In May 2023, IPSASB issued IPSAS 47 'Transfer Expenses' which is a new standard that covers non-exchange expense transactions.
A transfer expense is defined as an expense arising from a transaction in which an entity provides a good, service, or other asset to another entity, without directly receiving any good, service or other asset in return. Grant expenditure is covered by IPSAS 47.
No equivalent IFRS standard exists.
Appendix 3.1 – Accounting for grant expenditure – IFRS
Under IFRS, the relevant accounting standard that preparers would use is IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'. Accounting for grant expenditure is determined by whether the grant provider has a present obligation to make the grant payment. The process is very similar for IPSAS transfer expenses without performance obligations and is reviewed in more detail below.
Appendix 3.2 – Accounting for grant expenditure – IPSAS
Under IPSAS 47, the accounting for transfer expenses is driven by whether the transaction results in an enforceable right to have the transfer recipient satisfy their obligations. This right is recognised as an asset and subsequently expensed as the recipient performs its duties.
Similarly to the revenue standard, identifying whether the transactions arise from a binding arrangement will influence the asset recognition criteria as each party’s rights and obligations are set out. The binding arrangement must contain enforceable rights and obligations for all parties; enforceability is derived through legal or equivalent means, such as executive authority or ministerial directives.
Transfer expenses from transactions without binding arrangements
In a transfer expense without binding arrangements, the entity does not have both enforceable rights and obligations. For example, donations – a transfer provider cannot direct how these funds are to be used by the recipient. By contrast, education grants tend to contain enforceable rights – the recipient (schools, universities) will have to use the grants in certain ways but they cannot demand payment so there is no enforceable obligation on behalf of the grant provider in this instance.
Recognition
An entity will need to consider first if it has a constructive or legal obligation related to the transfer. If it has, the entity will need to recognise an expense and a provision and the subsequent transfer of resources then settles the provision.
If there is no related constructive or legal obligation the entity derecognises assets to be transferred and recognises a transfer expense when it ceases to control these resources.
Transfer expenses are measured at the carrying amount of the transferred assets.
Transfer expenses from transactions with binding arrangements
The accounting model for transfer expenses with a binding arrangement is driven by the enforceable rights and enforceable obligations in the binding arrangement, and whether the entity or the transfer recipient has fulfilled its respective obligations.
Recognition
The enforceable right contained within the binding arrangement meets the definition of an asset and when the resources are transferred, the entity derecognises the transferred asset and recognises a transfer right asset.
Subsequently, the transfer right asset is de-recognised and expensed when or as the transfer right is extinguished which is typically when the recipient satisfies its obligations in the binding arrangement.
Should the recipient start satisfying its obligations as per the binding arrangement prior to having received any resources, then the binding arrangement imposes enforceable obligations on the transfer provider resulting in the recognition of a liability.
The transfer right asset is measured at the carrying amount of the transferred asset. When an entity recognises a liability for the enforceable obligation to transfer resources, the liability is measured at the carrying amount of the resources which the entity is obliged to transfer.
Find out more
Follow these links for a detailed look at other areas of Government Grants:
