Proposed New Reporting Requirements for Non-exchange Revenue
Comments from ACCA
June 2006
Executive Summary
ACCA is pleased to have this opportunity to respond to the Exposure Draft (the ED), Revenue from Non-Exchange Transactions (Including Taxes and Transfers) from the International Public Sector Accounting Standards Board (IPSASB). These comments have been prepared in consultation with members of ACCA's Public Sector Network 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 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 and efficient 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, it being 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 taxpayer
- the tax authorities receive the tax return informing them of the taxpayer’s liability for capital gains tax
- the capital gains tax becomes due for payment
- the tax is paid.
2. The ED identifies the second point in the above list as the recognition point. In our view a government cannot be said to control an asset at that point because it does not have the necessary knowledge of the specific asset in question (the sum due from an individual taxpayer). It would be difficult for a government to measure the fair value of an asset or to ‘exclude or regulate the access of others to the benefits of an asset’ (paragraph 33, page 17) if it did not have specific knowledge of the particular asset’s existence.
3. We consider that 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 taxpayer and it is only after this event that the government could take the taxpayer to court for any non-payment of the tax due. This is consistent with the ED's general guidance on transfers, which states that an ‘entity obtains control of transferred resources either when the resources have been transferred to the entity, or the entity has an enforceable claim against the transferor’ (paragraph 80, page 26).
4. In addition, the IPSASB recognises that, in some cases at least, ‘the recognition criteria may not be satisfied until payment is received or receivable’ (paragraph 71, page 25). We believe that comparability would be increased if this position were adopted as the benchmark treatment.
5. In our view most users of the financial statements of governments will be interested in the transfer of assets from the taxpayer 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.
6. We are disappointed that the relevance to users of requiring tax to be accounted for from an earlier date has not been elaborated and the case set out more fully. The ED recognises ‘that there can be difficulties in reliably measuring certain taxation streams’ (paragraph BC20, page 60), but does not provide any of the reasons why the IPSASB rejected the approach of recognising taxation income when due.
PRACTICAL RECOGNITION
7. The ED specifies that, although taxation revenue should be recognised after the taxable event has occurred, 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
(b) the fair value or cost of the asset to the entity can be measured reliably. (paragraph 31, page 17)
8. The nature of taxation systems means that these criteria will not necessarily be met ‘until some time after the taxable event occurs’ (paragraph 71, page 25) and, as this paragraph indicates, this may in ‘exceptional circumstances’ be several years after the taxable event occurs.
9. We believe that the ED fails to consider how the significant challenges involved in recognising taxation income before the tax was received or receivable could be overcome. In many cases such income would have to be based on statistical estimates. This could affect the reliability of any information produced and would often require the development of additional specialist skills. Thus, we do not consider that the relative costs and benefits of developing financial reporting on this basis have been adequately assessed.
10. 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.
11. Finally, the encouragement of earlier recognition of taxation income by governments appears to conflict with the concept of prudence, which is recognised by the IPSASB as one of the qualitative characteristics of financial reporting.
Specific Matters for Comment
Below we have provided our responses to the proposals for which the IPSASB would particularly value comments.
(a) Exclude entity combinations that are non-exchange transactions from the scope of the Standard (see paragraph 2).
ACCA agrees with this proposal, while recognising that this issue should be subject to future consideration by the IPSASB.
(b) Include within the scope of the IPSAS compulsory contributions to social security schemes (e.g. health and disability insurance, aged pensions) which are in the nature of non-exchange transactions. In particular:
(i) Do you think that these compulsory contributions to social security schemes should be explicitly excluded from the scope?
(ii) Do you think that the ED gives enough guidance in respect of such compulsory contributions? If not, do you think the IPSAS should explicitly address these compulsory contributions and provide specific guidance to assist entities determine to what extent such contributions should be considered as exchange transactions? (See paragraph BC27)
ACCA agrees that compulsory contributions to social security schemes, which are in the nature of non-exchange transactions, should be within the scope of the IPSAS. We also consider that it would be helpful to provide specific guidance on the recognition of this type of income.
(c) Define terms as set out in paragraph 8. These definitions have been developed by the IPSASB for this IPSAS. Please identify any amendments to the definitions that you consider necessary.
ACCA does not consider that any specific amendments to the definitions set out in paragraph 8 of the ED are necessary.
