Reporting financial performance

Prepared by: Michael Wells

April 23-27, 2018
Addis Ababa
Aims

» Understand the concepts underlying the accounting for

financial performance
» Understand the requirements and the judgements in applying
the requirements in presenting performance in accordance with
IPSAS

2
IPSAS IFRS table of concordance
performance related issues

IPSAS IFRS
IPSAS 4 The Effects of Changes in Foreign Exchange Rates IAS 21
(determining functional currency)
IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and n/a
Transfers)
IPSAS 9 Revenue from Exchange Transactions IAS 18
IPSAS 11 Construction Contracts IAS 11
IPSAS 24 Presentation of Budget Information in Financial n/a
Statements

3
The underlying concepts
 IPSAS accrual
the underlying concepts

» Focused on information needs of primary users who cannot require

information from the entity: (i) service recipients and their representatives
(eg legislature and members of parliament); and (ii) resource providers.
» Assessments:
» accountability and
» resource provision decisions (eg provide or settle a loan)
» information to enable primary users to make their own assessments of the reporting
entity’s prospects for future net cash inflows
» as a basis for their decisions to buy, hold, sell equity and debt instruments or to
provide a loan or to require settlement of a loan

* source: Chapter 1 of IASB Conceptual Framework 5

 IPSAS accrual*
objective

» Focused on information needs of primary users who cannot

require information from the entity
» Designed for the general purpose financial reporting by public sector
entities other than those that are primarily profit oriented
» primary users = (i) service recipients and their representatives (eg
legislature and members of parliament); and (ii) resource providers
» assessments = accountability and decisions (eg provide or settle a
loan)
* source: Preface to and Chapter 2 of IPSASB Conceptual Framework 6
 IPSAS accrual*
objective

» Provides information about a public sector entity’s:

» Financial Position, Financial Performance and Cash Flows
» Budget Information and Compliance with Legislation or Other Authority
Governing the Raising and Use of Resources
» Service Delivery Achievements
» Prospective Financial and Non-financial Information
» Explanatory Information

* source: Preface to and Chapter 2 of IPSASB Conceptual Framework 7

Assessing prospects for future net cash inflows
the underlying concepts

» To assess an entity’s prospects for future net cash inflows,

existing and potential investors, lenders and other creditors
need information about:
» the resources of the entity;
» claims against the entity; and
» stewardship — how efficiently and effectively the entity’s management
and governing board have discharged their responsibilities to use the
entity’s resources
» for example, protecting the entity’s resources from unfavourable effects of
economic factors such as price and technological changes

8
 Elements of financial performance
the underlying concepts

Element IPSASB Conceptual Framework (paragraph 5.29 and 5.30)

Revenue …increases in the net financial position of the entity, other than
is… increases arising from ownership contributions.

Expense decreases in the net financial position of the entity, other than
is… decreases arising from ownership distributions.

9
What are revenue and expenses?
the underlying concepts

» Changes in net financial position (primarily assets less liabilities) other than
increases arising from transactions with owners in their capacity as owners
include:
» transformation of an asset (eg converting raw materials into finished goods; biological
transformation; depleting an asset’s service potential through use)
» change in the value of an asset or liability (eg changes in the price of commodities;
interest rate change effects on value of fixed-rate instruments)
» Question: in economics does exchanging assets (for example, exchanging
inventory for cash or the right to receive cash) result in a substantial change
in equity? Choose one of: 1) Yes; or 2) No.
10
Reporting financial performance
the underlying concepts (and some ‘concepts’)

» Surplus or deficit for the period is the difference between revenue and
expense reported on the statement of financial performance (note IPSAS
accrual specifies that some items of income and expense are presented
directly in net assets/equity, ie outside the statement of financial
performance).
» The relevance of revenue and expenses are enhanced by separate
presentation of:
» items that arise in the course of ordinary operations (for example, revenue from
exchange transactions); and
» those that do not (for example, incidental disposals of assets)

» Do not offset expenses against income unless explicitly required 11

Presenting revenue and expenses outside of the statement of
financial performance, ie by exception reported directly in equity

» Normally, all items of revenue and expense recognized in a

period are included in surplus or deficit.
» Examples of items of revenue and expense that are prohibited
from being included in the statement of financial performance
include:
» revaluation surpluses (see IPSAS 17);
» particular (a) gains and losses arising on translating the financial
statements of a foreign operation (see IPSAS 4); and
» gains or losses on remeasuring available-for-sale financial assets (see
IPSAS 29).
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Reporting financial performance
selected sub-classifications of revenue and expenses

» Subject to materiality considerations, minimum line-items the face of the

statement of financial performance are: (i) Revenue; (ii) Finance costs; (iii) Share
of the surplus or deficit of associates and joint ventures accounted for using the
equity method; (iv) Pre-tax gain or loss recognized on the disposal of assets or
settlement of liabilities attributable to discontinuing operations; and (iv) Surplus or
deficit.
» Additional line items, headings, and subtotals shall be presented on the face of
the statement of financial performance when such presentation is relevant to an
understanding of the entity’s financial performance.
» When items of revenue and expense are material, their nature and amount must
be disclosed separately (either in the statement of financial performance or the
notes).
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Reporting financial performance
selected sub-classifications of revenue and expenses

» Circumstances that would give rise to the separate disclosure of items of

revenue and expense include: (i)  Write-downs of inventories to net realizable
value or of property, plant, and equipment to recoverable amount or recoverable
service amount as appropriate, as well as reversals of such write-downs; (ii)
Restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring; (iii) Disposals of items of property, plant, and equipment;
(iv) Privatizations or other disposals of investments; (v) Discontinuing operations;
(vi) Litigation settlements; and (vii) Other reversals of provisions.
» Other commonly presented separate line items in the statement of financial
performance include: (i) Changes in the fair value less costs to sell of biological
assets in agricultural activity; and (ii) Changes in the fair value of investment
property.

