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Statement of Principles

Revenue
Prepared by: Public Sector Accounting Board August 2013
Comments are requested by February 3, 2014

PSAB

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: ed.psector@cpacanada.ca 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. PSABs 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 PSABs 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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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. 2. Are there other implications of the proposals that should be considered? If so, please provide a detailed explanation. 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. 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.) 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? 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? 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.)

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ii | STATEMENT OF PRINCIPLES AUGUST 2013

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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. 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. Do you agree with the distinction between refund liabilities and unearned revenues? If not, explain why not. (See paragraphs .052 and .108-.109.) 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? 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? 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.) 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. 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? 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. Do you agree contract costs should be expensed unless they give rise to a tangible capital asset or inventories? If not, why not. Do you agree with the proposed principle applying to presentation and financial statement disclosure requirements? If not, why not. 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

.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

1 | STATEMENT OF PRINCIPLES AUGUST 2013

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. 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. 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. 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.
REVENUE

.002

.004

.005

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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. 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. 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.

.007

.008

EFFECT ANALYSIS
.009 The proposed guidance addresses revenue recognition. The proposals clarify that amounts that otherwise meet PSABs 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. 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. 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.

.010

.011

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.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. Other reporting issues associated with the measurement of revenues arising from exchange transactions are discussed and may require consideration. 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.

.013

.014

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. 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. 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. 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.

.016

.017

.018

Revenue categories .019 This proposal aims to align recognition and measurement principles based on the public sector entitys 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). 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 Unilateral (Non-exchange) Examples Present or Proposed Primary Source of GAAP TAX REVENUE, Section PS 3510

.021

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 Revenues from exchange transactions

Scope of these proposals

FINANCIAL INSTRUMENTS, Section PS 3450 RESTRICTED ASSETS AND REVENUES, Section PS 3100 GOVERNMENT TRANSFERS, Section PS 3410 Under development

.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. 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. 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

.023

.024

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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. 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

.026

.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. Unlike exchange transactions, unilateral revenues do not necessarily entitle a resource provider to any specific public service or benefit. The public sector entitys right to the revenue is attributable to direct or devolved constitutional powers that allow unilateral revenue to be imposed. 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.

.028

.029

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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. 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. PSABs 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. 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.

.031

.032

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.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. 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.

.036

.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.

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.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). 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. 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. 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. 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.

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.042

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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 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

Measurement

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,

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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 IASBs 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. As the mandate of PSABs 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. 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 PSABs 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. 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. 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. 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.

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.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. 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. 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. 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. 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 PSABs exposure draft. 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.

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.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. 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.
REVENUE, Section 3400, provides principles that describe recognition separately

.061

.062

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. 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 payors expectations create performance obligations. When a payors expectations are enforceable promises, they are performance obligations. 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.

.065

.066

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 IASBs 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. As contracts may not underlie all of the exchange transactions between payors and public sector entities, PSABs proposed definition varies from the IASBs. 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 drivers licence and its issuance to a qualifying driver). 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.

.068 .069

.070

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. 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. 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. 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

.073

.074

.075

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. 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. 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.

.077

.078

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... 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

.080

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. 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.

.082

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. 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. 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.

.084

.085

17 | STATEMENT OF PRINCIPLES AUGUST 2013

(c) (d) (e) .086

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.

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. 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. 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.

.087

.088

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. 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 entitys performance creates or enhances an asset (for example, work in progress) that the payor controls as the asset is created or enhanced; or

.090

REVENUE

| 18

(b)

the public sector entitys 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 entitys 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. PSABs 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. 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 entitys performance obligations. Such changes would be accounted for as changes in accounting estimates in accordance with ACCOUNTING CHANGES, Section PS 2120. 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 entitys performance obligations to the payor.

.093

.094

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. 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. 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.

.096

.097

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. 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. 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. 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. A public sector entity accounts for a modification separately if the modification affects both: (a) promised goods or services that are distinct; and

.099

.100

.101

.102

REVENUE

| 20

(b)

a public sector entitys right to receive an amount of consideration that reflects the public sector entitys 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 PSABs 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. 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). 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. 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 PSABs exposure draft.

.105

.106

.107

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 entitys 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

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.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 Penalty associated with enforcement of a legislated requirement Situation Legislation that enables issuance of a summons 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. IPSASBs 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. The discussion in IPSASBs 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. IPSASB concludes that when the power is exercised and the rights exist to receive service potential or economic benefits, an asset arises. 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.

.116

.117 .118

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. 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.

.120

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. 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.

.123

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

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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. 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

.126

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. 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. 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. PSABs Reexposure Draft, Related Party Transactions, issued in June 2013, outlines proposals that would apply to related party transactions.

.128

.129

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. 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. 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. 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. 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. 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. 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.

.132

.133

.134

.135

.136

.137

REVENUE

| 26

(b)

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).

.138

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. 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. 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 entitys competitors for similar goods or services and adjusting those prices as necessary to reflect the entitys 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.

.140

.141

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. 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 Boards 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. 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. 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.

.143

.144

.145

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

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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. 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). 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.
FINANCIAL STATEMENT OBJECTIVES, Section PS 1100, cites the following as

.148

.149

.150

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 users assessment of the governments 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. 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. 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 governments program mandates, onerous contract provisions would apply. 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.

.153

.154

.155

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. 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. 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

.157

.158

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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.
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. 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.

.161

.162

.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 users understanding of financial results. 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:

.164

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(a) (b) .165

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.

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. 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. 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 entitys 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.

.166 .167

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.

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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? No Can the public sector entity identify specific performance obligations arising directly from the payment, or promise, of consideration? 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. Yes Apply TAX REVENUES, Section PS 3510 Yes Apply the principles applicable to revenues from exchange transactions in this statement. Yes Apply the standards applicable to Contributions (under development)

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