Government Transfers

 
Status: Third Re-exposure Draft issued for comment by September 15, 2010.

Background
Activities to Date
Next Steps
Related Information
Contact Information

Background

The Government Transfers project has been one of the most controversial projects undertaken by PSAB. Since the Statement of Principles was issued in October 2002, PSAB has been responding to stakeholders’ concerns at each stage of the due process and working towards building consensus within the conceptual framework, while also considering the definition of liability in Section PS 3200, Liabilities, and more recently the principles in International Public Sector Accounting Standard IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers).

Reasons for the Project
Section PS 3410, Government Transfers, was issued when governments were applying the modified accrual basis of accounting. When PSAB approved the change to full accrual accounting, the government community identified a need for additional guidance and clarification in certain areas to ensure consistent interpretation of the intent and requirements of Section PS 3410.

Issues
The areas requiring additional guidance and clarification include:

• recognition of multi-year funding provided by governments to outside organizations;
• the nature and level of authorization required for recognition of transfers by recipient and transferring governments;
• the effects of stipulations on recognition of transfers by recipient and transferring governments;
• recognition of transfers for capital purposes and transfers of tangible capital assets.

Objective
The objective is to amend Section PS 3410 to address:

• recognition criteria for recipient and transferring governments; and
• authorization of transfers.

Definition
The following definition has been adopted for purposes of this project:

Government transfers are transfers of monetary assets or tangible capital assets from a government to an individual, an organization or another government for which the government making the transfer does not:

• receive any goods or services directly in return, as would occur in a purchase/sale or other exchange transaction;
• expect to be repaid in the future, as would be expected in a loan; or
• expect a direct financial return, as would be expected in an investment.

Activities to Date

March 2010
PSAB approved a third Re-exposure Draft (RED 3).

The major change from the second Re-exposure draft (RED 2) is on recipient accounting for capital transfers. RED 3 proposes that a recipient government would recognize the transfer in revenue when it has been authorized and the recipient has met all eligibility criteria set by the transferor, unless the transfer creates a liability for the recipient. In some cases a liability may exist because the transfer stipulations direct the use of the funds for specific purposes. In other cases, a liability may exist because the transfer stipulations and the actions and communications of the recipient government direct the use of the funds for specific purposes. In both of these cases, revenue would be recognized as the liability is settled. The same accounting principles would apply to all types of transfers.

November 2009
PSAB discussed responses to RED 2.  The Board concluded that a third re-exposure draft (RED 3) would be necessary, as there was insufficient support for the RED 2 proposal on recipient accounting for capital transfers.

Throughout the life of this project term, there has been general support on many of the issues except for recipient accounting.  The task force will consider all past and present views of stakeholders for the purpose of developing a position on the critical issue of recipient accounting when developing RED 3 for the Board’s consideration in March 2010.

March 2009
PSAB approved RED 2.

The major differences from the previous RED include the following:

• A transferring government is permitted to consider a transfer authorized if it is demonstrably committed to the transfer and final approval of the related legislation, regulation or by-laws occurs before the date the financial statements are completed.
• Consistent with the previous RED, operating transfers are recognized as revenue when authorized and eligibility criteria met unless the definition of liability is met. RED 2 provides further guidance on the evidence of a liability, which includes consideration of both the transfer terms and a recipient government’s actions and communications related to the transfer.
• Unlike the previous RED, in RED 2 capital transfers or transfers of tangible capital assets are initially recognized as deferred capital contributions and reported separately from and below non-financial assets on the statement of financial position. The transfers are subsequently recognized in revenue when the related tangible capital assets are recognized in expenses

November 2008
PSAB discussed recognition criteria for recipient and transferring government including recipient government accounting for capital transfers, and authorization of transfers. The Board requested the task force to prepare a RED 2 for PSAB approval in the first quarter of 2009.

September 2008
PSAB discussed possible recognition criteria for a recipient government and interim input from the PSAB/Deputy Ministers of Finance Joint Working Group (JWG).

March 2008
PSAB discussed responses received on the Re-exposure Draft (RED). The Board planned to consider these responses and recommendations from the JWG in developing the RED 2.

March 2007
PSAB approved an RED.

The RED was based on International Public Sector Accounting Standard IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers), which required immediate expense recognition by transferring government. Liability recognition is allowed for a recipient government when certain stipulations and a return payment requirement are included in the terms of the transfers.

The main features of this RED include the following:

• A transferring government should recognize an expense when a transfer has been authorized and any eligibility criteria have been met.
• A recipient government should recognize revenue when a transfer has been authorized and any eligibility criteria have been met, except when and to the extent that the transfer stipulations create a liability in accordance with Section PS 3200, Liabilities.
• A liability for a recipient government can only arise when transfer stipulations establish both specific performance requirements not yet met as well as identifiable and enforceable return requirements.
• When a transfer is initially recognized as a liability by a recipient, revenue is recognized as the transfer stipulations are subsequently met.
• A determination that a transfer is authorized at the financial statement date requires evidence of the:

  (a)	authority to enter into a transaction, which is conveyed through approved legislation, regulations or by-laws; and
  (b)	exercise of that authority by the financial statement date.

   

November 2006
PSAB considered responses to the Exposure Draft (ED) and asked the task force to re-examine the application of the liability definition in Section PS 3200, Liabilities, to government transfers.

June 2006
PSAB approved an ED.

The ED required recognition of revenue by the recipient and expense by the transferor when the transfer was authorized and eligibility criteria were met. Pre-flow of cash does not result in recognition of asset and liability.

The main features of this ED include the following:

• Government transfers should be recognized as revenue or expenses when the transfer has been authorized and any eligibility criteria have been met.
• A determination that a transfer is authorized requires evidence at the financial statement date of:

  (a)	the authority to enter into a transaction, which is conveyed through approved legislation, regulations or by-laws; and
  (b)	the exercise of authority under legislation, regulations or by-laws in place at the financial statement date.

   

March 2006
PSAB reconsidered its decision from the January 2006 meeting and approved the development of an ED consistent with the conceptual framework.

January 2006
PSAB approved the development of an ED primarily based on the second Associates’ Draft (AD).

June 2005
PSAB approved a second AD.

The second AD allowed liability recognition when the definition of liability was met. Guidance was provided based on Sections PS 3100, Restricted Assets and Revenues, and PS 3200, Liabilities.

March 2004
PSAB approved an AD.

The AD allowed liability recognition of transfers if certain stipulations are included in the terms of the transfers.

October 2003
PSAB held a Forum with the senior government community.

October 2002
PSAB approved a Statement of Principles (SOP) proposing revisions to Section PS 3410, Government Transfers, and an Issues Paper to accompany the SOP for Associates’ comment.

The SOP was developed based on the conceptual framework. Asset recognition by transferring governments was not allowed. Liability recognition by recipient governments was allowed only in circumstances described in Section PS 3100.

June 2001
PSAB approved a Project Proposal.

Next Steps

PSAB expects to reach the following key steps at the dates indicated:

Related Information

Plain language document on Third Re-exposure Draft
Issues Analysis on Third Re-exposure Draft
Responses to Second Re-exposure Draft
Second Re-exposure Draft
Plain language document on Second Re-exposure Draft
Re-exposure Draft
Exposure Draft
International Public Sector Accounting Standard IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers)

Contact Information

Questions or comments on this project should be directed to:

Martha Jones Denning, CA
Principal, Public Sector Accounting
Telephone: +1 (416) 204-3288
Fax: +1 (416) 204-3412

The Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto ON M5V 3H2 Canada