Prepared by:
Public Sector Accounting Board
August 2013
Comments are requested by February 3, 2014
PSAB
Statement of Principles
Revenue
Commenting on this Statement of Principles
This Statement of Principles reflects proposals made by the Public Sector Accounting Board
(PSAB). It presents key principles that the Board expects to include in a future exposure
draft.
Individuals, governments and organizations are invited to send written comments on this
Statement of Principles.
Comments are most helpful if they are related to a specific principle, paragraph or group of
paragraphs. Any comments that express disagreement with the proposals in the Statement of
Principles should clearly explain the problem and include a suggested alternative, supported
by specific reasoning. All comments received will be available on the website shortly after
the comment deadline, unless confidentiality is requested. The request for confidentiality
must be stated explicitly within the response.
For your convenience, a PDF response form has been posted with this document. You
can save the form both during and after completion for future reference. You are not
restricted by the size of the interactive comment fields in the response form and there is
also a general comments section.
Alternatively, you may send written comments by email in Word format to:
[email protected]
To be considered, comments must be received by February 3, 2014, addressed to:
Tim Beauchamp, Director
Public Sector Accounting
Chartered Professional Accountants of Canada
277 Wellington Street West
Toronto, Ontario M5V 3H2
Highlights
The Public Sector Accounting Board (PSAB) proposes, subject to comments received on
this Statement of Principles and following its due process, to expose a new Section on
revenue. The Section would apply to public sector entities that base their accounting
policies on the CICA Public Sector Accounting (PSA) Handbook.
PSAB’s Conceptual Framework project may have implications on the proposals in this
Statement of Principles to the extent that a change in the revenues definition is proposed.
Implications of the Conceptual Framework project, if any, will be addressed as they
arise.
Main features
The main features of the proposals in this Statement of Principles are as follows:
•
The focus is on two main areas of revenue:
— exchange transactions; and
— unilateral (non-exchange) transactions.
•
The presence of performance obligations for the public sector entity receiving the
revenue is the distinguishing feature of an exchange transaction.
•
Performance obligations are enforceable promises to provide goods or services.
•
An exchange transaction is evaluated to identify which goods or services are
distinct and accounted for as a separate performance obligation.
•
Revenue from an exchange transaction is recognized as the public sector entity
satisfies a performance obligation.
•
Unilateral revenues are recognized when there is the authority and a past event
that gives rise to a claim of economic resources.
•
When applying PSAB’s general recognition criteria, revenue is not reduced when
collectibility (associated with credit risk) is uncertain.
Other proposals
This Statement of Principles includes proposals on issues that affect when revenue is
recognized, how it is measured, as well as its presentation and disclosure.
Comments requested
PSAB welcomes comments from individuals, governments and organizations on all
aspects of the Statement of Principles.
When comments have been prepared as a result of a consultative process within an
organization, it is helpful to identify generically the source of the comment in the
response. This will promote understanding of how the proposals are affecting various
aspects of an organization.
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|i
Comments are most helpful if they relate to a specific principle, paragraph or group of
paragraphs. Any comments that express disagreement with the proposals in the
Statement of Principles should clearly explain the problem and include a suggested
alternative, supported by specific reasoning, for alternative wording.
Supporting reasons for your comments are most valuable when they demonstrate how
the Statement of Principles proposals, or your alternatives:
•
produce more relevant information for accountability and decision-making by
external users;
•
improve the representation of the substance of the underlying transaction or
event;
•
contribute to improved measures and understanding of financial position and
annual results;
•
facilitate enhanced comparability; and
•
provide sufficient information for external users to understand the financial
statements.
Please respond to the following questions:
1.
Are there other implications of the proposals that should be considered? If so,
please provide a detailed explanation.
2.
Do you agree the identification of performance obligations is useful in
distinguishing revenues associated with an exchange of goods or services from
revenues such as fines, penalties and taxes that are unilateral by nature? If not,
propose an alternative approach. If you believe specific revenues (within the
scope of these proposals) would be difficult to classify, or they combine
characteristics of exchange and unilateral revenues, identify them and provide
background information.
3.
Do you agree public sector entities should recognize revenue even though
collectibility is uncertain? If you disagree, explain why users should not receive
this information. (See paragraphs .044-.053 and paragraphs .122-.123.)
4.
Do you agree with proposed Principle 1 that public sector entities should identify
which goods or services are distinct and, hence, should be accounted for as a
separate performance obligation? If not, what principle would you recommend,
and why?
5.
Do you agree with proposed Principle 2 that public sector entities should
recognize revenue as performance obligations are satisfied by transfer of control
of goods or services? If not, what principle would you recommend, and why?
6.
If a decision is the only performance obligation associated with a licence, do you
agree the fee is recognized at a point in time and not over the term of the licence?
If you disagree, explain your view in terms of continuing performance
obligations of the public sector entity and on what basis revenue recognition is
proposed. (See paragraphs .083-.091.)
ii | STATEMENT OF PRINCIPLES – AUGUST 2013
7.
Public sector entities issue other licences granting benefits to other parties. At
the end of the licence term, the benefits revert to the Crown. One view is that the
performance obligation has been met when the licence is granted as it is the
licence holder who determines when and how to use the benefit. No further
performance is required of the public sector entity. Alternatively, some assert
that a transfer of control over the associated benefit occurs over time, as the
public sector entity has an ongoing performance obligation to provide access.
Indicate the view you support and explain why. If your view would change if the
right granted to the licence holder was not exclusive, explain why.
8.
Do you agree with the proposed approach indicating how the requirements would
apply to specific issues as outlined in paragraphs .092-.107? If not, explain why
not. Explain any specific issues requiring guidance.
9.
Do you agree with the distinction between refund liabilities and unearned
revenues? If not, explain why not. (See paragraphs .052 and .108-.109.)
10.
Do you agree with proposed Principle 3 that public sector entities should
recognize unilateral revenues when there is authority to claim economic
resources from other parties and a past event that gives rise to a claim of
economic resources? If not, what principle would you recommend, and why?
11.
A table following paragraph .114 illustrates revenue recognition events
associated fines and penalties. Do you agree? If not, why not. Are there other
situations requiring guidance?
12.
When consideration is variable, the proposals outline two methods that would be
available to public sector entity. Do you agree? If not, comment on guidance
needed to measure consideration that is variable in amount. (See paragraphs
.131-.138.)
13.
Do you agree with proposed Principle 4 to link recognition of the portion of the
transaction price allocated to the performance obligation satisfied? If so, express
a view on methods proposed to allocate the transaction price. (See paragraph
.141.) If another approach should apply, comment on sources of revenue
requiring such guidance and propose one or more approaches.
14.
Is the measurement of revenue associated with transactions evidencing multiple
performance obligations a significant reporting issue for your organization, as it
is for profit-oriented entities?
15.
Do you agree that public sector entities should not be required to identify and
recognize onerous performance obligations? If not, comment on the scope and
measurement guidance needed.
16.
Do you agree contract costs should be expensed unless they give rise to a
tangible capital asset or inventories? If not, why not.
17.
Do you agree with the proposed principle applying to presentation and financial
statement disclosure requirements? If not, why not.
18.
Are there additional matters that need to be considered?
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Revenue
TABLE OF CONTENTS
PARAGRAPH
Purpose and scope ...............................................................................
The need for a standard .......................................................................
Effect analysis ........................................................................................
Applying the definition of revenues .................................................
Revenue categories ...............................................................................
Revenues from exchange transactions ............................................
Unilateral revenues .........................................................................
Approaches taken by other standard setters..........................................
Overview of reporting issues .............................................................
Recognition .............................................................................................
Revenues from exchange transactions ..................................................
Identifying performance obligations...............................................
Determining when revenue is recognized.......................................
Ancillary issues associated with revenues from exchange transactions
Performance obligations satisfied at a point in time .......................
Performance obligations satisfied over time...................................
Measuring progress towards complete satisfaction of a
performance obligation ...................................................................
Combining contracts .......................................................................
Modifications ..................................................................................
Repurchase agreements and put options .........................................
Unearned revenues..........................................................................
Unilateral revenues ...............................................................................
Determining when revenue is recognized.......................................
Measurement...........................................................................................
Common issues .....................................................................................
Collectibility ...................................................................................
Time value of money ......................................................................
Non-cash consideration ..................................................................
Revenues from exchange transactions ..................................................
Consideration that is variable in amount ........................................
Allocating the consideration to performance obligations ...............
Changes in the transaction price .....................................................
Onerous performance obligations ...................................................
Contract costs..................................................................................
Presentation and disclosure ...............................................................
Appendix — Decision tree
1 | STATEMENT OF PRINCIPLES – AUGUST 2013
.001-.005
.006-.008
.009-.014
.015-.042
.019-.032
.022-.026
.027-.032
.033-.042
.043
.044-.118
.054-.083
.064-.078
.079-.083
.083-.109
.083-.088
.089-.091
.092-.094
.095-.097
.098-.103
.104-.107
.108-.109
.110-.118
.111-.118
.119-.159
.121-.129
.122-.123
.124-.126
.127-.129
.130-.159
.131-.138
.139-.145
.146
.147-.155
.156-.159
.160-.167
PURPOSE AND SCOPE
.001
This Statement of Principles presents key principles that the Public Sector
Accounting Board (PSAB) expects to include in its future exposure draft on this
topic. Obtaining and deliberating comments on these principles and definitions
will complete the initial phase of due process of the project to issue a new
accounting standard addressing the recognition, measurement, presentation and
disclosure of revenues. It is intended that public sector entities using the CICA
Public Sector Accounting (PSA) Handbook to prepare their general purpose
financial statements will apply the final standard. A transition date will be
proposed when the exposure draft is issued for comment. This occurs at a future
stage in the project.