14
Revenue or other income
what do you think? (slide 1 of 2 slides for this Charity)

Charity must present either on the face of the statement of financial performance or in
the notes, a subclassification of total revenue, classified in a manner appropriate to the
entity’s operations.
How would Charity subclassify its total revenue (specify)?
Charity’s commercial operations has three segments: (i) motor vehicles; (ii) cattle; and
(iii) construction services.
» The motor vehicle segment: (i) retails new and second-hand vehicles; (ii) rents ‘new’
vehicles to others on short-term (up to three-month) rentals; and (iii) repairs motor
vehicles.
» The cattle segment breeds beef cattle for slaughter.
» The construction segment constructs specialised machinery for use in agriculture
sector.

15
Revenue or other income
what do you think? (slide 2 of 2 slides for this Charity)

» Charity also disposed of the following property in 2017:

» all farmland in Region X because its highest and best use is now
residential housing
» the head-office building because the staff moved into a new building
» the rental fleet because it was replaced with a new fleet of vehicles
» a herd of cattle culled by order of the Agriculture Ministry because foot
and mouth disease was found to be prevalent in the herd (nominal
compensation was received from the Ministry)

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Sub-classifications of expenses by function or by nature
must use most relevant and faithfully representative presentation

Must present, either on the face of the statement of financial performance or in the
notes, an analysis of expenses either the nature of expenses or by their function within
the entity.
» Analysis of expenses by their function (ie according to the program or purpose for
which they were made). For example, Charity’s retail operation could present: (i) cost
of sales; (ii) selling and distribution expenses; (iii) administrative expenses
» Analysis of expenses by their nature. For example, Charity’s retail operation could
present: (i) inventory derecognised when sold; (ii) depreciation/amortisation; (iii) staff
costs.
If classify expenses by function must also disclose information on the nature of
expenses, including depreciation and amortization expense and employee benefits
expense.

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Analysis of expenses by function
what do you think?

For for each expense below incurred by Charity’s commercial

operation choose one of: 1) cost of sales expense; 2)
administration expense; 3) selling and distribution expense; 4)
finance expense; 5) other expense (specify); or 6) not relevant
(explain why).
A. A toy retailer derecognises toy inventories sold to customers
B. A sheep farmer derecognises ewes sold at auction
C. A sheep farmer derecognises farmland sold

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Functional currency (IPSAS 4)
Aims

» Understand the concept of a functional currency in general

purpose financial information;
» Understand how to determine the functional currency; and
» Understand some of the main judgements made setting in
determining the functional currency.

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Relevant defined terms
source: paragraph 10 of IPSAS 4

» Functional currency is the currency of the primary economic

environment in which the entity operates.
» Foreign currency is a currency other than the functional
currency of the entity.
» Presentation currency is the currency in which the financial
statements are presented.

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Application guidance
source: paragraph 11 of IPSAS 4

»Functional currency is determined (not chosen)

»The primary economic environment in which an entity operates is normally
the one in which it primarily generates and expends cash. An entity
considers the following factors in determining its functional currency:
(a) The currency: (i) that revenue is raised from, such as taxes, grants, and fines;
(ii) that mainly influences sales prices for goods and services (this will often be the
currency in which sales prices for its goods and services are denominated and
settled); and (iii) of the country whose competitive forces and regulations mainly
determine the sale prices of its goods and services.
(b) The currency that mainly influences labor, material, and other costs of providing
goods and services (this will often be the currency in which such costs are
denominated and settled).

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Application guidance
source: paragraphs 12, 14 and 15 of IPSAS 4

The following factors may also provide evidence of an entity’s functional currency:
(a)  The currency in which funds from financing activities (i.e., issuing debt and equity
instruments) are generated.
(b) The currency in which receipts from operating activities are usually retained.
» When indicators are mixed and the functional currency is not obvious, management
uses its judgment to determine the functional currency that most faithfully
represents the economic effects of the underlying transactions, events, and
conditions. As part of this approach, management gives priority to the primary
indicators in paragraph 11 before considering other indicators, which are designed
to provide additional supporting evidence to determine an entity’s functional
currency.
» Once determined, the functional currency is not changed unless there is a change
in those underlying transactions, events, and conditions.
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Example 1
determining the functional currency

Which currency is Ethiopia Charity A’s functional currency?

Choose one of: 1) ETB; 2) USD; 3) GBP; 4) Euro; or 5) another
(specify)
Ethiopia Charity A conducts all of its activities in Ethiopia
exclusively in ETB. It has no international affiliations.

24
Example 2
determining the functional currency

Which currency is Ethiopia Charity B’s functional currency?

Choose one of: 1) ETB; 2) USD; 3) GBP; 4) Euro; or 5) another (specify)
Ethiopia Charity B:
» has no international affiliations
» conducts all of its charitable activities in Ethiopia
» all of its revenue is in the form of USD denominated grants (non-exchange
transactions) from a US Charity.
Because the US Charity stipulates a condition of its grants to Charity B that at least
60% the funds must spent in USD denominated transactions with US corporations
and US citizens, the majority of Charity B’s expenditures are USD denominated.
The remaining expenditures are in ETB.
25
Example 3
determining the functional currency

Which currency is Ethiopia Charity C’s functional currency?

Choose one of: 1) ETB; 2) USD; 3) GBP; 4) Euro; or 5) another
(specify)
Ethiopia Charity C has no international affiliations. It conducts all
of its charitable activities in Ethiopia and all of its expenditures
are in ETB.
However, all of its revenue is in the form of GBP denominated
grants (non-exchange transactions) from a UK charity.

26
Application guidance
source: paragraphs 13 of IPSAS 4

Additional factors for determining whether a foreign operation’s functional

currency is the same as the reporting entity that has the foreign operation as its
controlled entity, branch, associate, or joint arrangement):
(a)Whether the activities of the foreign operation are carried out as an extension of
the reporting entity, rather than with significant autonomy.
(b)Whether transactions with the reporting entity are a high or a low proportion of
the foreign operation’s activities.
(c)Whether cash flows from the activities of the foreign operation directly affect the
cash flows of the reporting entity and are readily available for remittance to it.
(d)Whether cash flows from the activities of the foreign operation are sufficient to
service existing and normally expected debt obligations without funds being
made available by the reporting entity.
27
Example 1
determining the functional currency of a foreign operation

Which currency is Ethiopian Branch Charity’s functional currency?

