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Comments from ACCA
September 2004

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to respond to the Invitation To Comment (the ITC), Revenue from Non-Exchange Transactions from IFAC's Public Sector Committee. These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Panel, a group of experienced accountants working in the public sector. They have also been considered by ACCA's Financial Reporting Committee.

ACCA believes that for taxation income (the most significant element of non-exchange revenue) the essential problem is to define the event which gives the government control of the taxable income. We consider that, on balance, it is only once the tax is due for payment that it can be considered to be controlled by the government and so be recognised as an asset.

ACCA believes that the recognition of taxation income as an asset from the point in time when it becomes due for payment would have the following advantages:

• it would be the more practical basis
  
• it would provide more relevant information
  
  and
  
• it would more closely correspond to current practice.

Detailed Comments

These comments are restricted to the consideration of accounting for taxation income by governments and other public-sector entities, the most significant aspect of non-exchange revenue.

THE TAXABLE EVENT

1. We consider that there are a variety of points in the taxation cycle which could be defined as being the event which gives rise to an asset. Thus, for example, for a tax levied on capital gains arising from share dealings, the taxable event could be defined as the point in time when:
   
   •  the shares appreciate in value and thus potentially give rise to a capital gains tax liability
   
   •  the shares are sold and the capital gain is realised by the tax payer
   
   •  the tax authorities receive the tax return informing them of the tax payers liability for capital gains tax
   
   •  the capital gains tax becomes due for payment
   
   •  the tax is paid
   
2. The ITC identifies the second point in the above list as the recognition point. In our view the government cannot be said to control the asset at that point because it does not have the necessary knowledge. We consider that, on balance, it is only after the tax is due for payment (the fourth bullet point above) that the asset can be considered to be controlled by the government. It is only after the due date that the tax becomes a legal liability for the tax payer and it is only after this event that the government could take the tax payer to court for any non-payment of the tax due.
   
3. In our view most users of the financial statements of governments will be interested in the transfer of assets from the tax-payer to the government and so in information on the resources which the government has received or which were receivable in the reporting period. Thus we believe that the event that gave rise to the tax assessment is less relevant, for financial reporting purposes, than the point in time at which the taxation becomes due for payment.
   
4. If an exposure draft is developed on the basis of these proposals then the relevance to users of requiring tax to be accounted from an earlier date should be elaborated and the case set out more fully.
   
   PRACTICAL RECOGNITION
   
5. The ITC indicates that, although taxation revenue should be recognised as early as possible, the following two recognition criteria must also be met:
   
   (a) it is probable that the future economic benefits or service potential associated with the asset will flow to the entity; and
    

•  the fair value or cost of the asset to the entity can be measured reliably . (paragraph 2.19)

6. The nature of taxation systems means that these criteria will not necessarily be met �until some considerable time after the taxable event occurs� (paragraph 3.16) and, as this paragraph indicates, this may in �exceptional circumstances� be several years after the taxable event occurs. The ITC fails to consider how tax accruals based on a date before the due date would be estimated and this could affect the reliability of any information produced and the problems of doing so. In other words the cost/benefit considerations of developing financial reporting on this basis.
   
7. The longer the time lapse, the more the financial statements will fail to reflect the economic reality of the government's finances, the less useful and reliable the information will be, and the more complex will be the production of the financial statements .
   
   ACCOUNTING FOR TAXATION BY OTHER STANDARD SETTERS
   
8. The ITC states that �there is no internationally agreed method of accounting for and reporting on revenue arising from non-exchange transactions� (paragraph 1.1). There are however, a number of national standard setters who have considered the problem of accounting for non-exchange transactions and have adopted different views from those outlined in the ITC. For example, in the US , the Federal Accounting Standards Advisory Board (FASAB) recommends that:
   
   Non-exchange revenue is recognized when a reporting entity establishes a specifically identifiable, legally enforceable claim to cash or other assets. It is recognized to the extent that the collection is probable (i.e., more likely than not) and the amount is measurable (i.e., reasonably estimable) . (FASAB, Statement of Federal Financial Accounting Standard No. 7 , 1996, paragraph 5)
   
9. Tax income is not legally enforceable until it is due for payment. Thus this approach will only recognise taxation income after the date on which it is due for payment has passed.
   
10. In the UK , the Inland Revenue also currently recognises taxation income in the year in which it is due for payment.
    
    CONSISTENCY WITH GFSM
    
11. The ITC makes reference to the Government Finance Statistics Manual (IMF 2001) in paragraphs 1.16 and 3.1, but does not acknowledge that its approach to accounting for taxation (the major component of non-exchange revenue) is very similar to that developed in the International Monetary Fund (IMF) manual. There are, however, major differences between financial accounting for governments (and their individual entities) and statistical reporting for economic purposes. Statistical reporting by governments feeds into the statistics for the whole national economy, thus it is necessary for tax flows to be recognised by private- sector entities which are paying the taxes and governments which are receiving the taxes in the same reporting period.
    
12. Financial accounting, however, serves a different purpose from statistical reporting. It is entity based and so the consistency between the recognition of a taxation liability by a tax-paying entity and the recognition by the government of that tax resource is not as important as it would be in the case of statistical reporting. A company may recognise a liability to pay taxes several years before these resources are due to be transferred to the government. In the government's accounts, the recognition of this taxation should reflect the economic reality of the transfer of resources. Thus we believe that taxes on corporate or personal income should be recognised when they are received or receivable, that is, from the date on which the taxes are due to be paid and the date from which the government can legally enforce its control.