.002
Revenues are defined in FINANCIAL STATEMENT CONCEPTS, Section PS
1000, as:
Revenues, including gains, are increases in economic resources, either by
way of increases of assets or decreases of liabilities, resulting from the
operations, transactions and events of the accounting period.
.003
Unlike entities applying accounting standards for profit-oriented entities
(including government business enterprises), a contract may not underlie many
revenues of public sector entities applying the PSA Handbook. In the case of a
public sector entity, revenues can arise from non-exchange transactions that are
constitutional or legislative in their origins, such as the right to collect taxes, or
impose a fine or penalty. Within this Statement of Principles, these sources are
described as unilateral revenues to distinguish them from revenues that arise
from exchange transactions and transfers or contributions.
.004
This Statement of Principles proposes a framework that would apply to many
forms of revenues reported on by public sector entities. PSAB believes the
framework and principles outlined are generally compatible with the following
detailed standards in the PSA Handbook. As such, PSAB does not propose to
amend requirements that apply to:
(a) inflows that are subject to external restrictions and the timing of their
subsequent recognition in revenue, addressed in RESTRICTED ASSETS
AND REVENUES, Section PS 3100;
(b) revenues within the scope of GOVERNMENT TRANSFERS, Section PS
3410; and
(c) interest, dividends, and gains accounted for in accordance with FINANCIAL
INSTRUMENTS, Section PS 3450; and
(d) revenues within the scope of TAX REVENUE, Section PS 3510.
.005
The scope of this project does not include developing detailed guidance to
address:
(a) the reporting of contributions, a topic being reviewed by the Joint Not-forProfit Task Force; and
(b) the reporting of appropriations.
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THE NEED FOR A STANDARD
.006
Public sector entities are the recipients of many types of revenue. Some revenues
received are unique, owing to the powers of governments. At present, those
applying the PSA Handbook frequently need to consult other sources of
generally accepted accounting principles (GAAP) when establishing policies in
the absence of an overarching standard addressing the reporting of revenue.
These other sources of GAAP may not have been developed with public sector
entities in mind. As there is a likelihood that diversity in practice exists, issuing
a standard would serve to diminish this.
.007
PSAB believes a framework, supported by a series of principles, is preferable to
developing a series of detailed standards to address each of the various types of
revenue public sector entities account for. As well, use of a single framework
aligns with current standard-setting activities of the International Accounting
Standards Board (IASB) that are expected to result in changes to reporting
requirements for other publicly accountable entities in Canada, including
government business enterprises.
.008
PSAB anticipates a single framework for the reporting of revenues will enhance
the relevance, reliability and comparability of information reported in financial
statements. These fundamental qualitative characteristics are described in
FINANCIAL STATEMENT CONCEPTS, Section PS 1000. This would enhance the
usefulness of the measures of net debt, accumulated surplus or deficit and
operating surplus or deficit.
EFFECT ANALYSIS
.009
The proposed guidance addresses revenue recognition. The proposals clarify that
amounts that otherwise meet PSAB’s general recognition criteria are not
excluded from initial recognition due to concerns about collectibility. This may
result in public sector entities reassessing their application of the initial
recognition criteria.
.010
For exchange transactions, revenue is recognized when a performance obligation
is satisfied. A performance obligation is an enforceable promise to provide a
good or service. Performance obligations are found in contracts and in the terms
of service a public sector entity may set, based on applicable regulations or
legislation. Guidance is provided to address situations where multiple
performance obligations are evident and when performance occurs over time.
.011
When there is no direct exchange of a good or service for consideration, the
proposed recognition criteria is equivalent to requirements in TAX REVENUE,
Section PS 3510. As the proposals are broader in scope than Section PS 3510,
public sector entities may need to reassess their accounting policies that apply to
fines and penalties. Policies that apply to the recognition of fees that do not give
rise to a performance obligation may also be affected.
3 | STATEMENT OF PRINCIPLES – AUGUST 2013
.012
Measurement of revenue may be affected when:
(a) recording revenues where collectibility is a concern;
(b) it is anticipated that significant time will pass between the date revenue is
recorded and its collection; and
(c) non-cash consideration is expected.
.013
Other reporting issues associated with the measurement of revenues arising from
exchange transactions are discussed and may require consideration.
.014
Disclosure requirements are proposed for revenues and associated cash flows.
These proposals may affect the information public sector entities disclose about
the nature, amount, timing and uncertainty associated with revenues.
APPLYING THE DEFINITION OF REVENUES
.015
The accrual basis of accounting is used to prepare financial statements in
accordance with the PSA Handbook. 1 Consequently, the reporting of revenue on
a cash basis is not among the alternative approaches advanced here. The cash
basis may be a pragmatic alternative when amounts are clearly insignificant. PSA
Standards are not intended to apply to immaterial or insignificant items or
matters.
.016
Revenues arise from increases in economic resources that result from the
operations, transactions and events of the accounting period. Each financial
statement element (assets, liabilities, revenues and expenses) has a role in
supporting the information needs of readers.
.017
Accrual accounting standards seek to distinguish inflows that give rise to an
increase in economic resources from those that do not. Not all inflows give rise
to an increase in both economic resources and net economic resources. Debt
issuance increases economic resources but not net economic resources.
.018
Similarly, when an inflow is associated with a future performance obligation
(such as a deposit for services to be provided at a future date), there is no
increase in net economic resources associated with the transaction. This is
consistent with TAX REVENUE, paragraph PS 3510.21, as taxes received in
advance are recognized as an asset and a related liability.
Revenue categories
.019
1
This proposal aims to align recognition and measurement principles based on the
public sector entity’s right to the revenue. Inflows may arise from an exchange,
an imposed fee or tax, or a contribution. In the case of an exchange transaction,
obligations will arise for the public sector entity. Alternatively, when revenue
FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.59.
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arises from the right to tax, the public sector entity will have a unilateral right to
the resources.
.020
Contributions may be in the form of donations or grants. The common trait is
that the economic resource is given at the discretion of a contributor who may
attach stipulations to the donation, or require the donated amount to be
maintained permanently (as is the case with an endowment).
.021
There are two main categories of revenues that are the focus of these proposals,
as illustrated in the table below. To determine which standards will apply to
specific categories of transactions, consult the decision tree in the Appendix.
Category
Examples
Unilateral
(Non-exchange)
Taxes
Fines, penalties
Logging and mineral rights
Fees that do not give rise to performance
obligations
Exchange
Sale of services
Fees and user charges giving rise to performance
obligations
A licence to use intangible assets/intellectual
property
Sale of goods or property (other than financial
instruments)
Interest, dividends, gains and losses when
derecognizing financial instruments
Inflows subject to an external restriction
Government transfers
Contributions, other than appropriations and government transfers
Present or Proposed Primary
Source of GAAP
TAX REVENUE, Section PS 3510
Scope of these
proposals
FINANCIAL INSTRUMENTS,
Section PS 3450
RESTRICTED ASSETS AND
REVENUES, Section PS 3100
GOVERNMENT TRANSFERS,
Section PS 3410
Under development
Revenues from exchange transactions
.022
Exchange transactions create performance obligations arising directly from a
payment or promise of consideration by a payor. In exchange for the fee charged,
the payor has a valid expectation of receiving a good or service. Identifying
performance obligations is a key factor in determining when to recognize
revenues from exchange transactions. Both profit-oriented entities and public
sector entities report revenues arising from exchange transactions.
.023
In the absence of a specific detailed PSA Handbook standard, many public sector
entities have based their reporting policies for exchange transactions on those
applied by profit-oriented entities.
.024
Recently, the IASB, in collaboration with the U.S. Financial Accounting
Standards Board, has been working on a new comprehensive standard on
revenues. Where possible, unless specific public sector reporting issues have
been identified, definitions and principles in this Statement of Principles conform
5 | STATEMENT OF PRINCIPLES – AUGUST 2013
to those being proposed by the IASB in its second Exposure Draft, “Revenue
from Contracts with Customers,” published in November 2011.
.025
The IASB proposals address financial reporting issues associated with
contractually based revenues. In the public sector, the nature of the relationship
between the payor and the public sector entity may be different from the
customer relationships associated with profit-oriented businesses. A public sector
entity may be the sole provider of the service and it may have the authority to set
the terms of service.
.026
When performance obligations are identified, it is proposed that any associated
consideration would be reported as an exchange transaction. The performance
obligation may be as simple as a decision in the case of an application to obtain a
right the public sector entity administers. In many cases, a contract may not be
evident; the established terms of service may constitute the only agreement
between the payor and the public sector entity.
Proposed definitions:
Performance obligations are enforceable promises to provide goods or services to
a payor as a result of exchange transactions.