Choose one of: 1) ETB; 2) USD; 3) GBP; 4) Euro; or 5) another (specify)
American Charity has Ethiopian Branch Charity (EBC) that conduct
activities in Ethiopia on behalf of American Charity.
EBC conducts its activities substantially in USD (the functional currency
of American Charity). For example, EBC staff are paid in USD and
receive only a small ETB allowance.
EBC’s purchases of supplies and equipment are largely obtained via
American Charity, with purchases in ETB being kept to a minimum.

28
Example 2
determining the functional currency of a foreign operation

Which currency is Ethiopian Campus A’s functional currency?

Choose one of: 1) ETB; 2) USD; 3) GBP; 4) Euro; or 5) another (specify)
Ethiopian Campus A (established by British University) operates under the
management and direction of Ethiopian Campus A.
Ethiopian Campus A conducts its activities substantially in GBP (the
functional currency of British University). For example, Ethiopian Campus
student fees are charged in GBP and staff salaries are GBP denominated.
Ethiopian Campus A purchases of supplies and equipment are largely
obtained via British University, with purchases in ETB being kept to a
minimum.
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Example 3
determining the functional currency of a foreign operation

Which currency is Ethiopian Campus B’s functional currency?

Choose one of: 1) ETB; 2) USD; 3) GBP; 4) Euro; or 5) another (specify)
Ethiopian Campus B (established through a collaboration between a German University and the
Ethiopian Government) operates under the management and direction of the Ethiopian Campus.
The functional currency of German University is the Euro. The main contributions of the German
University to Ethiopian Campus B are in the form of the transfer of academic and administrative
skills and branding).
Ethiopian Campus B conducts its activities almost exclusively in ETB. For example, Ethiopian
Campus student fees are charged in ETB and staff salaries are ETB denominated. Ethiopian
Campus B is funded primarily by ETB grants and low-interest loans both from the Ethiopian
Government.
Ethiopian Campus B purchases of supplies and equipment from Ethiopian suppliers
denominated in ETB.

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Example 4
determining the functional currency of a foreign operation

Which currency is International Charity’s Ethiopian Operation’s functional currency?

Choose one of: 1) ETB; 2) USD; 3) GBP; 4) Euro; or 5) another (specify)
International Charity established a separate charity in Ethiopia. Although USD is the functional
currency of the Geneva head office operations of International Charity, it has many operations in
other countries with other functional currencies.
International Charity’s Ethiopian Charity’s:
» international and Ethiopian fund raising activities are supported by International Charity and
raise cash in USD, Euro, GBP and ETB in near equal proportions.
» staff are paid in the currency of the country in which they mainly operate. While 80% of its staff
operate in Ethiopia, the country wage rate differentials results in only 30% of staff costs being
incurred in ETB. The remaining staff costs relate to fund raising personnel that operate in the
US, Eurozone countries and the UK.
» has no borrowings. Its purchases of supplies and equipment are, in almost equal proportions,
denominated in ETB, USD and Euros.
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Why determining functional currency matters!

»Functional currency is the entity’s measurement currency

»a foreign currency transaction is recorded, on initial recognition in
the functional currency (paragraph 24 of IPSAS 4)
»at the end of each reporting period foreign currency (paragraph
27 of IPSAS 4):
» monetary items are translated using the closing rate
» non-monetary items measured at historical cost are translated at
historic rates
» non-monetary items measured at fair value of translated at the
rate on the date fair value was measured (usually the closing rate)
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Distinguishing between:
IPSAS 23 Revenue from Non-exchange
Transactions; and
IPSAS 9 Revenue from Exchange Transactions
Distinguishing between exchange transactions and non-exchange
transactions

» An exchange transaction is one in which the entity receives

assets or services, or has liabilities extinguished, and directly
gives approximately equal value (primarily in the form of goods,
services, or use of assets) to the other party in exchange.
» Examples of exchange transactions include:
(a) The purchase or sale of goods or services; or
(b) the lease of property, plant and equipment at market rates.
» Examples of non-exchange transactions include revenue from
the use of sovereign powers (for example, direct and indirect
taxes, duties, and fines), grants, and donations.
34
Distinguishing between exchange transactions and non-exchange
transactions (continued)

» When there is a combination of exchange and non-exchange

transactions bundled in a single arrangement, the exchange and
non-exchange transactions must be bifurcated and each component
must be accounted for separately. (paragraph 10 of IPSAS 23)
» When it is not immediately clear whether a transaction is an
exchange transaction or non-exchange transaction judgement must
be exercised on the basis of the substance of the transaction to
make the determination. (paragraph 10 of IPSAS 23)
» When it is not possible to distinguish separate exchange and non-
exchange components, the transaction is treated as a non-
exchange transaction. (paragraph 41 of IPSAS 23) 35
Distinguishing between exchange and non-exchange transactions
test your understanding: example 1

In 2017 Charity receives goods with a fair value of ETB1.5 million

gifted from Philanthropist (ie no consideration and without any
condition or stipulation).
Is Charity’s contract with Philanthropist (choose one of):
1) an exchange transaction;
2) a non-exchange transaction;
3) a combination of an exchange transaction and a non-exchange
transaction; or
4) it depends (specify on what)?