(d) Distinguish exchange and non-exchange components of non-exchange transactions. Paragraphs 11 and 12 note that these transactions may comprise two components, one of which is an exchange transaction, each component of which is recognized separately.
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) Include guidance to clarify that restrictions do not give rise to the recognition of a liability on initial recognition of the transferred asset (paragraph 20). Do you agree that restrictions do not give rise to liabilities on initial recognition of the transferred asset?
ACCA agrees with this proposal.
(f) Require recognition of assets when resources are transferred or when the reporting entity has an enforceable claim to resources that are to be transferred (see paragraphs 33 – 34 and paragraph 80). The ED notes that before a claim to a resource is enforceable, the resource does not meet the definition of “control of an asset” because the recipient reporting entity cannot exclude or regulate the access of the transferor to the resource.
ACCA agrees with this proposal. We also consider that this principle should be applied to income from taxation. Thus, the benchmark treatment should be that taxation should be recognised from the date when it is due for payment.
(g) Measure assets acquired in a non-exchange transaction at their fair value on initial recognition and amend IPSAS 12, “Inventories”, IPSAS 16, “Investment Property” and IPSAS 17, “Property, Plant and Equipment” to be consistent with this requirement (see paragraphs 38 – 39 and the Appendix). IPSAS 12 currently requires inventory to be initially recognized at cost, and IPSASs 16 and 17 currently require that where assets are acquired for no cost or a nominal cost, their cost is their fair value as at the date of acquisition.
ACCA agrees with this proposal.
(h) Require that a liability be recognized in respect of an asset transferred subject to conditions upon initial recognition of the transferred asset (paragraph 50). When the condition has been satisfied the liability is reduced, or derecognized, and revenue recognized. Alternatively, do you consider that the IPSAS should only require the recognition of a liability when it is more likely than not that the condition will not be satisfied (see paragraph BC11)? In addition, are you of the view that the requirements relating to the recognition of a liability in respect of a condition applies equally to depreciable and non-depreciable assets?
ACCA considers that liabilities arising from conditions associated with transferred assets should only be recognised if it is probable that they will result in the outflow of resources and a reliable estimate can be made of this obligation. We consider that these requirements apply equally to depreciable and non-depreciable assets.
(i) Require liabilities related to inflows of resources to be measured according to the requirements of IPSAS 19, “Provisions, Contingent Liabilities and Contingent Assets” (paragraph 52).
ACCA agrees with this proposal.
(j) Require a non-exchange transaction that gives rise to the recognition of an asset to also give rise to the recognition of revenue to the extent that a liability is not recognized (paragraph 54). Are there any non-exchange transactions in which it would be appropriate to initially recognize the gross inflow of economic benefits or service potential represented by the asset as revenue even if a liability is also recognized, with the simultaneous recognition of an expense for the liability?
ACCA agrees with the proposal to require non-exchange transactions that give rise to the recognition of an asset to give rise also to the recognition of revenue to the extent that a liability is not recognised. We consider that the recognition should reflect the economic reality of a transaction, thus, if cash is provided for adopting a particular policy then the cash should be recognised as revenue. Where an asset is transferred on condition that it is appropriately maintained, then the overall economic effect of the transaction should be recognised.
(k) Require a reporting entity to recognize liabilities in respect of advance receipts related to taxes (see paragraph 67) and advance receipts related to transfers (see paragraph 105).
ACCA agrees with this proposal.
(l) Not permit the netting of expenses paid through the tax system (see paragraphs 72 – 76) against taxation revenue. Instead such expenses must be recognized separately on a gross basis. The ED distinguishes between expenses paid through the tax system and tax expenditures, and notes that tax expenditures are foregone revenue, not expenses.
ACCA agrees with this proposal.
(m) Permit recognition of services in-kind that satisfy the recognition requirements (see paragraphs 99 – 103) and require disclosure of the nature and type of services in-kind received, whether recognized or not (paragraph 107/108).
ACCA agrees with this proposal. Services in-kind should only be recognised if it is considered that the value of the information provided to the users of the financial statements will be greater than the cost of providing the information.
(n) Provide entities a five year period in which to conform their accounting policies in respect of taxation revenue to the requirements of this Standard. (See paragraphs 115 – 122). Do you believe that transitional provisions should be provided in respect of other non-exchange transactions?
ACCA agrees with both of these proposals.