Exchange transactions are transactions where goods or services are provided for
consideration. These transactions create performance obligations for a public
sector entity arising directly from a payment or promise of consideration by a
payor.
A contract is an agreement between two or more parties that creates enforceable
rights and obligations.
A payor is a party that has entered into an exchange transaction that creates
performance obligations for the public sector entity.
Unilateral revenues
.027
Unilateral revenues are unique to the public sector. Governments are unique as
they have the authority to enact legislation. Legislation derived from
constitutional authority, or delegated constitutional authority, underpins
unilateral revenues.
.028
Unlike exchange transactions, unilateral revenues do not necessarily entitle a
resource provider to any specific public service or benefit. The public sector
entity’s right to the revenue is attributable to direct or devolved constitutional
powers that allow unilateral revenue to be imposed.
.029
The distinction between revenues that derive from the unilateral rights held by
governments and those associated with exchange transactions is an important one
as the revenue recognition approaches being proposed differ. When assessing
when revenue should be recognized, accountants generally look for a past event.
REVENUE
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In the case of revenue associated with an exchange, providing goods or
performing a service (i.e., satisfying the performance obligations defined by the
parties) is often the past event.
.030
On the other hand, as performance obligations are not associated with unilateral
revenues, revenue recognition cannot be tied to the satisfaction of performance
obligations. In the case of unilateral revenues, it is the occurrence of a past event
together with the authority to the revenue that gives the public sector entity the
right to the amount.
.031
This classification model requires evaluation of facts and circumstances
associated with the underlying revenues. In some cases, the use of judgment will
be necessary. For example, the Crown (in this case, the provinces) has a right to
revenues associated with natural resources. However, revenues associated with
natural resources arise from various types of activities, some of which may be
exchange transactions, and others may give rise to unilateral revenues. Activities
include issuing permits to prospectors and the registration of claims. Legislation
also requires payments based on the extraction and processing of natural
resources. PSAB’s aim is to put in place an overarching framework that will be
useful when analyzing and accounting for a wide variety of the types of revenues
that exist in the public sector.
.032
Additionally, FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.58,
specifically excludes the recognition of intangibles as assets, including those that
have been purchased, developed or constructed, or inherited in right of the
Crown. Purchased software is the sole exception. However, this exclusion does
not imply that intangibles are not assets. Standards need to address how revenues
that derive from intangibles controlled by a public sector entity should be
accounted for.
Proposed definition:
Unilateral revenues increase the economic resources of a public sector entity
without a direct transfer of economic resources to the payor. The right to the
economic resources is attributable to legislation grounded on a constitutional
authority, or delegated constitutional authority, and an event entitling the public
sector entity to recognize revenue.
Approaches taken by other standard setters
.033
In preparing these proposals, PSAB considered approaches taken by other
standard setters. In addition to the IASB described earlier, PSAB also considered
standards issued by the International Public Sector Accounting Standards Board
(IPSASB), and the Governmental Accounting Standards Board (GASB). When
useful, various aspects are referenced in relation to the reporting issues facing
public sector entities in Canada.
7 | STATEMENT OF PRINCIPLES – AUGUST 2013
.034
The Handbook of International Public Sector Accounting Pronouncements
includes two revenue standards (IPSASs):
IPSAS 9, Revenue from Exchange Transactions; and
IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers).
When accounting for revenue, one considers whether the transaction has the
characteristics of an exchange transaction, defined as “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 exchange.” The definition of a nonexchange transaction included in these IPSASs comprises all other transactions
that give rise to revenue.
.035
IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers), is
an important benchmark reference that includes two recognition principles:
(a) 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; and
(b) as an entity satisfies a present obligation recognized as a liability in respect
of the 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.
.036
In its Basis for Conclusions to IPSAS 23, it is noted that:
“IPSASB considered whether to adopt an approach which focused on the
development of requirements for accounting for revenue arising from a range of
specific types of non-exchange transactions. However, the IPSASB noted and
agreed with the views of the Steering Committee that such an approach brings
with it consequent risks that the resultant Standard would not provide
comprehensive guidance for all revenue from non-exchange transactions.”
.037
The body of pronouncements issued by GASB include standards that address
several revenue topics. The key topics identified in the Codification of
Governmental Accounting and Financial Reporting Standards are:
N50, Nonexchange Transactions
P70, Property Taxes
S40, Special Assessments
T50, Tobacco Settlement Recognition
These pronouncements are the primary source of GAAP for state and local
governments in the United States, and those utilities, colleges, universities, and
health care providers that are public sector authorities. In addition to the
pronouncements cited, GASB publishes standards that apply to the stand-alone
reporting by specialized units and activities.
REVENUE
|8
.038
Topic N50, Nonexchange Transactions, identifies four classes of non-exchange
transactions based on similar characteristics:
1.
Derived tax revenues, which result from assessments imposed on exchange
transactions (for example, income taxes, sales taxes, and other assessments
on earnings or consumption).
2.
Imposed nonexchange revenues, which result from assessments imposed on
nongovernmental entities, including individuals, other than assessments on
exchange transactions (for example, property taxes and fines).
3.
Government-mandated nonexchange transactions, which occur when a
government at one level provides resources to a government at another
level and requires the recipient to use the resources for a specific purpose
(for example, federal programs that state or local governments are
mandated to perform).
4.
Voluntary nonexchange transactions, which result from legislative or
contractual agreements, other than exchanges, entered into willingly by the
parties to the agreement (for example, certain grants and private donations).
.039
The Basis for Conclusions to GASB Topic N50 notes that when it set the classes,
GASB “concluded that certain transactions, referred to in this Statement as
exchange-like transactions, are more similar to exchange transactions than to
nonexchange transactions, even though many governments and others call them
nonexchange transactions.”
.040
The Basis for Conclusions goes on to explain “the decision to account for certain
(technically nonexchange) transactions as exchange transactions reduced the
range of nonexchange transactions for which the Board would need to establish
accrual-basis recognition criteria other than the existence of an exchange.” In
the case of tax revenue derived by a government from an underlying sale, this
allowed GASB to piggyback identification of the taxable event to coincide with
the occurrence of the exchange between the merchant and the customer.
.041
GASB Topic N50 contemplates that certain imposed non-exchange revenues
may have time requirements associated with their use. Such requirements may
affect when revenue is recognized. Other than providing for the possibility of
taxes paid in advance of the taxable event, TAX REVENUE, Section PS 3510,
does not provide for a concept equivalent to the time requirement stipulation.
.042
In developing a framework to categorize revenues, PSAB considered both the
approach taken by IPSASB and GASB. PSAB concluded that the categories
proposed in this Statement of Principles provide a robust differentiation between
the types of revenues accounted for by public sector entities in Canada.
Principles governing recognition, measurement, disclosure and presentation are
outlined that are responsive to the characteristics of the revenue types described.
9 | STATEMENT OF PRINCIPLES – AUGUST 2013
OVERVIEW OF REPORTING ISSUES
.043
The chart below provides an overview of the reporting issues addressed in this
Statement of Principles. Given their nature, certain reporting issues pertain to
only exchange transactions or unilateral revenues.
Revenues from Exchange Transactions
Recognition
•
•
•
•
Measurement
•
•
•
•
•
•
Identifying performance obligations
Determining when revenue is recognized
Ancillary issues:
o Performance obligations satisfied at a point in time
o Performance obligations satisfied over time
o Measuring performance towards complete satisfaction of a
performance obligation
o Combining contracts
o Modifications
Repurchase agreements and put options
Unearned revenues
• Common issues
o Collectibility
o Time value of money
o Non-cash consideration
Consideration that is variable in amount
Allocating the consideration to performance obligations
Changes in the transaction price
Onerous performance obligations
Contract costs
Presentation and disclosure
Unilateral Revenues
•
Determining when revenue
is recognized
RECOGNITION
.044
FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.55, sets out general
recognition criteria that apply to all amounts reported on in public sector
financial statements:
The recognition criteria are as follows:
(a) the item has an appropriate basis of measurement, and a reasonable
estimate can be made of the amount involved; and
(b) for an item that involves obtaining or giving up future economic benefits, it
is expected that such benefits will be obtained or given up.
.045
Specific to the criteria, FINANCIAL STATEMENT CONCEPTS, paragraph PS
1000.56, goes on to state:
“Expected” is used with its usual general meaning and refers to that which
can reasonably be anticipated, contemplated or believed on the basis of
available evidence or logic but is neither certain nor proved. The use of the
word in the recognition criteria is intended to acknowledge that economic
activities occur in an environment characterized by uncertainty. It is not
intended to accommodate the recognition of items that do not meet the
definition of one of the elements of financial statements. By implication,
REVENUE
| 10
recognition would, therefore, not be appropriate without the occurrence of a
past transaction or economic event that gives rise to an asset, liability,
revenue or expense as defined in this Section.
.046
Other standard setters may use the word “probable” in their recognition criteria.
The IASB’s framework refers to “probable”. While it does not define the term,
in some standards such as: IAS 37 Provisions, Contingent Liabilities and
Contingent Assets and IPSAS 19, Provisions, Contingent Liabilities and
Contingent Assets, probable means “more likely than not to occur”.
