Revenue, Proposed Section PS 3400 Issues Analysis May 2017 Prepared by the staff of the Public Sector Accounting Board
Table of Contents Paragraph Introduction....01-.02 Background....03-.07 Identifying performance obligations....08-.17 Satisfying performance obligations at a point in time versus over a period of time....18-.27 Measurement....28-.38 Variable consideration....30-.32 Allocating the transaction price....33-.34 Multiple performance obligations....35-.36 Contract costs....37-.38 Other issues....39-.45 Collectibility....39 Project scope....40 Professional judgment....41-.42 Transitional provisions....43-.45 Revenue, Proposed Section PS 3400 May 2017 1
Introduction.01 This Issues Analysis is a supporting document to the Public Sector Accounting Board (PSAB) Exposure Draft, Revenue, Proposed Section PS 3400. It provides information on how significant matters arising from comments received on PSAB s Statement of Principles, Revenue, have been dealt with in the Exposure Draft. Among other matters, it addresses: (a) alternative views on the issues dealt with in the proposed standard; and (b) the view taken by the Board, with appropriate reasons for taking that position..02 The analysis is not issued under the authority of PSAB. Prior to approving the final standard, the Board will review and deliberate responses to the Exposure Draft. Background.03 PSAB issued a Statement of Principles in August 2013. The Statement of Principles proposed a framework that would apply to many forms of revenue in the public sector. Respondents were generally supportive of the key premise that identification of performance obligations differentiates revenue from exchange transactions from revenue that does not give rise to a transfer of goods or services to a payor (i.e., unilateral revenues)..04 The main concerns raised by respondents related to: (a) identifying performance obligations; (b) satisfying performance obligations; and (c) measurement issues..05 Respondents also provided valuable input on the disclosure requirements as well as general comments that helped in further clarifying the proposals..06 A couple of respondents suggested that the scope of this project be revisited to include certain types of revenue that are already addressed in the CPA Public Sector Accounting (PSA) Handbook, such as RESTRICTED ASSETS AND REVENUES, Section PS 3100. It was also noted that greater clarity and parameters around when a liability might exist is needed..07 A few respondents also wondered how performance obligations compared with stipulations as defined in GOVERNMENT TRANSFERS, Section PS 3410. Stipulations are associated with government transfers and differ from performance obligations as described in the Statement of Principles. The 2 Issues Analysis
Statement of Principles excluded accounting for government transfers from the scope of the revenue proposals. PSAB reconfirmed this scope exclusion. Identifying performance obligations.08 Respondents were generally supportive of using a performance obligation approach to distinguish revenue associated with exchange transactions from unilateral revenues. However, some respondents indicated that the concept may be difficult to apply..09 Some respondents questioned whether a transaction was an exchange or unilateral transaction when only a public sector entity can issue certain licences or permits. In addition, comments concerning situations where the consideration received was less than the fair value for the promised goods or services were raised. Guidance is included in the Exposure Draft to clarify that it is the performance obligation to provide goods or services to the payor that distinguishes an exchange transaction from a unilateral transaction. In return for the consideration, the payor would receive a direct benefit from the goods or services. Therefore, in order to be an exchange transaction, it does not necessarily have to be an exchange of equal value. Additional guidance is included in the Exposure Draft for those situations where the amount of consideration is significantly below fair value that may indicate a public sector entity has entered into a transaction with significant concessionary terms..10 Some respondents questioned whether the mission or mandate of a public sector entity results in a performance obligation..11 General obligations associated with a public sector entity s mission or mandate were not intended to be within the scope of this project. Additional guidance is included in the Exposure Draft to clarify that obligations or responsibilities associated with a public sector entity s mission or mandate are outside the scope of the proposals. Performance obligations are intended to be narrower in scope than a public sector entity s mission. They represent enforceable promises to deliver goods or services, including the granting of rights, to a payor who has entered into an exchange transaction with a public sector entity..12 Another issue raised pertains to the driver s licence example provided in the Statement of Principles. The example indicated that the public sector entity s performance obligation was to provide a decision regarding whether the licence should be granted or not. Some respondents expressed concerns that merely providing a decision does not constitute a performance obligation. Respondents indicated that administrative and law enforcement activities associated with obtaining a driver s licence also represented performance obligations. Revenue, Proposed Section PS 3400 May 2017 3
