July 2018

REVENUE FROM NON-EXCHANGE TRANSACTIONS (TAXES AND TRANSFERS)

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• Objective
• Scope
• Non exchange transactions
• Revenue
• Taxes
• Recognition flowcharts
• Advance receipt of taxes
• Expenses paid through the tax system and tax expenditures
• Transfers, debt forgives, fines, bequest, service in kind, pledges
• Concessionary loans
 Objective

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• The objective of this Standard is to prescribe requirements for the
financial reporting of revenue arising from non-exchange
transactions.
• This Standard deals with issues that need to be considered in
recognizing and measuring revenue from non-exchange
transactions, including the identification of contributions from
owners.
 Scope

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• An entity that prepares and presents financial statements under the
accrual basis of accounting shall apply this Standard in accounting
for revenue from non-exchange transactions.
• This Standard does not apply to an entity combination that is a non-
exchange transaction.
• This Standard applies to all public sector entities other than
Government Business Enterprises.
 Scope

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• This Standard addresses revenue arising from non-exchange
transactions.
• Revenue arising from exchange transactions is addressed in IPSAS
9, Revenue from Exchange Transactions.
• While revenues received by public sector entities arise from both
exchange and non-exchange transactions, the majority of revenue of
governments and other public sector entities is typically derived
from non-exchange transactions, such as:
– Taxes; and
– Transfers (whether cash or noncash), including grants, debt
forgiveness, fines, bequests, gifts, donations, goods and services
in-kind, and the off-market portion of concessionary loans
received.
 Non exchange transactions

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• In some transactions, it is clear that there is an exchange of
approximately equal value.
• These are exchange transactions and are addressed in other IPSASs.
• In other transactions, an entity will receive resources and provide no
or nominal consideration directly in return.
• These are clearly non-exchange transactions and are addressed in
this Standard.
• For example, taxpayers pay taxes because the tax law mandates the
payment of those taxes.
• While the taxing government will provide a variety of public services
to taxpayers, it does not do so in consideration for the payment of
taxes.
 Non exchange transaction

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• There is a further group of non-exchange transactions where the
entity may provide some consideration directly in return for the
resources received, but that consideration does not approximate the
fair value of the resources received.
• In these cases, the entity determines whether there is a combination
of exchange and non-exchange transactions, each component of
which is recognized separately.
• For example, an entity receives N6 million funding from a multi-
lateral development agency.
• The agreement stipulates that the entity must repay N5million of the
funding received over a period of 10years, at 5% interest when the
market rate for a similar loan is 11%.
 Non exchange transaction

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• The entity has effectively received a N1 million grant (N6million
received less N5million to be repaid) and entered into N5 million
concessionary loan which attracts interest at 6% below the market
interest rate for a similar loan.
• The N1 million grant received, as well as the off-market portion of
the interest payments in terms of the agreement, are non-exchange
transactions.
• The contractual capital and interest payments over the period of the
loan are exchange transactions.
 Revenue

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• Revenue comprises gross inflows of economic benefits or service
potential received and receivable by the reporting entity, which
represents an increase in net assets/equity, other than increases
relating to contributions from owners.
• Amounts collected as an agent of the government or another
government organization or other third parties will not give rise to
an increase in net assets or revenue of the agent.
• This is because the agent entity cannot control the use of, or
otherwise benefit from, the collected assets in the pursuit of its
objectives.
 Revenue

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• Where an entity incurs some cost in relation to revenue arising from
a non-exchange transaction, the revenue is the gross inflow of future
economic benefits or service potential, and any outflow of resources
is recognized as a cost of the transaction.
• For example, if a reporting entity is required to pay delivery and
installation costs in relation to the transfer of an item of plant to it
from another entity, those costs are recognized separately from
revenue arising from the transfer of the item of plant.
• Delivery and installation costs are included in the amount
recognized as an asset, in accordance with IPSAS 17, Property,
Plant, and Equipment.
 Taxes