.047
As the mandate of PSAB’s Revenues Task Force is to apply the present
recognition criteria when reporting on revenue, discussion of alternative
approaches to element recognition is beyond the scope of this Statement of
Principles.
.048
In accordance with the general recognition criteria stated in FINANCIAL
STATEMENT CONCEPTS, paragraph PS 1000.55, a public sector entity
recognizes only future economic benefits it expects to obtain. A public sector
entity would not report revenues that are inherently uncollectible at the date of
initial recognition. For example, when a parking summons is unenforceable
because the information collected is incomplete, revenue would not be
recognized. This is consistent with guidance in TAX REVENUES, paragraphs PS
3510.09-.10. Collectibility involves assessing the credit risk associated with a
receivable, a consideration associated with measurement. Amounts that
otherwise meet PSAB’s general recognition criteria are not excluded from initial
recognition due to concerns about collectibility.
.049
The IASB considered how an entity should account for the risk that an entity will
be unable to collect from the customer, described as uncertainty about
collectibility. The IASB proposes that any impairment be accounted for
separately. Revenue is not reduced because collectibility is uncertain. The IASB
does not identify a specific threshold for collectibility.
.050
The IASB accepted the view that the users of financial statements should receive
information allowing them to separately analyze revenue growth and receivables
management. PSAB finds this view equally compelling in the case of public
sector financial reporting. The implications of this view are explained under the
Measurement section.
.051
When revenues from exchange transactions are subject to variability, this is an
issue associated with measurement, not recognition. Variability is also addressed
under the Measurement section.
.052
A public sector entity does not initially record revenue it expects to refund. For
example, an individual may choose to pay a fine pending a decision on an appeal.
If the public sector entity does not expect to successfully defend the fine being
appealed, the amount expected to be repaid would be accounted for as a liability.
11 | STATEMENT OF PRINCIPLES – AUGUST 2013
.053
At each financial statement date, a public sector entity reviews any provisions
based on estimates. The effect of a change in an accounting estimate is accounted
for in accordance with ACCOUNTING CHANGES, Section PS 2120.
Revenues from exchange transactions
.054
An exchange may underlie revenues public sector entities receive. Generally, a
contract or standard terms of service can be identified. The contract may be
either a formal written contract negotiated between the parties or the standard
terms used by the public sector entity.
.055
An exchange transaction gives rise to one or more promises that create a valid
expectation that the payor will receive a good or service in exchange for the
consideration promised or paid. By definition, an exchange transaction creates
performance obligations for the public sector entity. When a contract underlies
the transaction, requirements in the contract will be a primary source of evidence
of performance obligations. In the absence of a contract, performance
obligations of the public sector entity may be indicated within the standard terms
of service, regulations or applicable legislation.
.056
A unique aspect of exchange transactions in the public sector is that the rate or
fee charged for a service may not ensure the recovery of the costs of providing
the service. Public sector entities often set fees or rates based on matters other
than profit maximization or recovery of costs.
.057
IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers),
defines both “exchange” and “non-exchange” transactions. It defines exchange
transactions as 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
exchange. This definition appears in TAX REVENUE, Section PS 3510.
.058
For the reasons set out earlier, the definition adopted in this Statement of
Principles focuses on performance obligations as the critical differentiator
between an exchange transaction and other revenues public sector entities
receive. Adoption of this approach will require a consequential amendment to the
definition of exchange transactions in TAX REVENUE, Section PS 3510. This
would be indicated in PSAB’s exposure draft.
.059
The provision of goods or services is the highly visible benchmark cited as the
basis of recognition in many accounting standards. The IASB proposes: “An
entity shall recognize revenue when (or as) the entity satisfies a performance
obligation by transferring a promised good or service (i.e., an asset) to a
customer. An asset is transferred when (or as) the customer obtains control of
that asset.” The supporting guidance addresses ancillary issues pertaining to the
identification of specific performance obligations.
REVENUE
| 12
.060
In this context, goods and services are assets, even if only momentarily, when
they are received and immediately used. Consequently, revenue is recognized
when a customer obtains control over the goods or services that constitute the
performance obligations.
.061
For many years, the reference standard within Canadian GAAP has been
REVENUE, CICA HANDBOOK – ACCOUNTING Section 3400, in the prechangeover standards in Part V. Given the limited guidance in the PSA
Handbook on the topic, past application of profit-oriented standards by
government organizations and similarities in the frameworks underlying the two
Handbooks, many of the accounting policies for revenues as presently applied
within the Canadian public sector can be attributed to principles set out in
Section 3400.
.062
REVENUE, Section 3400, provides principles that describe recognition separately
for transactions that involve:
(a) the sale of goods; and
(b) the rendering of services and long-term contracts.
.063
The proposed requirements in the IASB Exposure Draft do not distinguish
between goods and services. This approach is preferred as performance
obligations may involve both goods and services. Adopting the same approach
as the IASB would align the reporting principles that apply to public sector
entities with that will apply to other publicly accountable entities in Canada.
Identifying performance obligations
.064
Public sector entities may levy fees and service charges. In return, a payor
expects to receive specific goods or services. When these expectations are
enforceable promises, they are performance obligations. Performance
obligations are found in contracts and in the terms of service a public sector
entity has set based on applicable regulations or legislation.
.065
It is proposed that identification of specific performance obligations occur from
the perspective of the payor. This means performance obligations do not include
activities a public sector entity may undertake unless the payor receives a good or
service as those activities occur. For example, the administrative activities
associated with enrolling a student do not result in the provision of a service. On
the other hand, not all of a payor’s expectations create performance obligations.
When a payor’s expectations are enforceable promises, they are performance
obligations.
.066
For a promise to be enforceable, it has the essential characteristics of a liability.
LIABILITIES, paragraph PS 3200.05, includes these essential characteristics in
the definition of a liability.
13 | STATEMENT OF PRINCIPLES – AUGUST 2013
Liabilities are present obligations of a government to others arising from past
transactions or events, the settlement of which is expected to result in the future
sacrifice of economic benefits. Liabilities have three essential characteristics:
(a) they embody a duty or responsibility to others, leaving a government little
or no discretion to avoid settlement of the obligation;
(b) the duty or responsibility to others entails settlement by future transfer or
use of assets, provision of goods or services, or other form of economic
settlement at a specified or determinable date, on occurrence of a specified
event, or on demand; and
(c) the transactions or events obligating the government have already occurred.
.067
The definition of a performance obligation in the IASB Exposure Draft is
narrower than PSAB proposes. The IASB’s focus is on revenue arising from
contracts with customers. The IASB proposal defines a performance obligation
as a promise in a contract with a customer to transfer a good or service to the
customer.
.068
As contracts may not underlie all of the exchange transactions between payors
and public sector entities, PSAB’s proposed definition varies from the IASB’s.
.069
Promised goods or services may include, but are not limited to, the following:
(a) goods produced by a public sector entity for sale (for example, user charges
associated with drinking water);
(b) goods purchased by a public sector entity for resale (for example, the sale
of recycling bins);
(c) use of tangible capital property for a specified period (for example, the
lease of space in a building)
(d) providing a service, including those that involve another party (for
example, fares received by a public transit commission on routes operated
by a contracted service provider);
(e) standing ready to provide goods or services (for example, standby charges
levied to have paramedics on-site at an athletic competition organized by a
community group);
(f) constructing, manufacturing or developing an asset for a payor (for
example, fees to connect a private dwelling to the municipal water system);
(g) granting the right to use intangible assets owned by the Crown (for
example, fees charged to license patented technology);
(h) granting options to purchase additional goods or services (when those
options provide the payor with a material right);
(i) performing an agreed-upon task (or tasks) for a payor (for example, fees
charged by a day care facility) and;
(j) providing a decision (for example, fees to apply for a driver’s licence and
its issuance to a qualifying driver).
.070
When more than one good or service is to be provided, it is proposed that a
public sector entity would determine whether the goods and services are distinct.
REVENUE
| 14
Each distinct good or service would be accounted for as a separate performance
obligation. When a promised good or service is not distinct, a public sector
entity would combine that good or service with other promised goods or services
until the public sector entity identifies a bundle of goods or services that is
distinct. In many cases, the promised goods and services would be accounted for
as a single performance obligation.
.071
A good or service is considered to be distinct if either of the following criteria is
met:
(a) the public sector entity regularly offers the good or service separately; or
(b) the payor can benefit from the good or service either on its own or together
with other resources that are readily available to the payor.
Readily available resources are goods or services that are sold separately (by the
public sector entity or another entity) or resources that the payor has already
obtained (from the public sector entity or other transactions or events).
.072
Notwithstanding the criteria stated in the preceding paragraph, a good or service
in a bundle of promised goods or services is not distinct, and accounted for as a
single performance obligation, if both of the following criteria are met:
(a) the goods or services in the bundle are highly interrelated and for the public
sector entity to complete the performance obligation, a significant level of
service is required that involves integrating the goods or services into the
combined item(s); and
(b) the bundle of goods or services is significantly modified or customized to
fulfill the performance obligation.
.073
The criteria that describes when a good or service is distinct or when a bundle of
promised goods or services is not distinct is equivalent to the approach proposed
in the IASB Exposure Draft.
