17 February 2021: ICAEW’s public sector team examines the differences between International Financial Reporting Standards and International Public Sector Accounting Standards and the suitability of each in public sector financial reporting.

The IFRS standard on accounting for grant income, IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance, is based on the matching principle where grant income is recognised over the relevant periods to match it with expenditure or costs that the grant income should compensate. To achieve this, grant income is typically deferred, creating a liability on the balance sheet, which is then released to match with the period of the grant or the life of any associated assets the grant has helped finance. 

IAS 20 predates the Conceptual Framework for Financial Reporting that underpins IFRS, which does not include the matching principle as an underlying concept. There is an argument that deferred government grants do not always meet the IFRS definition of a liability. However, preparers are required to follow IAS 20 irrespective of whether the grant recipient has any obligations to fulfil in return for the grant or whether the grant would need to be repaid if those obligations are not met, potentially in conflict with the definition of a liability as requiring a probable outflow of resources. 

IPSASB’s current standard covering the accounting for grant income, IPSAS 23 – Revenue from Non-Exchange Transactions, is based on non-exchange transactions that either have conditions or restrictions in place. However, this standard is being phased out for several reasons, in particular that it can be difficult to differentiate between exchange and non-exchange transactions in practice. 

IPSASB is currently consulting on new draft standards that would provide guidance for both grant income and expenditure. The current proposal is that all transactions, both income and expenditure, will be accounted for based on binding arrangements that contain either a performance obligation or a present obligation. The principle is that grant transactions would be underpinned by a contract (the binding arrangement) setting out the terms the recipient has to fulfil (performance/present obligations) or risk having to return the grant. The grant income is then deferred until the obligation has been satisfied. If there is no contract ie binding arrangement and/or no performance or present obligation, then the income and expenditure are recognised immediately. 

The consultation is still ongoing in respect of these proposals, but initial reactions seem to indicate that stakeholders find this new approach too complicated. The distinction between a performance obligation and a present obligation is not obvious and seems slightly contrived. A grant recipient would defer income until either the performance obligation or the present obligation is satisfied. However, a grant provider would only defer expenditure if the recipient had a performance obligation but would recognise expenditure immediately if the recipient had a present obligation. The accounting treatment differs significantly for the grant provider, which is why it is very important to have a clear delineation of performance and present obligations.

IPSAS provide more relevant public sector application guidance, in particular in relation to the factors that give rise to binding arrangements and enforceability mechanisms beyond legislation and contracts. 

IFRS and IPSAS are principles-based accounting standards that require judgment. The recognition of expenses, revenue, assets and liabilities will depend on whether the definitions within the standards have been met.

Read the full know-how article: IFRS vs. IPSAS in public sector financial reporting