MPSAS 23 Revenue From Non-Exchange Transaction (Taxes and Transfers) is another interesting accounting standard for the public sector entities. Similar to MPSAS 21: Impairment for Non-Cash Generating Assets, this accounting standard is not available for entities in the private sector. It is common for public sector entities to receive resources without giving back in return the approximate value of the resources received such as taxes and transfers (grants, concessionary loans). In other scenarios, public sector entities receive resources without giving anything in return such as donations and gifts received. In fact, revenue from non-exchange transactions constitutes a significant portion of public sector entities revenue due to the nature of the public sector entities – i.e. to provide goods and services to the public at large. We have covered the nature of public sector entities in details in MPSAS Series: Why there is a need for public sector accounting standards?
What is the definition of revenue from non-exchange transactions?
MPSAS 23 does not provide a specific definition of revenue from non-exchange transactions but MPSAS 9 Revenue from Exchange Transactions provides guidance on what is a non-exchange transaction. Taking this guidance into context, revenue from a non-exchange transaction is revenue arising from a transaction where an entity receives value from another entity without directly giving approximately equal value in exchange. It means, in a non-exchange transaction, an entity either (i) provides no or nominal consideration directly in return; or (ii) provides some consideration but that consideration does not approximate the fair value of the resources provided. There are also some tricky transactions where they are not entirely clear whether it is an exchange or non-exchange transaction. In this situation, an entity needs to assess the substance of the transaction to determine the appropriate classification. It is also important to note that a reduction in the price due to trade discounts, rebates and other similar reductions do not necessarily mean such a transaction is a non-exchange transaction.
Having considered the discussion above, an entity in the public sector may have revenue from a non-exchange transaction when:
- It receives resources without giving approximates equal value in exchange such as donations, grants taxes and others.
- It sells or provides goods and services without receiving equal value in exchange such as providing goods to the public at a subsidised price.
How and when to recognise revenue from non-exchange transactions?
MPSAS 23 provides an illustration of the analytic process an entity undertakes when there is an inflow of resources to determine how and when the revenue arises.
Revenue is generally recognised at the same time when the asset (cash or other types of assets) arising from the non-exchange transaction is recognised. MPSAS 23 requires an entity to recognise and measure the revenue at the amount of the increase in the net assets. So, where an entity has satisfied all of the obligations related to the inflow, the amount of revenue recognised is equal to the amount of asset, which is measured at the fair value as at the date of acquisition.
However, there are instances where revenue is not recognised immediately (or being deferred) when the asset is recognised. This happens when, for example, there are conditions attached to the transferred assets. In such a situation, instead of revenue, a liability will be recognised. This liability is measured based on the best estimate of the amount required to settle the present obligation at the reporting date. It also takes into consideration the time value of money if it is material. Revenue will only be recognised when an entity satisfies the present obligation related to the transaction by reducing the carrying amount of liability. Revenue is recognised at an amount equal to the reduction of the carrying amount of the liability.
How to determine if there is a condition attached to the transferred assets?
MPSAS 23 states that the assets transferred to the public sector entities may come with stipulations. Stipulations on transferred assets are terms in laws or regulations, or a binding arrangement imposed upon the use of a transferred asset by external entities. Stipulations can either be a condition or restriction and the accounting for the two are different. The definition of the two are as follows:
- Restriction on a transferred asset – stipulations that limit or direct the purposes for which a transferred asset may be used, but do not specify that future economic benefits or service potential is required to be returned to the transferor if not deployed as specified.
- Condition on a transferred asset – stipulations that specify that the future economic benefits or service potential embodied in the asset is required to be consumed by the recipient as specified or future economic benefits or service potential must be returned to the transferor.
Liability is only recognised for conditions as conditions require the future economic benefits or service potential to be returned to the transferor if the stipulation is breached. No liability is recognised for restriction. Accordingly, when the public sector entities gain control over an asset subject to a condition, the public sector entities are required to recognise a liability due to the present obligation to return the asset.
An important point to note – MPSAS 23 emphasises for public sector entities to consider the substance of the terms instead of merely their form. This means a mere clause to require an entity to return the asset if not consumed is not sufficient to justify the recognition of liability. MPSAS 23 requires an entity to consider whether the requirement to return the asset or other future economic benefits or service potential is: (1) enforceable; and (2) would be enforced by the transferor. If the stipulation cannot be enforced by the transferor, it will be considered as a restriction. Or if the transferor never enforces the requirement in the past when breaches have occurred, it is a restriction because the stipulation has the form but not substance. What if the entity has no experience with the transferor or has not breached stipulation in the past? In this situation, MPSAS 23 states that such a stipulation has to be treated as a condition, assuming that the transferor would enforce the stipulation.
What are other considerations for revenue from non-exchange transactions
MPSAS 23 also provides discussion and consideration for specific revenue from non-exchange transactions of the following:
- Taxes – an asset is recognised when the taxable event occurs and the asset recognition criteria are met. Taxation revenue will only be recognised by the government that imposes the tax and not its agent. Taxes also do not meet the definition of contribution from owners. Revenue from taxes will be recognised when the taxable event has occurred.
- Debt forgiveness and assumption of liabilities – revenue arising from debt forgiveness will only be recognised when the former debt no longer meets the definition of liability or satisfies the criteria for recognition of a liability. It is also possible for debt forgiveness to be treated as a contribution from owners and hence, an entity needs to assess this. Revenue from debt forgiveness is measured at the carrying amount of the debt forgiven.
- Fines – Revenue from fines are recognised when the receivable meets the definition of an asset and satisfies the criteria for recognition as an asset.
- Gifts and donations – Revenue will be recognised when it is probable that the future economic benefits or service potential will flow to the entity and the fair value of the assets can be measured reliably.
- Services-in-kind – MPSAS 23 states that an entity may but is not required to recognise services-in-kind as revenue and as an asset.
- Concessionary loans (loans received below-market terms) – an entity will need to assess the exchange element/portion and whether the difference between the transaction price (loan proceeds) and the fair value of the loan on initial recognition, is a non-exchange transaction as per this standard.
The full details of MPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers) is available on the website of the Accountant General’s Department of Malaysia for your reference. We will continue to discuss other MPSAS in the upcoming articles.Meantime, please enjoy other articles in the Financial Accounting section.