.074
As a practical expedient, a public sector entity may account for two or more
distinct goods or services as a single performance obligation when provision of
those goods and services evidence the same pattern of transfer to the payor. For
example, while a public sector entity may promise to provide two or more
distinct services to a payor over the same period of time, these might be
accounted as one performance obligation. It would be appropriate to do this
when consistent application of the method used to measure progress indicates the
payor receives control of the good or service and the right to payment evidences
the same pattern of transfer.
.075
An alternative would be not to require public sector entities to evaluate whether
multiple performance obligations might exist. This approach was considered but
PSAB felt that the standard should be sufficiently robust to deal with the
possibility of multiple performance obligations. Although bundled transactions
are not common in the public sector, they can occur. PSAB believes the criteria
proposed can be readily applied. Proper application of the principle will
15 | STATEMENT OF PRINCIPLES – AUGUST 2013
improve financial reporting as the allocation of revenue amongst reporting
periods will be more consistent.
.076
Revenues are not reported when both parties can cancel without penalty and
provision of or use of assets or, the provision of a service has yet to occur. Any
refundable deposit is a liability.
.077
In those limited instances when a public sector entity provides a warranty to
replace or repair a defective product, this obligation would be accounted for as a
liability. CONTINGENT LIABILITIES, Section PS 3300, would be applied to
measure the liability, if any. This approach is proposed as PSAB does not view
this type of warranty to be a separate performance obligation. When a warranty
is sold or negotiated in a manner that would allow the payor to choose whether or
not to purchase warranty coverage, it would be accounted for separately, as this
is considered to be a separable performance obligation. These proposals are
consistent with those of the IASB.
.078
Customers of profit-oriented businesses (including government business
enterprises), may be induced to purchase goods or services by marketing
incentives, such as loyalty rewards. Although such arrangements are less
prevalent amongst public sector entities, such offers can meet the definition of
performance obligations. These proposals would not exempt public sector
entities from accounting for such performance obligations, although the entity
itself may regard these as perfunctory or inconsequential. When offered, a public
sector entity measures these performance obligations unless they are immaterial.
Principle 1
A public sector entity should evaluate the goods or services it has promised to provide,
and should identify which goods or services (or which bundles of goods or services) are
distinct and, hence, should be accounted for as a separate performance obligation.
Determining when revenue is recognized
.079
When a good is provided, the IASB proposes revenue would be recognized when
the customer obtains control of the good. This approach is different from
REVENUE, Section 3400, in subtle ways. Paragraph 3400.07 states performance
should be regarded as having been achieved when two conditions are met. The
first condition stated is relevant to this discussion. Paragraph 3400.07(a) states:
“...the seller of the goods has transferred to the buyer the significant risks and
rewards of ownership, in that all significant acts have been completed and the
seller retains no continuing managerial involvement in, or effective control of,
the goods transferred to a degree associated with ownership...”
.080
Revenue recognition occurs when performance obligations are met. For the
performance obligation to be met, the payor must have control of the benefits
associated with the goods or services. Control is an event that gives the payor a
REVENUE
| 16
unilateral and present right to obtain the benefits from the goods or services. A
payor may benefit in a variety of ways, including:
(a) applying the goods or services to the provision of other services or the
production of other goods;
(b) applying the goods or services to enhance the value of other assets;
(c) applying the goods or services to settle liabilities or reduce expenses;
(d) reselling the goods or services;
(e) pledging the goods to secure a loan; and
(f) directly benefiting from the goods or services.
.081
When evaluating whether a payor obtains control of a good, an entity considers
any agreement to repurchase the promised asset or a component of the promised
asset. Matters that apply to repurchase agreements and put options are outlined
later in this Statement of Principles.
.082
The proposed approach has the following advantages:
(a) approaching the transfer of control from the perspective of the payor reduces
the risk of a public sector entity recognizing revenue from activities that do
not coincide with the provision of goods or services to the payor; and
(b) the complexity is reduced as a single recognition principle would apply to
the receipt of services, goods, or any combination of goods or services.
Principle 2
Revenues from exchange transactions should be recognized when (or as) the public
sector entity satisfies a performance obligation by the provision of the promised goods or
services to a payor. Until a payor has control of the benefits of the goods or services the
performance obligation is not considered to be satisfied.
Ancillary issues associated with revenues from exchange transactions
Performance obligations satisfied at a point in time
.083
Many services offered by public sector entities are provided at a single point in
time. When this is the case, the performance obligation is considered to be
satisfied at a point in time.
.084
The IASB Exposure Draft includes a number of indicators to resolve issues
associated with the timing of revenue recognition. These indicators apply when
an entity determines that control of a good or service is not being transferred over
time. The focus is on establishing when a transfer of control has occurred. The
performance obligation may comprise both goods and services; these are
described as “the asset”.
.085
The proposed indicators are summarized below. PSAB views these indicators as
useful.
(a) The public sector entity has a present right to payment for the asset.
(b) The public sector entity has transferred physical possession of the asset.
17 | STATEMENT OF PRINCIPLES – AUGUST 2013
(c)
(d)
(e)
The payor has the significant risks and rewards of ownership of the asset.
The payor has accepted the asset.
The payor has legal title to the asset.
.086
However, many of the revenues public sector entities receive involve fees for
services, rather than the sale of goods. As well, public sector entities may be
able to require payment in advance. Consequently, a revenue standard for the
public sector needs to address reporting issues associated with services, including
how refund obligations and unearned revenue should be presented.
.087
When revenue is derived from a fee or charge for service, a public sector entity
identifies its performance obligations (Principle 1). Once its performance
obligations have been identified, the public sector entity determines whether its
performance obligations are satisfied at a point in time, or over time (Principle
2). The following are illustrations:
(a) Driver licensure aims to establish that the licence holder possesses the skill
and knowledge to operate a motor vehicle. An administrative process
provides each applicant with a decision and supporting documentation.
There is no contract with the applicant. The privilege is not transferable to
others and is revocable without compensation. Once a decision is rendered
and the privilege is granted (or denied), the performance obligation is
satisfied and the public sector entity recognizes the revenue.
(b) On the other hand, a public sector entity renting surplus land has a
continuing performance obligation to provide its tenant with exclusive use
of the property throughout the rental period. The revenue is recognized
over the rental period.
.088
In many cases, the terms of service set by the public sector entity will require
payment in advance. Amounts received in advance are reported as unearned
revenues until performance obligations attributable to the inflow are satisfied.
The topic of unearned revenues is discussed in further detail under the
Measurement section.
Performance obligations satisfied over time
.089
Rather than at a point in time, the promised goods or services may be provided
over a period of time. In such a case, establishing when the revenues should be
recognized can be more complex. The aim is to have the public sector entity
recognize revenue in a manner that best depicts the transfer of goods or services
to the payor.
.090
The transfer of a good or service occurs over time and, accordingly, the public
sector entity satisfies a performance obligation and recognizes revenue over time
if at least one of the following two criteria is met:
(a) the public sector entity’s performance creates or enhances an asset (for
example, work in progress) that the payor controls as the asset is created or
enhanced; or
REVENUE
| 18
(b)
the public sector entity’s performance does not create an asset with an
alternative use to the public sector entity and at least one of the following
criteria is met:
(i) the payor simultaneously receives and consumes the benefits of the
public sector entity’s performance as the public sector entity
performs;
(ii) another entity would not need to substantially reperform the work the
public sector entity has completed to date if that other entity were to
fulfill the remaining obligation to the payor; or
(iii) the public sector entity has a right to payment for performance
completed to date and it expects to fulfill the performance obligations
as promised.
.091 PSAB has not identified reasons why public sector entities would recognize
revenue associated with performance obligations satisfied over time differently
than profit-oriented entities. PSAB’s exposure draft will include detailed guidance
on this topic.
Measuring progress towards complete satisfaction of a performance obligation
.092
A public sector entity recognizes revenue over time by measuring the progress
towards complete satisfaction of a performance obligation. For example, a
government organization might be hired to film a documentary for a private film
distributor. Work is completed in stages over several financial reporting periods.
The contract gives the film distributor a right to cancel the project at any time
and take possession of the incomplete work. The government organization would
need to determine how much revenue to recognize in each reporting period. It
does this by measuring progress in relation to milestones established in the
contract or on some other basis if no specific milestones have been established.
.093
There are various methods the government organization could use to measure its
progress on the documentary. One approach would be to track the cost of the
inputs relative to the total inputs expected to satisfy its performance obligation to
the payor. As circumstances change over time, the estimate is updated to depict
progress towards satisfaction of the public sector entity’s performance
obligations. Such changes would be accounted for as changes in accounting
estimates in accordance with ACCOUNTING CHANGES, Section PS 2120.
.094
The method a public sector entity selects is consistent with the objective of
measuring progress towards complete satisfaction of the performance objective.
The method is applied consistently to similar performance obligations and
similar circumstances. The measure of progress includes only goods or services
directly associated with completion of the public sector entity’s performance
obligations to the payor.
19 | STATEMENT OF PRINCIPLES – AUGUST 2013
Combining contracts
.095
In those cases where an exchange is governed by a contract, the terms of the
arrangement may be set out fully in a single contract. However, it is possible that
the amount and timing of revenue can be affected when the consideration for
goods and services in one contract is dependent on provisions in another contract.