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• Taxes are the major source of revenue for many governments and
other public sector entities.
• Taxes are economic benefits compulsorily paid or payable to public
sector entities, in accordance with laws or regulation, established to
provide revenue to the government, excluding fines or other
penalties imposed for breaches of laws or regulation.
• Noncompulsory transfers to the government or public sector entities
such as donations and the payment of fees are not taxes, although
they may be the result of non-exchange transactions.
• A government levies taxation on individuals and other entities,
known as taxpayers, within its jurisdiction by use of its sovereign
powers.
• Advance receipts, being amounts received in advance of the taxable
event, may also arise in respect of taxes.
 Initial recognition

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• An entity will recognize an asset arising from a non-exchange
transaction when it gains control of resources that meet the
definition of an asset and satisfy the recognition criteria.
• In certain circumstances, such as when a creditor forgives a liability,
a decrease in the carrying amount of a previously recognized liability
may arise.
• In these cases, instead of recognizing an asset, the entity decreases
the carrying amount of the liability.
• In some cases, gaining control of the asset may also carry with it
obligations that the entity will recognize as a liability.
 Initial recognition

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• Contributions from owners do not give rise to revenue, so each type
of transaction is analyzed, and any contributions from owners are
accounted for separately.
• Consistent with the approach set out in this Standard, entities will
analyze non-exchange transactions to determine which elements of
general purpose financial statements will be recognized as a result of
the transactions.
• The flow chart on the following page illustrates the analytic process
an entity undertakes when there is an inflow of resources to
determine whether revenue arises.
• This Standard follows the structure of the flowchart.
 Flowchart analysis

Do not recognize an
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Does the inflow give rise to an item
that meets the definition of an asset?
(IPSAS 1)
No increase in an asset,
consider disclosure
(P. 36)
Yes
Does the inflow satisfy the criteria No Do not recognize an increase in
for recognition as an asset? an asset, consider disclosure
(P. 31) (P. 36)
Yes
Is the transaction a
Does the inflow result from a No No
non-exchange Refer to other
contribution from owners?
transaction? IPSASs
(P. 37 – 38)
(P. 39 – 41)
Yes Yes
Refer to other IPSASs
Recognize
• An Asset and revenue to
the extent that a liability is
Has the entity satisfied all of the present No not also recognized; and
obligations related to the inflow?
• A liability to the extent that
(P. 50 – 56)
the present obligation have
Yes not been satisfied
(P. 44 – 45)
Recognize an asset and recognize revenue
(P. 44)
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 Recognition of Revenue from Non-
Exchange Transactions
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• An inflow of resources from a non-exchange transaction recognized as
an asset shall be recognized as revenue, except to the extent that a
liability is also recognized in respect of the same inflow.
• As an entity satisfies a present obligation recognized as a liability in
respect of an inflow of resources from a non-exchange transaction
recognized as an asset, it shall reduce the carrying amount of the
liability recognized and recognize an amount of revenue equal to that
reduction.
• When an entity recognizes an increase in net assets as a result of a non-
exchange transaction, it recognizes revenue.
• If it has recognized a liability in respect of the inflow of resources arising
from the non-exchange transaction, when the liability is subsequently
reduced, because the taxable event occurs or a condition is satisfied, it
recognizes revenue.
• If an inflow of resources satisfies the definition of contributions from
owners, it is not recognized as a liability or revenue.
 Recognition of revenue from taxes

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• An entity shall recognize an asset in respect of taxes when the
taxable event occurs and the asset recognition criteria are met.
• Resources arising from taxes satisfy the definition of an asset when
the entity controls the resources as a result of a past event (the
taxable event) and expects to receive future economic benefits or
service potential from those resources.
• Resources arising from taxes satisfy the criteria for recognition as an
asset when it is probable that the inflow of resources will occur and
their fair value can be reliably measured.
• The degree of probability attached to the inflow of resources is
determined on the basis of evidence available at the time of initial
recognition, which includes, but is not limited to, disclosure of the
taxable event by the taxpayer.
 Taxable events

