As Malaysia moves to an accrual accounting system under the MPSAS framework, Ramesh Ruben Louis looks at non-exchange transactions
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This article was first published in the September 2018 Malaysia edition of Accounting and Business magazine.
In this second part of the Malaysian Public Sector Accounting Standards (MPSAS) series (see the April issue for the first part), we examine further the accounting for key sources revenue in the public sector, as prescribed by MPSAS 23, Revenue from Non-Exchange Transactions. This deals with issues that need to be considered in recognising and measuring revenue from non-exchange transactions, including the identification of contributions from owners.
MPSAS 23 addresses revenue arising from non-exchange transactions while revenue from exchange transactions is addressed in MPSAS 9, Revenue from Exchange Transactions. While revenues received by public sector entities arise from both exchange and non-exchange transactions, the majority of revenue of governments and other public sector entities is typically derived from non-exchange transactions comprising taxes and transfers (be it in cash or non-cash/in-kind). MPSAS 23 is uniquely for public sector and, as such, there is no IFRS/MFRS equivalent.
MPSAS 9 defines exchange transactions as those 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. Consequently, MPSAS 9 defines non-exchange transactions as those where an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange. (Note: MPSAS 23 does not provide a definition of non-exchange transaction.)
In most transactions involving the private sector, there is an exchange of approximately equal value; but in the public sector, most entities undertake activities or transactions where they receive resources and provide no or nominal consideration directly in return. These are clearly non-exchange transactions. For example, taxpayers pay taxes because the tax law mandates the payment of those taxes. While the taxing government will provide a variety of public services to taxpayers, it does not do so in consideration for the payment of taxes.
There are also non-exchange transactions where the entity may provide some consideration directly in return for the resources received, but that consideration does not approximate the fair value of the resources received. In these cases, the public sector entity determines whether there is a combination of exchange and non-exchange transactions, each component of which is recognised separately.
For example, Agency X receives RM10m funding from a multilateral development body. The agreement stipulates that Agency X must repay RM8m over a period of 10 years, at 4% interest when the market rate for a similar loan is 8%. The entity has effectively received a RM2m grant (RM10m received less RM8m to be repaid) and entered into an RM8m concessionary loan, which attracts interest at 4% below the market interest rate for a similar loan. The RM2m grant and the off-market portion of the interest payments in terms of the agreement are non-exchange transactions. The contractual capital and interest payments over the period of the loan are exchange transactions.
Types of transactions
This figure provides an overview of the main types of non-exchange transactions, prescribed under MPSAS 23. These are explained below:
- Taxes – An entity shall recognise an asset in respect of taxes when the taxable event occurs and the asset recognition criteria are met. Taxation revenue arises only for the government that imposes the tax, and not for other entities. For example, where the national government imposes a tax that is collected by its taxation agency – for example, an inland revenue board – assets and revenue accrue to the government, not the taxation agency. Taxation revenue shall be determined at a gross amount and shall not be reduced for expenses paid through the tax system. Taxation revenue shall also not be grossed up for the amount of tax expenditures. For example, in some jurisdictions, homeowners are permitted to deduct mortgage interest and property taxes from their gross income when calculating tax-assessable income. These types of concessions are available only to taxpayers. If an entity (including a natural person) does not pay tax, it cannot access the concession. These are called tax expenditures. Tax expenditures are foregone revenue, not expenses, and do not give rise to inflows or outflows of resources – that is, they do not give rise to assets, liabilities, revenue or expenses of the taxing government.
- Debt forgiveness Lenders will sometimes waive their right to collect a debt owed by a public sector entity, effectively cancelling the debt. For example, a national government may cancel a loan owed by a local government. In such circumstances, the local government recognises an increase in net assets because a liability it previously recognised is extinguished. Revenue arising from debt forgiveness is measured at the carrying amount of the debt forgiven.
- Fines normally require an entity to transfer a fixed amount of cash to the government, and do not impose on the government any obligations that may be recognised as a liability. As such, fines are recognised as revenue when the receivable meets the definition of an asset and satisfies the criteria for recognition as an asset. It is important to note that according to the accountant general’s department (AGD) guideline, Bil 2 2014 on Government Receivables for the Federal Government, there will not be any receivable recognised for police summons as the revenue cannot be reasonably determined until received.
- Bequests are transfers made according to the provisions of a deceased person’s will. They are recognised as assets and revenue 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.
- Gifts and donations (other than services-in-kind) are recognised as assets and revenue 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. Cash or other monetary gifts or donations and goods-in-kind are usually recognised on the date that they are received. On initial recognition, gifts and donations including goods-in-kind are measured at their fair value as at the date of acquisition, which may be ascertained by reference to an active market, or by appraisal. For many assets, the fair value will be readily ascertainable by reference to quoted prices in an active and liquid market. For example, current market prices can usually be obtained for land, non-specialised buildings, motor vehicles and many types of plant and equipment.
- An entity may, but is not required to, recognise services-in-kind as revenue and as an asset.
- Grants are transfers that satisfy the definition of non-exchange transactions because the transferor provides resources to the recipient entity without the recipient providing approximately equal value directly in exchange. An entity analyses all stipulations contained in transfer agreements to determine if it incurs a liability when it accepts transferred resources. For example, the federal government (transferor) grants RM10m to a provincial government (reporting entity) to be used to improve and maintain mass transit systems. Specifically, the money is required to be used as follows: 30% for existing rail system upgrades, 50% for new rail systems, and 20% for rolling stock purchases and improvements. The agreement requires the grant to be spent in the current year or be returned. The provincial government recognises the grant money as an asset. The provincial government also recognises a liability in respect of the condition attached to the grant. As the province satisfies the condition – that is, as it makes authorised expenditures – it reduces the liability and recognises revenue in the statement of financial performance of the reporting period in which the liability is discharged.
- AGD’s guideline – Bil 2 2014 on Government Receivables for the Federal Government – has also set out that revenue from licences, permits or vehicle levies are recognised when cash is received.
Contribution from owners
Contributions from owners do not give rise to revenue. MPSAS 1 defines contributions from owners as future economic benefits or service potential that has been contributed to the entity by external parties, other than those that result in liabilities of the entity, that establish a financial interest in the net assets/equity of the entity, which:
a) conveys entitlement both to (i) distributions of future economic benefits or service potential by the entity during its life, such distributions being at the discretion of the owners or their representatives, and to (ii) distributions of any excess of assets over liabilities in the event of the entity being wound up, and/or
b) can be sold, exchanged, transferred or redeemed.
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory
CPD technical article
"MPSAS 23 is uniquely for public sector and, as such, there is no IFRS/MFRS equivalent"