.096
When two or more contracts are entered into at or near the same time, it is
proposed that they would be accounted for on a combined basis if one or more of
the following criteria are met:
(a) the contracts are negotiated as a package with a single purpose;
(b) the amount of the consideration to be paid in one contract depends on the
price or performance of the other contract; or
(c) the goods or services promised in the contracts (or some goods or services
promised in the contracts) are a single performance obligation.
.097
PSAB has insufficient information to assess how frequently the reporting issue of
combining contracts is encountered. This provision is included to communicate
the need to consider the substance of the arrangement when two or more
contracts are entered into at or near the same time with a payor.
Modifications
.098
As changes in legislation and regulations apply prospectively in nearly all cases,
the need to address modifications may only arise when a contract underlies an
exchange transaction. PSAB considered the provisions applicable to contract
modifications set out in the IASB Exposure Draft and proposes requirements that
are generally equivalent.
.099
A modification exists when there is a change in the scope or price (or both).
Until a modification is approved, the existing provisions form the basis of the
activities reported on. When the performance obligations derive from the contract
between the two parties, accounting for the modification is not affected until each
party to the contract agrees to the modification.
.100
If there is a change in the scope of the contract but the corresponding change in
price is not yet established, the modified provisions apply when the public sector
entity has an expectation that the price of the modification will be approved. The
transaction price would be estimated applying provisions within the measurement
section of this statement.
.101
If the modification results only in a change to the transaction price, a public
sector entity accounts for the modification as a change in the transaction price in
accordance with requirements that apply to changes in a transaction price.
.102
A public sector entity accounts for a modification separately if the modification
affects both:
(a) promised goods or services that are distinct; and
REVENUE
| 20
(b)
a public sector entity’s right to receive an amount of consideration that
reflects the public sector entity’s stand-alone selling price of the promised
goods or services, and any appropriate adjustments to that price to reflect
the circumstances of the agreement. For example, when a discount is
granted because the public sector entity has avoided the costs of selling to a
new payor, the public sector entity would adjust the stand-alone selling
price.
.103 Other situations may arise. Detailed guidance will be provided in PSAB’s
exposure draft based on the approach adopted by the IASB.
Repurchase agreements and put options
.104
As part of evaluating whether the payor has control of a good, it is proposed that
a public sector entity would consider whether there is an agreement to repurchase
the promised asset, some component or portion of that asset.
.105
When a public sector entity has an unconditional obligation or right to repurchase
an asset (i.e., a forward or call option), control over that asset is not relinquished,
and, therefore, no revenue is recognized. The ability of the payor to direct the
use of, and receive the benefit from, the asset has been constrained. The
repurchase agreement obliges the payor to return, or stand ready to return, the
asset to the public sector entity and, for this reason, the payor cannot itself sell
the asset (unless that sale is subject to a further repurchase agreement that
similarly constrains that purchaser).
.106
Public sector entities would continue to account for sale-leaseback transactions in
accordance with PUBLIC SECTOR GUIDELINE PSG-5, Sale-Leaseback
Transactions. In those situations involving a sale and 100 percent leaseback, no
holding gain is recognized in operating results. Under PSG-5, holding gains are
recognized only when the agreement calls for less than 100 percent of the
tangible capital asset to be leased back or when the nature of the lease back is
limited to an operating lease without other interrelationships.
.107
A payor may have an unconditional right to require a public sector entity to
repurchase an asset (i.e., a put option). In this case, the public sector entity
considers at the inception of the contract whether the payor has a significant
economic incentive to exercise that right. If the payor has a significant economic
incentive to exercise the put option, the public sector entity has effectively been
promised consideration for the right to use an asset for a period of time. On the
other hand, if the payor does not have a significant economic incentive to
exercise the put option, the public sector entity accounts for the transaction as a
sale with a right of return. Application guidance will be provided in PSAB’s
exposure draft.
Unearned revenues
.108
Consideration received prior to the provision of the goods or services is unearned
revenue. When the public sector entity has not yet satisfied performance
21 | STATEMENT OF PRINCIPLES – AUGUST 2013
obligations identified in the contract, the payor does not have the ability to direct
the use of, and receive the benefit of, the good or service contracted for.
Consequently, although the public sector entity may have possession of
economic resources associated with those performance obligations, it does not
have the right to recognize them as revenue.
.109
To distinguish unearned revenues from other liabilities of a public sector entity
(including refund obligations), it is proposed they be presented separately. A
public sector entity would not be prohibited from using an alternative
description. However, if a public sector entity uses another term, it would
disclose information so the financial statement user could distinguish the public
sector entity’s unearned revenues from the other forms of liabilities it is reporting
on. An amendment to FINANCIAL STATEMENT PRESENTATION, Section PS
1201, would be proposed to enable this requirement.
Proposed definition:
Unearned revenues are present obligations of a public sector entity to provide goods or
services in the future to payors arising from past exchange transactions.
Unilateral revenues
.110
Certain revenues public sector entities report can be attributed to legislation
grounded on constitutional authority, or delegated constitutional authority. When
there is no direct exchange for goods or services, as is the case when
performance obligations arise directly from the consideration promised or
received, these revenues are described in this Statement of Principles as
unilateral revenues.
Determining when revenue is recognized
.111
To recognize unilateral revenue, it is proposed that the public sector entity must
have the authority to (i.e., be authorized to collect) the revenues and be able to
identify an event that gives the public sector entity a right to those revenues.
Expected Unilateral Revenues
Authority + Event = Revenue
(Authorization)
.112
For there to be authority to unilateral revenues, related legislation, regulations or
by-laws must be in place. To some degree, what constitutes authority will be
based on the framework and precedents that apply in individual jurisdictions. For
example, a recognized practice supported by precedents established in a court of
law may allow the assessment and collection of taxes prior to formal approval by
a legislature. This is described in TAX REVENUE, Section PS 3510, as
“legislative convention”.
REVENUE
| 22
.113
It is the occurrence of a past event together with the authority that gives the
public sector entity a right to the revenue. Unilateral revenues are recognized
when the public sector entity has an unconditional right to the revenue, regardless
of when cash is received.
.114 The past event is specific to the nature of the transaction and the legal authority
that gives the public sector entity a right to the revenue. The desired effect is that
the past event should be readily identifiable and consistent, both over time and
amongst those jurisdictions with similar sources of unilateral revenue. In TAX
REVENUE, Section PS 3510, the equivalent concept is the taxable event.
Paragraph PS 3510.20 cites examples of taxable events consistent with the
concept proposed here. Examples associated with fines and penalties are
summarized in the following table.
Source
Fine arising from
violation of a law or bylaw
Situation
Legislation that enables
issuance of a summons
Penalty associated
with enforcement of a
legislated requirement
Legislation that does not
require that a summons
be issued
Revenue Recognition Event(s)
Earlier of:
• Guilty plea entered (party possibly pays fine)
• Date to contest summons expires
• Court imposes a fine
An enforceable claim exists in accordance with
provisions of the legislation
.115
Other public sector standard setters are discussing questions relevant to the
matter of when and how to recognize revenues arising from the constitutional
authority of government. IPSASB’s Exposure Draft, “Conceptual Framework for
General Purpose Financial Reporting by Public Sector Entities: Elements and
Recognition in Financial Statements,” identifies “the power to tax or to issue
licences, and to access or restrict or deny access to the benefits embodied in
intangible resources like the electromagnetic spectrum”, as examples of powers
and rights unique to the public sector.
.116
The discussion in IPSASB’s Exposure Draft notes that it is “essential to
determine the point or event at which such rights or powers give rise to an asset
of the entity.” Alternative points by IPSASB in the case of a tax are:
(a) a general ability to tax,
(b) establishment of a power through a statute,
(c) exercising the power to create a right, or
(d) the taxable event which gives rise to an obligation of another party to pay
the tax.
.117
IPSASB concludes that “when the power is exercised and the rights exist to
receive service potential or economic benefits, an asset arises.”
.118
This approach is consistent with the recognition criteria adopted in TAX
REVENUE, Section PS 3510. It is proposed that there needs to be both a legal
right and a past event to recognize unilateral revenues.
23 | STATEMENT OF PRINCIPLES – AUGUST 2013
Principle 3
Unilateral revenues should be recognized by a public sector entity when there is:
(a) authority to claim economic resources from other parties; and
(b) a past event that gives rise to a claim of economic resources.
MEASUREMENT
.119
This section addresses matters specific to the measurement of revenues. Certain
topics apply to both unilateral revenues and revenues from exchange
transactions. These are matters associated with the initial measurement of a
transaction and accounting for uncertainties. Other issues apply only when
reporting on revenues associated with exchange transactions and these topics are
covered later in this section.
.120
Generally, the consideration associated with a transaction is readily determinable
as it is a fixed amount, paid or payable on a specific date or upon provision of the
promised goods or services. In other cases, the consideration may be variable
and, in each financial reporting period, an estimate may need to be made.
Common issues
.121
It is proposed that supporting guidance would address the following reporting
issues, which are common to both exchange revenues and unilateral revenues:
(a) collectibility;
(b) the time value of money when payments are not immediately due; and
(c) the value attributable to any non-cash consideration.