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• Similar types of taxes are levied in many jurisdictions.
• The reporting entity analyzes the taxation law in its own jurisdiction
to determine what the taxable event is for the various taxes levied.
Unless otherwise specified in laws or regulations, it is likely that the
taxable event for:
– Income tax is the earning of assessable income during the
taxation period by the taxpayer;
– Value-added tax is the undertaking of taxable activity during the
taxation period by the taxpayer;
– Goods and services tax is the purchase or sale of taxable goods
and services during the taxation period;
 Taxable events

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– Customs duty is the movement of dutiable goods or services
across the customs boundary;
– Death duty is the death of a person owning taxable property; and
– Property tax is the passing of the date on which the tax is levied,
or the period for which the tax is levied, if the tax is levied on a
periodic basis.
 Advanced receipt of taxes

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• Consistent with the definitions of assets, liabilities, resources for
taxes received prior to the occurrence of the taxable event are
recognized as an asset and a liability (advance receipts), because
– the event that gives rise to the entity’s entitlement to the taxes
has not occurred, and
– the criteria for recognition of taxation revenue have not been
satisfied, notwithstanding that the entity has already received an
inflow of resources.
• Advance receipts in respect of taxes are not fundamentally different
from other advance receipts, so a liability is recognized until the
taxable event occurs.
• When the taxable event occurs, the liability is discharged and
revenue is recognized.
 Expenses Paid Through the Tax System
and Tax Expenditures
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• Taxation revenue shall be determined at a gross amount.
• It shall not be reduced for expenses paid through the tax system.
• In some jurisdictions, the government uses the tax system as a
convenient method of paying to taxpayers benefits that would
otherwise be paid using another payment method, such as writing a
check, directly depositing the amount in a taxpayer’s bank account,
or settling another account on behalf of the taxpayer.
• For example, a government may pay part of residents’ health
insurance premiums, to encourage the uptake of such insurance,
either by reducing the individual’s tax liability, making a payment by
check, or by paying an amount directly to the insurance company.
• In these cases, the amount is payable irrespective of whether the
individual pays taxes.
 Expenses Paid Through the Tax System
and Tax Expenditures
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• Consequently, this amount is an expense of the government and
should be recognized separately in the statement of financial
performance.
• Tax revenue should be increased for the amount of any of these
expenses paid through the tax system.
• Taxation revenue shall not be grossed up for the amount of tax
expenditures.
 Expenses Paid Through the Tax System
and Tax Expenditures
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• The key distinction between expenses paid through the tax system
and tax expenditures is that, for expenses paid through the tax
system, the amount is available to recipients irrespective of whether
they pay taxes, or use a particular mechanism to pay their taxes.
• IPSAS 1 prohibits the offsetting of items of revenue and expense
unless permitted by another standard.
• The offsetting of tax revenue and expenses paid through the tax
system is not permitted.
 Transfers

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• An entity shall recognize an asset in respect of transfers when the
transferred resources meet the definition of an asset and satisfy the
criteria for recognition as an asset.
• Transfers include grants, debt forgiveness, fines, bequests, gifts,
donations, and goods and services in-kind.
• All these items have the common attribute that they transfer
resources from one entity to another without providing
approximately equal value in exchange, and are not taxes as defined
in this Standard.
 Debt Forgiveness and Assumption of Liabilities

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• Lenders will sometimes waive their right to collect a debt owed by a
public sector entity, effectively canceling the debt.
• For example, a national government may cancel a loan owed by a
local government.
• In such circumstances, the local government recognizes an increase
in net assets because a liability it previously recognized is
extinguished.
• Entities recognize revenue in respect of debt forgiveness when the
former debt no longer meets the definition of a liability or satisfies
the criteria for recognition as a liability, provided that the debt
forgiveness does not satisfy the definition of a contribution from
owners.
 Fines

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• Fines are economic benefits or service potential received or
receivable by a public sector entity, from an individual or other
entity, as determined by a court or other law enforcement body, as a
consequence of the individual or other entity breaching the
requirements of laws or regulations.
• In some jurisdictions, law enforcement officials are able to impose
fines on individuals considered to have breached the law.
• In these cases, the individual will normally have the choice of paying
the fine, or going to court to defend the matter.
• Where a defendant reaches an agreement with a prosecutor that
includes the payment of a penalty instead of being tried in court, the
payment is recognized as a fine.
 Bequests