36
Distinguishing between exchange and non-exchange transactions
test your understanding: example 2

In 2017 Charity buys goods with a fair value of ETB1.5 million

from Supplier for ETB1 million.
Is Charity’s contract with Supplier (choose one of):
1) an exchange transaction;
2) a non-exchange transaction;
3) a combination of an exchange transaction and a non-exchange
transaction; or
4) it depends (specify on what)?
Clue: would your answer be different if the discount reflected a
volume rebate rather than a subsidized price?
37
Distinguishing between exchange and non-exchange transactions
test your understanding: example 3

» On 01/01/2017 Charity receives ETB2 million cash grant from a

multi-lateral development agency (MLDA). Charity has no
obligation to repay MDLA and there are no conditions or
stipulations attached to the grant.
Is Charity’s contract with the MLDA (choose one of):
1) an exchange transaction;
2) a non-exchange transaction;
3) a combination of an exchange transaction and a non-exchange
transaction; or
4) it depends (specify on what)?
38
Distinguishing between exchange and non-exchange transactions
test your understanding: example 4

» On 01/01/2017 Charity receives ETB12 million funding from a multi-

lateral development agency (MLDA).
» On 31/12/2018 Charity is contractually bound to pay MDLA
ETB12.1 million to settle the loan.
» The market rate for a similar loan to Charity is 10%
Is Charity’s contract with the MLDA (choose one of):
1) an exchange transaction;
2) a non-exchange transaction;
3) a combination of an exchange transaction and a non-exchange
transaction; or
4) it depends (specify on what)? 39
IPSAS 23 Revenue from Non-exchange
Transactions
Paragraph 29 of IPSAS 23 illustrates the process when there is an
inflow of resources to determine whether revenue arises

41
IPSAS 23 Revenue from Non-exchange Transactions
when to recognise an asset from a non-exchange transaction

» Recognize an asset arising from a non-exchange transaction (or in

particular circumstances, a decrease in the carrying amount of a
previously recognized liability) when it gains control of resources that
meet the definition of an asset and satisfy the recognition criteria.
» Recognition criteria: an inflow of resources from a non-exchange
transaction, other than services in-kind, that satisfies the definition of
an asset must be recognised as an asset when, and only when:
(a)  It is probable that the future economic benefits or service potential
associated with the asset will flow to the entity; and
(b) The fair value of the asset can be measured reliably.

42
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of when to recognise an asset from a non-exchange transaction: example

On 15/10/2017 Charity receives notification from Philanthropist that

Philanthropist has goods that could be of use to Charity. The gift is
offered at no consideration and without any condition or stipulation.
01/01/2018 Charity inspects and accepts the goods from
Philanthropist at Charity’s premises.
Charity must recognise the asset (inventory) for the goods received
from the Philanthropist on (choose one of):
1) 15/10/2017 when Philanthropist notifies Charity of the goods;
2) 01/01/2018 (control of the goods passes to Charity); or
3) 31/12/2018 (balance sheet date). 43
IPSAS 23 Revenue from Non-exchange Transactions
when to also recognise a liability from non-exchange transactions

» In some cases, gaining control of the asset recognised in an non-exchange

transaction also carries with it obligations that must be recognized as a
liability.
» When the asset is transferred subject to the transferee consuming it in
providing goods and services to third parties or the asset must be returned to
the transferor, the transferee considers whether, in substance, the
requirement to return the asset or other future economic benefits or service
potential is enforceable, and would be enforced by the transferor.
» If the legal stipulation is enforceable and would be enforced, recognise a liability
(because a condition exists).
» The existence of a legal stipulation that is not a condition (ie a restriction) does not in
itself trigger the recognition of a liability

44
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of when to recognise a liability in connection with an asset non-exchange
transaction: example

On 31/12/2017 Charity receives a substantial delivery of tinned food from

Philanthropist free of charge, on the strict condition that Charity uses the
goods only to provide free hot meals from its soup kitchens in Ethiopia. If
Charity decides to use the gifted tin food for any other purpose
Philanthropist stipulates that any of the unused tins it has provided to
Charity must immediately be return to Philanthropist.
Scenario A: despite the stipulation, Philanthropist’s practice is not to
enforce it, choosing rather not to provide any further support to any charity
in breach of its stipulations.
On 31/12/2017 in addition to recognising the asset (inventory) for the
goods received from the Philanthropist, must Charity also recognise a
liability? (choose one of): 1) yes; 2) no; or 3) it depends 45
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of when to recognise a liability in connection with an asset non-exchange
transaction: example

On 31/12/2017 Charity receives a substantial delivery of tinned food from

Philanthropist free of charge, with a stipulation that Charity uses the goods
only to provide free hot meals from its soup kitchens in Ethiopia. If Charity
decides to use the gifted tin food for any other purpose Philanthropist
stipulates that any of the unused tins it has provided to Charity should
immediately be return to Philanthropist.
Scenario B: Philanthropist’s practice is to enforce its stipulation requiring
Charity to keep the tinned food it supplies separately from Charity’s other
inventories and performing period audits of their activities.
On 31/12/2017 in addition to recognising the asset (inventory) for the
goods received from the Philanthropist, must Charity also recognise a
liability? (choose one of): 1) yes; 2) no; or 3) it depends 46
IPSAS 23 Revenue from Non-exchange Transactions
when to also recognise revenue from non-exchange transactions

» If an inflow of resources satisfies the definition of contributions

from owners, it is not recognized as a liability or revenue.
» When an inflow of resources from a non-exchange transaction
is recognized as an asset it must be recognized as revenue,
except to the extent that a liability is also recognized in respect
of the same inflow.
» As an entity extinguishes/part extinguishes the liability in respect of an
inflow of resources from a non-exchange transaction recognized as an
asset, it must reduce the carrying amount of the liability recognized and
recognize an amount of revenue equal to that reduction.
47
IPSAS 23 Revenue from Non-exchange Transactions
when to also recognise revenue from non-exchange transactions

» The timing of revenue recognition is determined by the nature of

the conditions and their settlement. For example, if a condition
specifies that the entity is to provide goods or services to third
parties, or return unused funds to the transferor, revenue is
recognized as goods or services are provided.

48
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of recognising revenue from non-exchange transactions: example

On 31/12/2017 Charity receives a delivery of tinned food (with a fair value of ETB1.2
million) from Philanthropist free of charge, with the stipulation that Charity uses the goods
only to provide free hot meals from its soup kitchens in Ethiopia. If Charity decides to use
the gifted tin food for any other purpose Philanthropist stipulates that any of the unused
tins it has provided to Charity should immediately be return to Philanthropist.
Evenly over 2018, Charity uses the tinned food to provide free meals from its Ethiopian
soup kitchens.
Scenario A: despite the stipulation, Philanthropist’s practice is not to enforce it, choosing
rather not to provide any further support to any charity in breach of its stipulations.
How must Charity recognise revenue from the non-exchange transaction with
Philanthropist? (choose one of): 1) ETB1.2 million on 31/12/2017; 2) ETB100,000 each
month in 2018; or 3) never because it did not pay for the tinned food and does not charge
for the meals it was used to provide.
49
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of recognising revenue from non-exchange transactions: example
(continued)

Scenario B: Philanthropist’s practice is to enforce its stipulation

requiring Charity to keep the tinned food it supplies separately
from Charity’s other inventories and performing period audits of
their activities.
How must Charity recognise revenue from the non-exchange
transaction with Philanthropist? (choose one of):
1) ETB1.2 million on 31/12/2017;
2) ETB100,000 each month in 2018; or
3) never because it did not pay for the tinned food and does not
charge for the meals it was used to provide. 50
IPSAS 23 Revenue from Non-exchange Transactions
how to measure revenue arising from non-exchange transactions

» Revenue from non-exchange transaction: at the amount of the

increase in net assets recognized by the entity.
» Asset acquired through a non-exchange transaction: its acquisition-
date fair value. Exceptions apply, for example:
» for biological assets in agricultural activity initial measurement is at
acquisition-date fair value less costs to sell (see paragraph 17 of IPSAS 27)
» Liability incurred through a non-exchange transaction: the best
estimate of the amount required to settle the present obligation at
the reporting date (see Section 19 Provisions, Contingent Liabilities
and Contingent Assets).
51
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of measuring revenue from non-exchange transactions: example 1

» On 01/01/2017 Charity receives ETB12 million funding from a multi-

lateral development agency (MLDA).
» On 31/12/2018 Charity is contractually bound to pay MDLA ETB12.1
million to settle the loan (ie ETB2 million is a grant on 01/01/2017 and
the remaining ETB10 million bears interest at 10% per year).
» The market rate for a similar loan to Charity is 10% per year.
How must Charity recognise revenue from the non-exchange component
of the transaction with MLDA? (choose one of):
1) ETB2 million on 01/01/2017;
2) ETB83,333 each month in 2017 and 2018; or
3) Another (specify…) 52
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of measuring revenue from non-exchange transactions: example 2

» On 01/01/2017 a Simien Mountain-based Charity receives a herd of 1,000 cattle

from a Philanthropist for free in support of Charity’s objectives of increasing the
productivity and profitability of cattle farming around the Simien Mountains by:
» improving the genetics of the cattle farmed in the area; and
» through increasing economies of scale of local cattle farming by transforming it from
subsistence agriculture to community-wide commercial cattle ranching.
» Charity observed the Philanthropist’s agent pay ETB20,000 per cow at the Kera
Market Centre auction in Addis Ababa on 31/12/2016.
» Charity is also aware that Philanthropist paid:
» transactions costs at auction of ETB200 per cow on 31/12/2016 (a further ETB200 per cow
transactions costs was also paid by the seller); and
» a Livestock Transporter ETB900 per cow to move the cattle to Charity’s leasehold land in
the foothills of the Simien Mountains on 01/01/2017.
53
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding of measuring revenue from non-exchange transactions: example 2
(continued)

At what amount must Charity recognise revenue from the non-

exchange transaction with Philanthropist on 01/01/2017?
Choose one of:
1) ETB21.1 million;
2) ETB20.9 million;
3) ETB20 million;
4) ETB19.1 million;
5) ETB19 million; or
6) ETB18.9 million.

54
IPSAS 23 Revenue from Non-exchange Transactions
how to recognise and measure services in-kind

» An entity may (provided that it has control over the services in-
kind, and is able to measure their fair value reliably), but is not
required to, recognize services in-kind as revenue and as an
asset (the asset is immediately consumed and typically
becomes an expense unless it forms part of the cost of another
asset).
» IPSAS 23 encourages the disclosure of the nature and type of
services in-kind received during the reporting period.

55
IPSAS 23 Revenue from Non-exchange Transactions
accounting for costs associated with non-exchange transactions

» Costs incurred in relation to revenue arising from a non-

exchange transaction are not offset against the revenue arising
from a non-exchange transaction. Such costs are accounted
for a a separate transaction.

56
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding: costs associated with non-exchange transactions

» In 2017 Charity receives from the Government of Ethiopia a grant of a

building (fair value = ETB1 million) from which to expand its
operations.
» Charity assesses the stipulation that the building be used for the
Charity’s business to be a restriction not a condition.
» In 2017 Charity incurs obligations of ETB10,000 for property transfer
duty and ETB100,000 in modifying the building to enable it to better
serve Charity’s purpose.
At 31/12/2017, which one of the following alternatives applies to
Charity? (see alternatives presented on the next slide)
57
IPSAS 23 Revenue from Non-exchange Transactions
test your understanding: costs associated with non-exchange transactions (continued)

At 31/12/2017, which one of the following alternatives applies to Charity?

1) ETB1 million asset (PPE, building) and ETB1 million revenue from non-
exchange transaction
2) ETB110,000 asset (PPE, building) and ETB110,000 liability (obligation for
property transfer duty and building modification costs)
3) ETB1,110,000 asset (PPE, building); ETB1 million revenue from non-exchange
transaction; and ETB110,000 liability (obligation for property transfer duty and
building modification costs)
4) ETB890,000 asset (PPE, building); ETB890,000 million revenue from non-
exchange transaction (ie ETB1 million fair value of building received in non-
exchange transaction less ETB110,000 obligation for property transfer duty
and building modification costs)

58
IPSAS 9 Revenue from Exchange
Transactions
IPSAS 9 Revenue from Exchange Transactions

IPSAS 9 does not apply to:

» revenue from non-exchange transactions within the scope of IPSAS 23
» revenue from exchange transactions that are construction contracts in the scope of IPSAS 11
» lease contracts within the scope of IPSAS 13 Leases
» insurance contracts within the scope of IFRS 4 or IFRS 17 Insurance Contracts;
» investments accounted for using the equity method in accordance with IPSAS 36
Investments in Associates and Joint Ventures
» Changes in the fair value of assets and liabilities (for financial instruments see IPSAS 29,
Financial Instruments: Recognition and Measurement; for biological assets in agricultural
activity and the initial recognition of agricultural produce see IPSAS 27, Agriculture)
» the extraction of mineral ores

60
Measuring revenue from exchange
transactions
IPSAS 9 Revenue from Exchange Transactions
measurement of revenue

» Measure revenue at the fair value of the consideration

received/receivable. However,
» When the inflow of cash or cash equivalents is deferred, the fair value of
the consideration may be less than the nominal amount of cash received
or receivable (ie account separately for the financing arrangement).
» When goods are sold or services are rendered in exchange for dissimilar
goods or services, the exchange is regarded as a transaction that
generates revenue. The revenue is measured at the fair value of the
goods or services received. When the fair value of the goods or services
received cannot be measured reliably, the revenue is measured at the fair
value of the goods or services given up.
62
Measuring revenue from the sale of goods and services
test your understanding of IPSAS 9

Charity generates revenue by operating a retail outlet that sells

furniture manufactured in the remote community that it serves. To
increase sales in a time of great need in the community, Charity
for the first time sells furniture on 2-years interest-free credit and
at the same time introduces a 25% discount from list-price for all
cash sales.
How must Charity measure revenue from an ETB10,000 list-price
sale of furniture on 31/12/2017?
Choose one of the alternatives on the next slide: 63
Measuring revenue from the sale of goods and services
test your understanding of IPSAS 9

At 31/12/2017 Charity must measure revenue from the sale of

goods at:
1) ETB10,000 irrespective of whether the sale is for cash or on 2-
years interest-free credit;
2) ETB7,500 if a cash sale (because this is the proceeds from
the sale) and ETB10,000 if the sale is on 2-years interest-free
credit; or
3) ETB7,500 irrespective of whether the sale is for cash or on 2-
years interest-free credit. 64
Measuring revenue from the sale of goods and services
test your understanding of IPSAS 9

Charity A operates a clinic that provides primary health care to a particular

remote community in the Ethiopian highlands free from charge.
Charity B is upskilling small scale gold mining operations in a neighboring
community in the Ethiopian highlands that is without primary healthcare
facilities.
In exchange for Charity A extending primary health care services to the
neighboring mining community, Charity B provides Charity A with 2 ounces
of gold per month.
How, if at all, do Charity A and Charity B measure revenue from the exchange
transaction? Choose one of the alternatives on the next slide: 65
Measuring revenue from the sale of goods and services
test your understanding of IPSAS 9

1. Charity A and Charity B at the fair value of the gold transferred each
month;
2. Charity A and Charity B at the fair value of the primary health care
services provided each month;
3. Charity A at the fair value of the primary health care services provided
each month and Charity B at the fair value of the gold transferred each
month; or
4. Charity B at the fair value of the primary health care services provided
each month and Charity A at the fair value of the gold transferred each
month. 66
Revenue from the sale of goods and
related expenses
IPSAS 9 Revenue from Exchange Transactions
main requirements for the sale of goods

» Recognise revenue from the sale of goods when:

» substantially all the risks and rewards of ownership transfer from the seller
» seller retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods
» amount (fair value) of revenue can be measured reliably
» probable that economic benefits will flow to the seller
» costs incurred (or to be incurred) in respect of the sale transaction can be
measured reliably

» Measure revenue at the fair value of the consideration received/receivable.

68
Cost of goods sold expense
IPSAS 12 Inventories

» Paragraph 44 of IPSAS 12 specifies that when inventories are sold, exchanged or

distributed, the carrying amount of those inventories must be recognised as an expense
in the period in which the related revenue is recognised.
» IPSAS 12 specifies measure the carrying amount of inventories at the lower of cost and
net realisable value (ie estimated selling price less costs to complete and sell).
Exceptions:
(a) inventories acquired through a non-exchange transaction, cost = acquisition-date
fair value.
(b) Inventories measured at the lower of cost and current replacement cost because
they are held for: (i) distribution at no charge or for a nominal charge; or (ii)
consumption in the production process of goods to be distributed at no charge or for
a nominal charge.

69
Cost of goods sold expense
other Standards

» IPSAS 12 does not apply to:

» financial instruments;
» biological assets in agricultural activity before harvest
» work-in-progress arising under construction contracts (see IPSAS 11 Construction Contracts);
» work-in-progress of services to be provided for no or nominal consideration directly in return
from the recipients.

» IPSAS 12 does not apply to measurement of inventories held by:

» producers of agricultural and forest products, agricultural produce after harvest, and minerals
and mineral products, to the extent that they are measured at net realisable value/fair value
less costs to sell in accordance with well-established practices in those industries; and
» commodity broker-traders who measure their inventories at fair value less costs to sell.

70
Cost of inventories

» The cost of inventories comprises all:

» costs of purchase
» costs of conversion
» other costs incurred in bringing inventories to their present location and
condition

71
Cost of goods sold
rebates

» IPSAS 12 (paragraph 11) specifies that trade discounts, rebates and

other similar items are deducted in determining the cost of inventories
» For IAS 2 Inventories the IFRIC clarifies that the following discounts
received by a purchaser of goods should be deducted from their cost:
» cash discounts (August 2002)
» prompt settlement discounts (November 2004)
» other rebates and discounts (November 2004) unless the rebate specifically
and genuinely refunds selling expenses

72
Cost of goods sold expense
complex supplier arrangements: variable consideration

» a convention for variable consideration in IPSAS 12

Inventories is yet to be codified. Consequently, diversity in
practice likely as other IPSASs (relevant when applying the
IPSAS hierarchy) use a range of treatments. However,
» enhanced disclosures apply (paragraphs 137 and 140 of IPSAS 1)
» regulatory action, for example, UK FRC regarding Tesco and now
focussing on other relevant manufacturers and retailers too (note:
Tesco sources coffee, clothing etc from Ethiopia and is seeing to
open a mega store)
73
Cost of goods sold
complex supplier arrangements: variable consideration continued