Collectibility
.122
Collectibility refers to the credit risk accruing to a public sector entity when full
payment is not made at the time a transaction occurs. The assessment of
collectibility is made once the public sector entity has satisfied a performance
obligation (in the case of exchange transactions), or as the public sector entity
has the authority and a past event occurs that gives rise to its claim over the
economic resources (in the case of unilateral revenues). The assessment of
collectibility occurs when measuring the amount to be recorded once it is
determined that revenue meets the recognition criteria.
.123
A public sector entity does not reduce the amount of revenue recognized because
the receivable is impaired. When a valuation allowance is required on initial
recognition, the gross amount of revenue is reported, and both a bad debt expense
and a valuation allowance are recorded. This allows users of financial statements
to separately analyze revenue growth and receivables management.
Time value of money
.124
Consideration is given to the time value of money when it is anticipated that
significant time will pass between the date revenue is recorded and its collection.
Use of the present value measurement technique is identified in FINANCIAL
REVENUE
| 24
STATEMENT CONCEPTS, Section PS 1000, and is embedded in requirements
that apply to the cost of retirement benefits, landfill closure and post-closure
liabilities, leasing transactions and when measuring the value of loans and
investments with significant concessionary terms.
.125
Public sector entities are not indifferent to the timing of cash flows as borrowing
to fund operating and capital requirements is commonplace. Similarly, surplus
cash can be invested to earn a return. Reflecting the time value of money
portrays an important economic aspect of the transaction. Comparability is
enhanced when transactions are reported in a manner that clearly sets out the cost
of financing even when it is embedded in the amount due.
.126
In many cases, the effect of the time value of money will not be material. It is
proposed that the standard include a provision requiring consideration of the time
value of money when the period between the date the transaction is recorded and
final payment is one year or more. In assessing whether the time value of money
might affect the initial measurement of revenue, the public sector entity would
evaluate factors including, but not limited to, the following:
(a) whether the consideration would be substantially different if payment was
made in cash in accordance with typical credit terms extended in the sector
and jurisdiction;
(b) the expected length of time between the date the public sector entity
provides any promised goods or services and when payment is expected;
and
(c) the specified interest rate (if any) and prevailing market interest rates. 2
Non-cash consideration
.127
In certain instances, public sector entities may receive or expect to receive, noncash consideration. When this is the case, the fair value of the non-cash
consideration is accounted for when recording the transaction. This approach is
consistent with TAX REVENUE, paragraph PS 3510.26, and TANGIBLE
CAPITAL ASSETS, paragraph PS 3150.14.
.128
When the payor in an exchange transaction contributes goods or services (for
example, materials, equipment or labour) to facilitate the activity being
accounted for, a public sector entity would need to assess when it obtains control
of the goods or services contributed. In this case, the public sector entity would
account for the contributed goods or services as non-cash consideration.
.129
The measurement of non-cash consideration between related parties would not be
affected, as these requirements would not apply to transactions within the scope
of the related party transactions standard under development. PSAB’s Reexposure Draft, “Related Party Transactions,” issued in June 2013, outlines
proposals that would apply to related party transactions.
2
The factors cited are equivalent to those proposed in the IASB Exposure Draft.
25 | STATEMENT OF PRINCIPLES – AUGUST 2013
Revenues from exchange transactions
.130
Financial reporting issues specific to accounting for revenues from exchange
transactions addressed in this Statement of Principles are:
(a) a consideration that is variable in amount;
(b) allocating the consideration to performance obligations;
(c) changes in the transaction price;
(d) onerous performance obligations; and
(e) contract costs.
Consideration that is variable in amount
.131
The consideration may be variable in amount for a number of reasons. The
consideration payable may not be fixed due to discounts, rebates, refunds,
credits, incentives, performance bonuses/penalties, contingencies, price
concessions or other similar items.
.132
Some of these reasons may give rise to situations that cause variability in the
amount of the consideration that is not resolved until sometime after the
transaction is initially recorded.
.133
The general recognition criteria in FINANCIAL STATEMENT CONCEPTS,
paragraph PS 1000.55, require that “a reasonable estimate can be made of the
amount involved.” Consequently, revenue is not recognized until this
requirement is met. The PSA Handbook provides no further guidance as to when
revenue is recognized when the amount of the consideration is known to be
variable.
.134
For amounts subject to material measurement uncertainty, a public sector entity
would consider MEASUREMENT UNCERTAINTY, Section PS 2130. Disclosure
requirements apply to amounts that could change by a material amount in the
near term.
.135
The IASB proposals specify that objective and appropriate measurement methods
should be used to estimate the transaction price when the consideration is
variable. The supporting basis for conclusions explains that this is needed to
provide the necessary framework to ensure rigor in the process of estimation.
.136
The IASB identifies two approaches that could be used to estimate the
transaction price. The entity applies the approach it believes will be superior in
predicting the amount of the consideration to which the entity will be entitled.
.137
Two methods are available and guidance on their application is provided:
(a) Expected value – the sum of probability-weighted amounts in a range of
possible consideration amounts. An expected value may be an appropriate
estimate of the transaction price if an entity has a large number of contracts
with similar characteristics.
REVENUE
| 26
(b)
.138
The most likely amount – the single most likely amount in a range of
possible consideration amounts (i.e., the single most likely outcome of the
contract). The most likely amount may be an appropriate estimate of the
transaction price if the contract has only two possible outcomes (for
example, an entity either achieves a performance bonus or it does not).
When the consideration is variable in amount, PSAB proposes that public sector
entities calculate an estimate based on either the expected value or most likely
amount. The method applied should be the one that is superior in predicting the
amount the public sector entity expects to receive.
Proposed definitions:
The expected value is the sum of probability-weighted amounts in a range of possible
amounts.
The most likely amount is the single most likely amount in a range of possible amounts.
Allocating the consideration to performance obligations
.139
When more than one performance obligation is identified, a public sector entity
needs to consider on what basis it will allocate the agreed-upon consideration.
This allocation is made at the date of initial recognition. It is proposed that the
allocation would be made in proportion to the stand-alone selling price of the
good or service underlying each of those performance obligations.
.140
Usually, the best evidence of a stand-alone selling price is the observable price
charged when the same public sector entity sells that good or service in similar
circumstances. A price stated in a contract or a list price for a good or service is
not presumed to represent the stand-alone selling price of that good or service. If
a stand-alone selling price is not directly observable, a public sector entity could
estimate it.
.141
The IASB proposals include guidance covering such estimates. When estimating
stand-alone selling prices, all information is considered. This includes market
conditions, entity-specific factors and information about the customer or class of
customer. An entity maximizes the use of observable inputs and applies
estimation methods consistently in similar circumstances. Suitable estimation
methods include, but are not limited to, those outlined below.
(a) Adjusted market assessment – an entity evaluates the market in which it
sells goods or services and estimates the price that customers in that market
would be willing to pay for those goods or services. When applying this
approach, the entity might also include referring to prices from the entity’s
competitors for similar goods or services and adjusting those prices as
necessary to reflect the entity’s costs and margins.
(b) Expected cost – an entity forecasts its expected costs of satisfying a
performance obligation and, when applicable, adds an appropriate margin
for that good or service.
27 | STATEMENT OF PRINCIPLES – AUGUST 2013
(c)
Residual approach – if the stand-alone selling price of a good or service is
highly variable or uncertain, then an entity estimates the stand-alone selling
price by reference to the total transaction price less the sum of the
observable stand-alone selling prices of other goods or services promised in
the contract. A selling price is highly variable when an entity sells the
same good or service to different customers (at or near the same time) for a
broad range of amounts. A selling price is uncertain when an entity has not
yet established a price for a good or service and the good or service has not
previously been sold.
.142
As an alternative, PSAB may:
(a) not wish to require the allocation of the transaction price to individual
performance obligations; or
(b) wish to explore other bases that would apply to the reporting of revenues
associated with multiple performance obligations, such as the use of
observable prices when available and relevant to the transaction being
reported on.
.143
The reporting of transactions that evidence multiple performance obligations is a
significant financial reporting issue among profit-oriented enterprises. Prior to
being disbanded, the Accounting Standards Board’s Emerging Issues Committee
(EIC) issued several abstracts on this topic. Those public sector organizations in
Canada accounting for transactions with multiple performance obligations
applying pre-changeover standards in Part V of the CICA Handbook –
Accounting will have applied the EIC Abstracts.
.144
Staff of PSAB has no basis to assess the extent to which multiple performance
obligations are encountered as a reporting issue in the public sector. In proposing
a principle that requires a public sector entity to recognize revenue in relation to
the performance obligations it has achieved, consideration needs to be given to
the extent of supporting guidance needed.
.145
The principle advanced allows scope for judgment. On balance, PSAB decided
to include a principle addressing the issue of allocating the consideration to
performance obligations but chose to exclude detailed guidance that could be
viewed as mechanical or unnecessary in its detail.
Principle 4
When a public sector entity satisfies a performance obligation, it should recognize as
revenue the portion of the transaction price allocated to that performance obligation.
Changes in the transaction price
.146
Changes in the transaction price subsequent to initial recognition of an exchange
transaction can occur for various reasons. Circumstances may change, or aspects
of the arrangements that were uncertain when the exchange transaction was
REVENUE
| 28
recognized may become clear. Either situation can give rise to a change in the
transaction price. The guidance set out below would apply:
(a) If multiple performance obligations are evident, a public sector entity
would allocate any change in the transaction price to each performance
obligation.