.13 Upon further deliberations, PSAB agrees that merely making a decision may not represent a performance obligation. For example, in the driver s licence example, if the application is approved (i.e., the decision made) then the licence must be issued and available for the payor. Depending on the circumstances and facts of each situation, additional performance obligations may exist. Clarifications are included in the Exposure Draft..14 With regard to administrative activities, again it may depend on the nature of the activities but, in general, administrative activities alone do not normally create a performance obligation. These types of activities usually do not provide the payor with a good or service that would directly benefit the payor. In addition, law enforcement activities are necessary activities of the public sector entity to fulfil their mandate and mission but they may not necessarily confer a direct benefit to the payor or be attributable to the specific payor with whom the public sector entity entered into an exchange transaction..15 The Statement of Principles included a table that illustrated the two main categories of revenue the proposals applied to, which raised some questions on the part of respondents. In particular, logging and mineral rights appeared to fall into the unilateral revenues category on the table. It was also noted that royalties were not considered. The intent of the table was to illustrate the type of transactions that may fall within a category. It was meant to be illustrative and not reflect a complete listing or categorization of all revenue transactions..16 Given comments received, a survey was issued to gather additional information about some of these types of activities including royalties and other natural resource licences or permits. Based on the information gathered, royalties and licences or permits pertaining to natural resources could be either exchange or unilateral revenues depending on the facts and circumstances of the individual transactions. Guidance in the Exposure Draft clarifies that each individual transaction must be assessed to determine the nature of revenue..17 Some respondents indicated that there may be transactions that have features of both an exchange transaction and unilateral transaction. These are referred to as hybrid transactions in the Exposure Draft. Additional guidance to address these types of arrangements is provided. Satisfying performance obligations at a point in time versus over a period of time.18 The most controversial issue regarding performance obligations related to licences and whether the performance obligation was satisfied at a point in time or over a period of time. Those respondents who favoured recognizing revenue over a period of time argued that multi-year licences, such as the driver s 4 Issues Analysis
licence example illustrated in the Statement of Principles, conveys a right to the payor for a period of time. Respondents noted that the public sector entity needs to ensure that the roads are available and maintained over that period and that the public sector entity s right to earn revenue in the future period has been reduced as they cannot require payment again until the licence has expired. Some respondents also mentioned that the revenue needed to match the expenses..19 On the other side of the argument, those respondents that favoured recognizing revenue at a point in time (i.e., when the licence was granted) noted that the public sector entity does not have any additional performance obligations associated with granting that licence. The roads would be maintained regardless of whether that licence was issued or not..20 Responses indicated that in many cases it did not seem to matter whether exclusive or non-exclusive rights were granted. The views were mixed on whether revenue should be recognized at a point in time versus over a period of time..21 Some respondents noted that a key consideration was whether the public sector entity had a continuing involvement in the provision of those promised goods or services to the payor..22 After much deliberation, PSAB agreed that recognition of revenue should focus on when the public sector entity has satisfied its performance obligations. As part of this determination, each individual transaction or arrangement needs to be separately considered. Not all licences are the same..23 As part of that assessment, an understanding of the characteristics of the goods or services promised is needed. A distinction was made between granting access to a specific good or service versus granting a right to do something. For example, issuing a park pass grants a right to access a specific good or service versus issuing a hunting licence, which grants the right to hunt..24 When granting the right to access a specific good or service, such as a park, the public sector entity has additional responsibilities from simply issuing the park pass. The public sector entity must ensure the payor can gain entry to the park as outlined in the agreement between the payor and the public sector entity. In this example, the specific good or services being provided is access to the park..25 This is different from granting a right to do something such as a hunting licence that grants a right to hunt. In this example, the good or service being provided is the right to hunt. The hunting licence would provide the payor with that benefit. The public sector entity would need to then determine whether any further performance obligations specific to that payor are present. Revenue, Proposed Section PS 3400 May 2017 5
.26 A public sector entity must be able to identify or assess when it has satisfied its performance obligation(s) in order to recognize revenue in a manner that reflects the substance of the events that have occurred. One indicator that the public sector entity has satisfied its performance obligation is when a payor has control of the goods or services. However, from the public sector entity s perspective, the focus needs to be on determining the performance obligations and when they have been satisfied..27 Additional guidance in the Exposure Draft acknowledges that professional judgment is needed. Criteria are proposed to help determine when revenue would be recognized at a point in time versus over a period of time. Measurement.28 The Statement of Principles addressed four main categories related to measurement: (a) variable consideration; (b) allocating the transaction price; (c) multiple performance obligations; and (d) contract costs..29 Respondents were generally supportive of those proposals. Caution was expressed about being too prescriptive. Also the appropriateness of some of the guidance in a public sector context was raised. Variable consideration.30 With regard to variable consideration, the majority of respondents supported the application of either the expected value method or the most likely amount method. The Exposure Draft refers to these methods as potential methods to determine a reasonable estimate of the amount. The guidance also emphasizes that a reasonable estimate is needed otherwise the revenue would not be recognized in accordance with FINANCIAL STATEMENT CONCEPTS, Section PS 1000. The guidance also recognizes that professional judgment is required to determine the most relevant and reliable estimated amount given the circumstances..31 When considering variable consideration, some respondents indicated that clarification was needed for refunds. A public sector entity does not initially record revenue it expects to refund. If the public sector entity has already received the consideration that is expected to be repaid, a refund liability would be reported. This is clarified in the Exposure Draft. 6 Issues Analysis