Specific Matters for Comment

Below we have provided our responses to the specific issues on which the ITC requested comments.

(a) Do you agree with the �assets and liabilities� approach to the recognition of revenue from non-exchange transactions that has been proposed in this ITC? That is, do you agree that revenue should be recognized when a public-sector entity recognizes an increase in net assets/equity that does not arise from a contribution from owners?

We agree with this approach to the recognition of revenue from non-exchange transactions. We consider, however, that further consideration should be given to the identification of the past event which will give rise to the recognition of non-exchange revenue. In the case of taxation income, we consider that it would be more appropriate to identify this past event as the date on which the taxation income becomes due for payment.

 

(b) Do you agree that public sector entities should be permitted to designate a transfer to a wholly-owned controlled entit y as a contribution from owners as outlined in paragraph 2.7?

We agree in principle with this approach, but consider that the terminology used makes this less easy to understand than would otherwise be the case. In the public sector the distinction should, we believe, more appropriately be made between funds which are provided for revenue purposes and those which are of a capital nature.

(c) Do you believe there are circumstances in which �contributions from owners�, as defined, may be non-exchange transactions?

We consider that, in general, such transactions will be non-exchange transactions.

 

(d) The Steering Committee proposes that some components of non-exchange transactions be accounted for in the same manner as exchange transactions. Do you agree with this treatment?

We consider that, in most cases, payments which are made as part of a �non-exchange contract� are more in the nature of a tax than a payment in exchange for goods or services. Thus we do not consider that this aspect of the transaction should be treated as an exchange transaction. Rather the two aspects of the transaction (income and expenditure) should be accounted for as two separate non-exchange contracts.

 

(e) Do you agree with the Steering Committee view that some non-exchange transactions can consist of an exchange component and a non-exchange component?

As indicated above, we do not agree with this view of the Steering Committee.

(f) Do you agree with the Steering Committee view that the taxable event for property taxes is the passing of the date on which taxes are levied, or the period for which the tax is levied, if the tax is levied on a periodic basis? If you do not agree, what do you think the taxable event is?

As with accounting for taxation generally, we believe that the taxable event should be the date on which the tax becomes due for payment. In the case of property taxes, this may be very similar to the taxable event outlined in the ICT.

 

(g) Do you agree with the proposal that disclosures about the �tax gap� should be made in the notes to the general-purpose financial report when they can be reliably estimated? The Steering Committee has not made a formal statement that such disclosures should be made; however, the PSC would be interested to receive comments from respondents about whether it is possible to make reliable estimates of the tax gap. Where it is not possible to reliably estimate the tax gap, do you think disclosures about the nature of the tax gap should be made in general-purpose financial statements without including any numerical estimates of the amounts involved?

We consider that information on the tax gap should be provided in notes to the accounts to the extent that it can be reliably estimated. The tax gap information that would be relevant would depend on the recognition criteria for taxable revenue. We have suggested that taxes should be recognised when due for payment and if so, information on the extent of the gap between taxable events and the amount due for payment should be provided, together with the provision included for taxes which are due for payment, but which are not expected to be collectable.

(h) Do you agree with the Steering Committee view that �expenses paid through the tax system� should be recognized separately in the statement of financial performance and that tax revenue should be grossed up in respect of expenses paid through the tax system? If you do not agree with the Steering Committee view, do you agree with the minority view that taxation revenues should be reported net of expenses paid through the tax system to the extent that an individual taxpayer's tax bill is reduced to zero?

We agree with this view of the Steering Committee.

 

(i) Do you agree that, where physical assets are transferred to a reporting entity subject to conditions that they be consumed in the provision of goods and services, revenue should be recognized in respect of the transfer as the physical asset is consumed?

We consider that in most cases such assets should be recognised in the balance sheet as contributions from funders when received. Fixed assets, for example, should then be depreciated in the normal way (with a balancing item of revenue from the funding body being transferred from the balance sheet to the operating statement in each reporting period).

 

(j) Do you agree with the Steering Committee's conclusions regarding stipulations? That is, do you agree that:

(i) restrictions do not give rise to liabilities that should be recognized in the statement of financial position;

We agree with this position.

(ii) conditions give rise to liabilities that should be recognized in the statement of financial position; and

We agree with this position only to the extent that the resources are likely to be repaid. Otherwise such conditions may be recognised as a contingent liability unless its crystallisation would solely result from decisions taken by the entity itself.

(iii) time requirements give rise to deemed liabilities that should be recognized in the statement of financial position?

We agree with this position.

(k) Do you agree with the proposition in paragraph 4.38 that liabilities should be reduced and revenue recognized when the conditions have been satisfied? Alternatively, do you believe that entities should decrease liabilities and recognize revenue when it is probable that the conditions will be satisfied?

We consider that entities should decrease liabilities and recognize revenue when it is probable that the conditions will be satisfied.

 

(l) Do you agree with the Steering Committee view that voluntary services should not be recognized as assets and revenue in the general-purpose financial statements?

We agree with this position.

(m) Do you agree with the Steering Committee view that the PSC should develop one International Public Sector Accounting Standard (IPSAS) on revenue that includes both exchange and non-exchange transactions within its scope?

We consider that non-exchange revenue transactions have fundamentally different characteristics from exchange transactions. Thus we believe that a separate IPSAS should be developed for each of these two types of transaction.

 

(n) Do you believe that an IPSAS on revenue should require separate disclosure of revenue from exchange transactions and revenue from non-exchange transactions?

Given our views above, we consider that revenue from non-exchange transactions should be disclosed separately from revenue received from exchange transactions.

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