(b) When a change in the transaction price is associated with a satisfied
performance obligation, the amount would be recognized as revenue
immediately. Otherwise, the change in the transaction price would be
recognized when the performance obligation is satisfied.
(c) A public sector entity would not reallocate the transaction price amongst its
performance obligations subsequent to contract inception due to subsequent
changes in the prices it charges for stand-alone good and services.
Onerous performance obligations
.147
The IASB Exposure Draft describes a performance obligation as onerous if the
lowest cost of settling the performance obligation exceeds the amount of the
transaction price allocated to the performance obligation. The IASB proposes to
require the recognition of a liability when a contract is identified at inception as
being onerous and the performance obligations associated with that contract are
expected to take a year or more to satisfy.
.148
In the public sector, it is not uncommon for the services provided to exceed the
value of the established consideration. A good or service may be offered by a
public sector entity because it is in the public interest. When this is the case,
rates may be set at levels to support community access (such as services to
remote communities and public transit).
.149
The approach taken for profit-oriented financial reporting does not transfer
seamlessly to the public sector, as a principal goal of governments and
government organizations is to provide services and redistribute resources, not to
make a profit. Broader questions than profitability are in play when governments
mandate programs and public sector entities set the fees or rates that will apply to
goods or services offered.
.150
FINANCIAL STATEMENT OBJECTIVES, Section PS 1100, cites the following as
among the four objectives of public sector financial reporting.
Financial statements should present information to describe the government's
financial position at the end of the accounting period. Such information should
be useful in evaluating:
(a) the government's ability to finance its activities and to meet its liabilities
and contractual obligations; and
(b) the government's ability to provide future services.
.151
Information to support a user’s assessment of the government’s ability to provide
future services is communicated within the construct of an accrual accounting
29 | STATEMENT OF PRINCIPLES – AUGUST 2013
model that reports liabilities in relation to the present obligations of a
government to others arising from past transactions.
.152
Some constituents believe that it would be useful if governments reported more
broadly on their obligations than the present accrual accounting model requires.
Some seek information about the sustainability of government programs. When
programs involve service delivery rather than a redistribution of wealth, there are
difficulties in estimating future financial implications as assumptions about
innovation in methods of service delivery as well as future service requirements
can be inherently variable.
.153
Among the active projects of IPSASB is the reporting on the long-term
sustainability of public finances. However, the objective is limited to the
development of a framework for the disclosure of information.
.154
If the concept of reporting on onerous performance obligations applies in public
sector reporting, it might be restricted to certain revenues from exchange
transactions. For example, a government might provide free printing services to
a community group as part of its financial support of their programs. This would
not be considered an onerous performance obligation as it is associated with a
program mandate. On the other hand, if the same government entered into an
agreement to print materials at less than cost and the contract was unrelated to
the government’s program mandates, onerous contract provisions would apply.
.155
However, this is not what is being proposed. Developing requirements to
measure and report on onerous performance obligations is beyond the scope of
this project.
Contract costs
.156
The IASB Exposure Draft provides criteria that apply to the accounting for
contract costs, other than those costs within the scope of other IFRSs such as IAS
2 Inventories, IAS 16 Property, Plant and Equipment or IAS 38 Intangible
Assets. The supporting guidance comments on costs that relate to a contract that
would normally be considered assets as well as those that would normally be
considered expenses.
.157
As public sector financial reporting focuses on accounting for the use of
resources to provide services, limited attention is given in the PSA Handbook to
measuring the costs associated with revenues originating from activities that
focus on the generation of profit. Consequently, consideration needs to be given
to the question of whether contract costs can give rise to an asset when the PSA
Handbook applies and, if so, in what circumstances.
.158
This is an important issue, as the discussion of onerous performance obligations
has illustrated, as one cannot presume that net future economic benefits will flow
to a public sector entity. The incremental costs associated with entering into an
REVENUE
| 30
exchange transaction may result in a net economic loss, as it is quite possible that
the cost of completing the performance obligations may exceed the revenue the
public sector entity is entitled to recognize.
.159
Consequently, unless contract costs give rise to a tangible capital asset or
inventories, it is proposed that such costs would be accounted for as an expense
in the period those costs are incurred. Expenditures on inventories and tangible
capital assets are subject to an evaluation of their service potential under
FINANCIAL STATEMENT PRESENTATION, Section PS 1201, and TANGIBLE
CAPITAL ASSETS, Section PS 3150.
PRESENTATION AND DISCLOSURE
.160
Provisions in FINANCIAL STATEMENT PRESENTATION, Section PS 1201, set
out the classes of assets and liabilities presented on the statement of financial
position. Within the class of revenues receivable, there is no requirement to
differentiate receivables associated with various types of revenues (i.e., to present
receivables associated with taxes and other forms of unilateral revenues, separately
from receivables associated with exchange transactions such as from sales of
goods or services). No change to these requirements is viewed as necessary.
.161
FINANCIAL STATEMENT PRESENTATION, Section PS 1201, requires
disclosure of the gross amounts of revenues. Public sector entities are provided
with the flexibility to detail and describe revenues on the statement of operations
in the manner they view to be informative. When amounts shown on the
statement of operations are “net” of related expenses, the requirement to inform
users of the gross amount is satisfied by disclosure (generally in the notes). No
change to these requirements is proposed.
.162
FINANCIAL STATEMENT PRESENTATION, Section PS 1201, does not require
that a public sector entity disclose information to assist users in understanding
the composition, or timing that may be associated with the revenues reported on.
.163
In applying the requirements, public sector entities may be required to make
significant judgments. For example, judgment may be required in:
(a) identification of performance obligations;
(b) modeling estimates of revenues that involve assumptions including rates of
interest, or other future trends or events;
(c) determining the timing of satisfaction of performance obligations; and
(d) determining the transaction price and allocating it to performance obligations.
It is proposed that public sector entities should inform readers as to judgments
such as these to assist a user’s understanding of financial results.
.164
It is proposed that public sector entities reporting revenues from exchange
transactions include more informative disclosures about their accounting policies
when performance obligations are satisfied over time. For example, this might
include:
31 | STATEMENT OF PRINCIPLES – AUGUST 2013
(a)
(b)
the methods (such as, output methods, input methods and methods based on
the passage of time) used to recognize revenues; and
an explanation of why such methods depict the right of the public sector
entity to the revenues being recognized.
.165
When reporting revenues arising from exchange transactions, it is proposed that
disclosures would describe estimates and judgments associated with:
(a) the transaction price;
(b) stand-alone selling prices of promised goods or services, where applicable; and
(c) obligations for returns, refunds and other similar obligations.
.166
It is proposed that the requirements would be communicated in the form of a principle,
supported by illustrative comments, rather than a list of required disclosures.
.167
The IASB proposals address whether the rights and performance obligations
associated with a contract would form a single unit of account and would be
accounted for, and presented, on a net basis as an asset or a liability. Having
considered this matter, PSAB supports presentation of the obligations as a net
amount on the statement of financial position when the obligations associated
with performance obligations are interdependent. That is, the right to receive
consideration from the payor is dependent on the public sector entity’s
performance and, similarly, when the public sector entity is required to perform
only as long as payment continues. This is consistent with the principle that
applies when reporting on financial instruments.
Principle 5
To help users of financial statements understand the nature, amount, timing and
uncertainty associated with revenues and cash flows, disclosures should:
(a) disaggregate revenues reported on the statement of operations into categories, with
separate disclosure of revenues that are not related to recurring activities, such as
revenues arising from the sale of public assets;
(b) provide information about major sources of estimation uncertainty that may give
rise to a material adjustment in an asset or liability within the next financial year;
(c) inform readers as to significant judgments, and changes in judgments, made in
applying the requirements, including information about the amounts recorded and
information about other possible outcomes including the amounts or a range of
amounts associated with those outcomes;
(d) outline accounting policies applied to the reporting of revenues, as required by
DISCLOSURE OF ACCOUNTING POLICIES, Section PS 2100, describing the
nature of the revenues being recognized and, in the case of revenues from
exchange transactions, typical performance obligations and the methods and
policies that apply when recognizing revenues, including why such methods are a
faithful depiction of the provision of goods or services; and
(e) explain continuing obligations associated with revenues from exchange
transactions, such as might arise from returns, refunds, warranties, guarantees and
other similar obligations.
REVENUE
| 32
APPENDIX — DECISION TREE
Is the amount received or receivable a
government transfer?
Yes
Apply GOVERNMENT TRANSFERS,
Section PS 3410
No
Is the amount received or receivable a
contribution, made at the discretion of
the contributor?
Yes
Apply the standards applicable to
Contributions (under development)
No
Can the public sector entity identify
specific performance obligations
arising directly from the payment, or
promise, of consideration?
Yes
Apply the principles applicable to
revenues from exchange
transactions in this statement.
No
Is the amount received or receivable
an amount within the scope of TAX
REVENUE, Section PS 3510?
No
Apply the principles applicable to
unilateral revenues in this statement.
33 | STATEMENT OF PRINCIPLES – AUGUST 2013
Yes
Apply TAX REVENUES, Section PS
3510