» Some of the biggest accounting firms provide the following application

guidance for the similar issue in IFRS:
» if it is probable that the contractual rebate or volume discount will be earned
and the amount can be measured reliably, then the discount should be
recognised as a reduction in the purchase price of inventory when it is first
recognised
» If not probable then recognised inventory at the gross amount (ie before
rebate) until the rebate becomes probable
» p585 and p586 of KPMG’s Insights into IFRS 2015/2016
» p674 and p675 of Deloitte’s iGAAP 2015 (by analogy to IAS 34 Interim Reporting)

74
Revenue and expenses from the sale of goods
test your understanding of IPSAS 9

When does each Charity below recognise: (i) revenue from the sale of goods by its retail
operation; and (ii) as an expense cost of goods sold? Choose one of:
A. when the value of the inventory changes;
B. when substantially all the risks and rewards of ownership of the inventory pass from the charity
to its customer;
C. when control of the inventory pass from the charity to its customer;
D. when the customer pays the charity for the inventory sold;
E. another time (specify).

Charity A trades in second-hand toys.

Charity B (a commodity-broker-trader) trades in commodities that trade in deep and
liquid markets (for example: gold and coffee).
Charity C trades in apricots that it grows. 75
Revenue and expenses from the sale of goods
test your understanding of IPSAS 9

Charity D generates cash to fund its operations by selling second-hand toys that are donated to it for
no consideration (ie acquired in a non-exchange transaction).
For simplicity, assume:
» On 31/12/2017 receives unwanted Christmas gift toys worth ETB10,000.
» On 31/01/2018 sells the toys on credit for ETB11,000.
» On 28/02/2018 receives ETB11,000 cash from customer.
How does Charity D recognise revenue and cost of goods sold expense? Choose one of:
1) on 31/12/2017 revenue ETB11,000 and COGS ETB0;
2) on 31/01/2018 revenue ETB11,000 and COGS ETB0;
3) on 28/02/2018 revenue ETB11,000 and COGS ETB0;
4) on 31/12/2017 revenue ETB10,000 and COGS ETB0 and on 31/01/2018 revenue ETB11,000 and
COGS ETB10,000.

76
Revenue and expenses from the sale of goods
test your understanding of IPSAS 9

Charity E buys new toys to distribute free of charge to children in Ethiopian orphanages (ie the
distribution of toys is in a non-exchange transaction). Charity E funds its operations by receiving
donations. For simplicity, assume:
» On 25/12/2017 Charity receives a donation of ETB10,000 from a member of the Ethiopian
diaspora.
» On 26/12/2017 buys toys for ETB10,000 in the post-Christmas sales.
» On 31/12/2017 observes that the current replacement of the toys falls to ETB7,500 as toy
retailers offload their surplus stocks.
» On 31/01/2018, when it distributes the toys to Ethiopian orphans, the replacement cost of the toys
is ETB11,000.
How does Charity E recognise revenue and expense relating to the inventories it holds? Choose
one of the alternatives presented on the next slide:
77
Revenue and expenses from the sale of goods
test your understanding of IPSAS 9

1) No income and no expenses because the money in and the toys out are both non-exchange
transactions
2) on 25/12/2017 donation revenue ETB10,000 and on 31/01/2018 donation expense ETB10,000
3) on 25/12/2017 donation revenue ETB10,000; on 31/12/2017 inventories impairment expense
ETB2,500; and on 31/01/2018 donation expense ETB7,500
4) on 25/12/2017 donation revenue ETB10,000; on 31/12/2017 inventories impairment expense
ETB2,500; and on 31/01/2018 reversal of prior period inventories impairment ETB2,500
income and donation expense ETB10,000
5) on 25/12/2017 donation revenue ETB10,000; on 31/12/2017 decrease in value of inventories
expense ETB2,500; and on 31/01/2018 increase in value of inventories ETB3,500 income and
donation expense ETB11,000

78
Revenue from rendering services
and related expenses
IPSAS 9 revenue from rendering of services
the main requirement: percentage of completion method

» Recognise revenue from the rendering of services when:

» amount (fair value) of revenue can be measured reliably
» probable that economic benefits will flow to the seller
» the stage of completion at the end of the reporting period can be measured
reliably
» costs incurred and the cost to be incurred to complete the transaction can be
measured reliably
» When the outcome of the service transaction cannot be estimated
reliably, revenue must be recognized only to the extent of the expenses
recognized that are recoverable.
80
IPSAS 9 revenue from rendering of services
the main requirement: percentage of completion method

The stage of completion of a transaction must be determined using the

method that measures reliably the services performed.
» surveys of work performed
» services performed to date as % of total services to be performed; or
» proportion that costs incurred to date bear to the estimated total costs of the
transaction. Only costs that reflect services performed to date are included in
costs incurred to date. Only costs that reflect services performed or to be
performed are included in the estimated total costs of the transaction.

See the illustrations of the stage of completion presented for

construction contracts below.
81
Cost of services expense
IPSAS 12 Inventories

» To the extent that service providers have inventories (except work-in-progress of services to be
provided for no or nominal consideration directly in return from the recipients), they measure
them at the costs of their production. These costs consist primarily of the labor and other
costs of personnel directly engaged in providing the service , including supervisory personnel
and attributable overheads. The costs of labor not engaged in providing the service are not
included. Labor and other costs relating to sales and general administrative personnel are not
included, but are recognized as expenses in the period in which they are incurred. The cost of
inventories of a service provider does not include surplus margins or non-attributable
overheads that are often factored into prices charged by service providers. (paragraph 28)
» For a service provider, the point when inventories are recognized as expenses normally occurs
when services are rendered, or upon billing for chargeable services. (paragraph 45)