.32 Another issue noted was the need to identify unearned revenue as consideration that has been received from a payor when the public sector entity has not completed its performance obligations. In order to distinguish unearned revenue from other liabilities, separate reporting was proposed and widely supported. Allocating the transaction price.33 Principle 5 in the Statement of Principles proposed that 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. The majority of respondents supported the need to allocate the transaction price when more than one performance obligation was identified. Many suggested that guidance to allocate the transaction price would help ensure consistent and comparable information. However, some respondents noted that the methods described in the Statement of Principles were private sector-oriented, focusing on profit margins or finding an active market that may not be relevant or applicable in the public sector..34 Given respondents concerns, options for allocating the transaction price were reviewed, which included considering existing guidance from other standard setters. The Exposure Draft proposes methods similar to those proposed in the Statement of Principles but they are tailored to the public sector. The guidance also notes that professional judgment is required to ensure the economic substance of the transaction is reflected. Multiple performance obligations.35 With regard to multiple performance obligations, most respondents supported the notion that if one or more goods or services were to be provided to a payor, each distinct good or service would be accounted for as a separate performance obligation. It was noted that this may not be a common experience in the public sector but some respondents did suggest that guidance may be helpful, especially for government organizations.36 As some respondents commented, even though it may not at this time be a significant issue in the public sector, guidance would help consistency of application for those situations where multiple performance obligations were present. Contract costs.37 The Statement of Principles proposed that contract costs be expensed unless they gave rise to a tangible capital asset or inventory. The majority of respondents supported the proposal. Some respondents also suggested that Revenue, Proposed Section PS 3400 May 2017 7
they would need to meet the test of an asset as well. In other cases, specific examples were provided that may represent a private public partnership arrangement. A Private Public Partnerships project is underway..38 After further discussions, guidance related to contract costs was excluded from the Exposure Draft. The focus of the Exposure Draft is to develop a framework that would apply to many forms of revenue reported on by public sector entities. Therefore, including guidance related to costs is beyond the scope of this project. Other issues Collectibility.39 The Statement of Principles proposed that a public sector entity recognize the gross amount of revenue with both a bad debt expense and a valuation allowance if the receivable is impaired. Many respondents supported this approach. It was thought to present a more complete picture of potential revenue and outcomes associated with collection efforts. However, some respondents believed the approach was inconsistent with PSAB s general recognition criteria and initial measurement requirements in other Sections. Given that some public sector entities are mandated to provide services to parties who may be unwilling or unable to pay, this became an area of concern. Upon further consideration, the proposals in the Exposure Draft are in accordance with the general recognition criteria stated in FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.55 (i.e., a public sector entity recognizes only future economic benefits it expects to obtain). Project scope.40 Given concerns raised pertaining to RESTRICTED ASSETS AND REVENUES, Section PS 3100, the task force reconsidered the scope of this project. As part of the deliberations, a survey was developed and issued to gather additional information about the nature of transactions falling within that standard. PSAB is of the view that a review of Section PS 3100 is warranted and must be considered from a broader perspective than the Revenue project. There was support to identify Section PS 3100 as a potential project on the project priority survey for broader input from the stakeholders. Professional judgment.41 The respondents also noted that in some areas the Statement of Principle proposals were too prescriptive. Examples included determining whether a 8 Issues Analysis
good or service is distinct or whether a bundle of goods or services is being provided..42 One of the objectives of the proposals is to improve consistency and comparability over time and between public sector entities. Therefore, the Exposure Draft does provide some guidance around possible approaches (for example, when allocating the transaction price among performance obligations). However, the guidance still allows and requires professional judgment to ensure the facts and circumstances of each transaction are properly assessed. Transitional provisions.43 As noted in the Statement of Principles, applying a performance obligation approach to determine whether the transaction is an exchange transaction or not is a relatively new concept. Also, some respondents noted that in the public sector it may be difficult to identify the performance obligation..44 In order to allow public sector entities time to review existing agreements and gather the necessary information to apply the Section, at least two complete budget cycles are proposed from the date of issue..45 Also, retroactive application with restatement of prior years figures is proposed. The ability to compare information over time is relevant. This would result in consistent information regarding revenue transactions regardless of whether those revenue transactions were entered into before or after the standard became effective. Revenue, Proposed Section PS 3400 May 2017 9
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