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• A bequest is a transfer made according to the provisions of a
deceased person’s will.
• The past event giving rise to the control of resources embodying
future economic benefits or service potential for a bequest occurs
when the entity has an enforceable claim, for example on the death
of the testator, or the granting of probate, depending on the laws of
the jurisdiction.
• Bequests that satisfy the definition of an asset are recognized as
assets and revenue when it is probable that the future economic
benefits or service potential will flow to the entity, and the fair value
of the assets can be measured reliably.
 Gifts and Donations, including Goods In-kind

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• Gifts and donations are voluntary transfers of assets, including cash
or other monetary assets, goods in-kind, and services in-kind that
one entity makes to another, normally free from stipulations.
• The transferor may be an entity or an individual.
• For gifts and donations of cash or other monetary assets and goods
in-kind, the past event giving rise to the control of resources
embodying future economic benefits or service potential is normally
the receipt of the gift or donation.
• Goods in-kind are tangible assets transferred to an entity in a non-
exchange transaction, without charge, but may be subject to
stipulations.
• External assistance provided by multilateral or bilateral
development organizations often includes a component of goods in-
kind.
 Service in kind

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• An entity may, but is not required to, recognize services in-kind as
revenue and as an asset.
• Services in-kind are services provided by individuals to public sector
entities in a non-exchange transaction.
• These services meet the definition of an asset because the entity
controls a resource from which future economic benefits or service
potential are expected to flow to the entity.
• These assets are, however, immediately consumed, and a
transaction of equal value is also recognized to reflect the
consumption of these services in-kind.
 Service in kind

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• For example, a public school that receives volunteer services from
teachers’ aides, the fair value of which can be reliably measured,
may recognize an increase in an asset and revenue, and a decrease in
an asset and an expense.
• In many cases, the entity will recognize an expense for the
consumption of services in-kind.
• However, services in-kind may also be utilized to construct an asset,
in which case the amount recognized in respect of services in-kind is
included in the cost of the asset being constructed.
 Service in kind

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• Public sector entities may be recipients of services in-kind under
voluntary or non-voluntary schemes operated in the public interest.
• For example:
– Technical assistance from other governments or international
organizations;
– Persons convicted of offenses may be required to perform
community service for a public sector entity;
– Public hospitals may receive the services of volunteers;
– Public schools may receive voluntary services from parents as
teachers’ aides or as board members; and
– Local governments may receive the services of volunteer fire
fighters.
 Pledges

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• Pledges are unenforceable undertakings to transfer assets to the
recipient entity.
• Pledges do not meet the definition of an asset, because the recipient
entity is unable to control the access of the transferor to the future
economic benefits or service potential embodied in the item pledged.
• Entities do not recognize pledged items as assets or revenue.
• If the pledged item is subsequently transferred to the recipient
entity, it is recognized as a gift or donation.
• Pledges may warrant disclosure as contingent assets under the
requirements of IPSAS 19.
 Concessionary loans

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• Concessionary loans are loans received by an entity at below market
terms.
• The portion of the loan that is repayable, along with any interest
payments, is an exchange transaction and is accounted for in
accordance with IPSAS 29, Financial Instruments: Recognition and
Measurement.
• An entity considers whether any difference between the transaction
price (loan proceeds) and the fair value of the loan on initial
recognition (see IPSAS 29) is non-exchange revenue that should be
accounted for in accordance with this Standard.
 Concessionary loans

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• Where an entity determines that the difference between the
transaction price (loan proceeds) and the fair value of the loan on
initial recognition is non-exchange revenue, an entity recognizes the
difference as revenue, except if a present obligation exists, e.g.,
where specific conditions imposed on the transferred assets by the
recipient result in a present obligation.
• Where a present obligation exists, it is recognized as a liability.
• As the entity satisfies the present obligation, the liability is reduced
and an equal amount of revenue is recognized.
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