82
IPSAS 11 Construction Contracts
Construction contracts
the basics

» When the outcome of the construction contract can be measured reliably,

recognise revenue (and contract costs) from construction contracts using the
stage of completion method
» total contract revenue can be measured reliably
» probable that economic benefits will flow to the seller
» stage of completion can be determined reliably
» costs incurred (and costs to complete) can be measured reliably

» However:
» recognise an expected loss immediately (like an onerous contract)
» when the outcome of a contract cannot be measured reliably, recognise contract
costs as incurred and limit the recognition of revenue to recoverable contract costs
84
Construction contracts
estimating the stage of completion method

Methods of estimating the stage of completion

» Usually on the basis of inputs
» % of contract costs incurred to date over estimated total
contract costs.
» exclude costs incurred for future activities (for example, raw materials inventory and
prepayments)
» On the basis of outputs is also permitted:
» engineering survey of work performed
» physical portion of work that has been completed (for
example, kilometers of road constructed)
85
Construction contracts
example 1

» Entity has a fixed price contract to construct a road for the

government that becomes onerous.
Original
estimates 2014 2015 2016
Revenue 2,000,000 2,000,000 2,000,000 2,000,000

Costs incurred - 200,000 1,100,000 2,100,000

Estimated future costs 1,000,000 800,000 1,100,000 -
Total expected costs 1,000,000 1,000,000 2,200,000 2,100,000

86
Construction contracts
example 1 continued

» Entity calculates percentage of completion.

2014 2015 2016
Costs incurred 200,000 1,100,000 2,100,000
Estimated future costs 800,000 1,100,000 -
Total expected costs 1,000,000 2,200,000 2,100,000
Costs incurred/Total expected costs 20% 50% 100%

87
Construction contracts
example 1 continued

» Revenue and costs on the basis of % of completion and raises

a provision for any onerousness in the contract:
Cumulative
end of Cumulative
for 2014 for 2015 2015 for 2016 end of2016
% complete 20% 50% 100%
Revenue 400,000 600,000 1,000,000 1,000,000 2,000,000
Costs (200,000) (900,000) (1,100,000) (1,000,000) (2,100,000)
Onerousness (100,000) (100,000) 100,000 -
Profit (loss) 200,000 (400,000) (200,000) 100,000 (100,000)

88
Construction contracts
example 2

Entity has a fixed price contract to construct a bridge using

new technologies but cannot initially determine the outcome of
the contract.
Original
estimates 2014 2015 2016
Revenue 2,000,000 2,000,000 2,000,000 2,000,000

Costs incurred - 200,000 750,000 1,200,000

Estimated future costs ? ? 250,000 -
Total expected costs ? ? 1,000,000 1,200,000

89
Construction contracts
example 2 continued

» Entity calculates percentage of completion.

2014 2015 2016
Costs incurred 200,000 750,000 1,200,000
Estimated future costs ? 250,000 -
Total expected costs ? 1,000,000 1,200,000
Costs incurred/Total expected costs n/a 75% 100%

90
Construction contracts
example 2 continued

» Revenue is initially limited to recoverable contract costs; then

on % of completion when outcome more reliable.
Cumulative Cumulative
end of end of
for 2014 for 2015 2015 for 2016 2016
% complete n/a 75% 100%
Revenue 200,000 1,300,000 1,500,000 500,000 2,000,000
Costs (200,000) (550,000) (750,000) (450,000) (1,200,000)
Profit - 750,000 750,000 50,000 800,000

91
Royalties
Royalties
the main requirements

» Recognise royalties on the accrual basis in accordance with the

substance of the agreement

93
Principal versus agent
Agent
the basics

» Amounts collected on behalf of other third parties are excluded from

revenue because they are not economic benefits or service potential
that flow to the entity, and do not result in increases in assets or
decreases in liabilities.
» For example, the collection of telephone and electricity payments by the post
office on behalf of entities providing such services.
» In an agency relationship, the gross inflows of economic benefits or
service potential include amounts collected on behalf of the principal
that do not result in increases in net assets/equity for the entity.
Consequently, the amounts collected on behalf of the principal are not
revenue. Instead, revenue is the amount of any commission received,
or receivable, for the collection or handling of the gross flows. 95
Principal versus agent
test your understanding of IPSAS 9

Charity operates a website that enables customers to purchase goods from a

range of suppliers who deliver the goods directly to the customers.
» When a good is purchased via the website, Charity is entitled to a
commission of 10% of the sales price.
» Charity’s website facilitates payment between the supplier and the customer
at prices that are set by the supplier.
» Charity requires payment from customers before orders are processed and
all orders are non-refundable.
» Charity has no further obligations to the customer after arranging for the
products to be provided to the customer.
Is Charity a principle or an agent? Choose one of: 1) principal; or 2) agent.
96
IPSAS 24 Presentation of Budget
Information in Financial Statements
IPSAS 24 Presentation of Budget Information in Financial
Statements

» IPSAS 24 applies to governments and government entities that make

publicly available (because they are required to or because they elect to)
the approved budget(s) for which they are held accountable. It does not
require approved budgets to be made publicly available, nor does it require
that the financial statements disclose information about, or make
comparisons with, approved budgets that are not made publicly available.
» IPSAS 24 requires a comparison of budget amounts and the actual
amounts arising from execution of the budget to be included in the financial
statements.
» When IPSAS 24 applies it also requires disclosure of an explanation of the
reasons for material differences between the budget and actual amounts.

98
IPSAS 24 Presentation of Budget Information in Financial
Statements

» When financial statements and the budget are not prepared on a

comparable basis, present a reconciliation to the following actual amounts
presented in the financial statements, identifying separately any basis, timing,
and entity differences:
» (i) If the accrual basis is adopted for the budget: total revenues, total expenses and
net cash flows from operating activities, investing activities, and financing activities; and
» (ii) If another basis (other than the accrual basis) is adopted for the budget: net cash
flows from operating activities, investing activities, and financing activities.
» Compliance with IPSAS 24 is helpful in discharging accountability obligations
and enhances the transparency of financial statements by demonstrating (a)
compliance with the approved budget and (b) where the budget and the
financial statements are prepared on the same basis, their financial
performance in achieving the budgeted results.

99