of the asset can be measured reliably.
Control of an Asset The ability to exclude or regulate the access of others to the benefits of an asset is an essential element of control that distinguishes an entity’s assets from those public goods that all entities have access to and benefit from.
In the public sector, governments exercise a regulatory role over certain activities, for example, financial institutions or pension funds.
This regulatory role does not necessarily mean that such regulated items meet the definition of an asset of the government, or satisfy the criteria for recognition as an asset in the general purpose financial statements of the government that regulates those assets.
An announcement of an intention to transfer resources to a public sector entity is not of itself sufficient to identify resources as controlled by a recipient.
For example, if a public school was destroyed by a forest fire and a government announced its intention to transfer funds to rebuild the school; the school would not recognize an inflow of resources (resources receivable) at the time of the announcement.
In circumstances where a transfer agreement is required before resources can be transferred, a recipient entity will not identify resources as controlled until such time as the agreement is binding because the receiving entity cannot exclude or regulate the access of the transferor to the resources.
In many instances, the entity will need to establish the enforceability of its control of resources before it can recognize an asset.
If an entity does not have an enforceable claim to resources, it cannot exclude or regulate the transferor’s access to those resources
Past Event Public sector entities normally obtain assets from governments, other entities including taxpayers, or by purchasing or producing them. Therefore, the past event which gives rise to control of an asset may be a purchase, a taxable event, or a transfer. Transactions or events expected to occur in the future do not in themselves give rise to assets – hence, for example, an intention to levy taxation is not a past event that gives rise to an asset in the form of a claim against a taxpayer
Probable Inflow of Resources an inflow of resources is “probable” when the inflow is more likely than not to occur. The entity bases this determination on its past experience with similar types of flows of resources and its expectations regarding the taxpayer or transferor.
For example, where a government agrees to transfer funds to a public sector entity (reporting entity), the agreement is binding and the government has a history of transferring agreed resources, it is probable that the inflow will occur, notwithstanding that the funds have not been transferred at the reporting date.
Contingent Assets an item that possesses the essential characteristics of an asset, but fails to satisfy the criteria for recognition may warrant disclosure in the notes as a contingent asset.
Exchange and Non-Exchange Components of a Transaction
Where an asset is acquired by means of a transaction that has an exchange component and a non-exchange component, the entity recognizes the exchange component according to the principles and requirements of other IPSASs.
The non-exchange component is recognized according to the principles and requirements of this Standard.
In determining whether a transaction has an identifiable exchange and non-exchange components, professional judgment is exercised. Where it is not possible to distinguish separate exchange and non-exchange components, the transaction is treated as a non-exchange transaction.
Recognition and Measurement of Revenue from Non-Exchange
Transactions an inflow of resources from a non-exchange transaction recognized as an asset shall be recognized as revenue, except to the extent that a liability is also recognized in respect of the same inflow.
As an entity satisfies a present obligation recognized as a liability in respect of an inflow of resources from a non-exchange transaction recognized as an asset, it shall reduce the carrying amount of the liability recognized and recognize an amount of revenue equal to that reduction.
Revenue from non-exchange transactions shall be measured at the amount of the increase in net assets recognized by the entity.
A present obligation arising from a non-exchange transaction that meets the definition of liability shall be recognized as a liability when and only when:
- a) It is probable that an outflow of resources embodying future economic benefits or service potential will be required to settle the obligation; and
- b) A reliable estimate can be made of the amount of the obligation. 4.13 Present Obligation A present obligation is a duty to act or perform in a certain way and may give rise to a liability in respect of any non-exchange transaction. Present obligations may be imposed by stipulations in laws or regulations or binding arrangements establishing the basis of transfers. They may also arise from the normal operating environment, such as the recognition of advance receipts.
In many instances, taxes are levied and assets are transferred to public sector entities in non-exchange transactions pursuant to laws, regulation or other binding arrangements that impose stipulations that they are used for particular purposes.
Measurement of Liabilities on Initial Recognition
The amount recognized as a liability shall be the best estimate of the amount required to settle the present obligation at the reporting date. The estimate takes account of the risks and uncertainties that surround the events causing the liability to be recognized.
Where the time value of money is material, the liability will be measured at the present value of the amount expected to be required to settle the obligation.
Self-Assessment Questions Exercise
- State the main sources of government revenue.
- Explain the differences between revenue and receipts in the public sector.
- Explain the recognition of revenue from Non-exchange transactions.
- Write short notes on the following according to IPSAS 9 and 23:
- Exchange transactions
- Non-exchange transactions
- Substance over form
- Discuss the initial Analysis of the Inflow of Resources from Non-Exchange Transactions