• Accounting Alert

    October 2017

PBEs: New accounting standard proposals could have a big impact on you – have your say

All Tier 1 and Tier 2 Public Benefit Entities (PBEs) (both Public Sector and Not-for-Profit) should take note of the newly released consultation paper on accounting for revenue and non-exchange expenses (CP Revenue & Non-exchange expenses) and exposure draft on financial instruments (ED 62 Financial Instruments).

These proposals could have a significant impact on the accounting requirements for your entity and we would urge you to review these in light of your entity’s circumstances and provide commentary on the proposed changes to the New Zealand External Reporting Board (XRB) who in turn will make submission to the International Public Sector Accounting Standards Board (IPSASB).

Consultation Paper - Accounting for Revenue and Non-Exchange Expenses 

Tier 1 and Tier 2 prepares of financial statements under PBE standards have experienced difficulties in determining whether revenue from certain transactions (particularly when funding is received from the Crown to provide goods or services to the general public) should be classified as exchange or non-exchange revenue under PBE IPSAS 9 Revenue from Exchange Transactions and PBE IPSAS 23 Revenue from Non-Exchange Transactions. There is also a question as to whether the distinction between exchange and non-exchange revenue has value for users of the financial statements.

In addition many not-for-profit (NFP) entities believe that PBE IPSAS 23 is too restrictive in not allowing revenue to be recognised over time when funding is received for a specific purpose, but there are no return obligations.

A further complication is that Tier 1 and Tier 2 for-profit entities will be migrating to a new revenue standard – NZ IFRS 15 Revenue from Contracts with Customers – for annual periods beginning on or after 1 January 2018. NZ IFRS 15 is expected to change the pattern of revenue recognition for most for-profit entities and introduces a 5-step approach to the recognition of revenue. With the introduction of NZ IFRS 15, there will be significant divergence in the accounting for revenue between for-profit entities and PBEs, which will lead to significant issues for mixed groups (i.e. groups with both for-profit entities and public benefit entities).

Many PBE entities are also exposed to non-exchange expenses especially where they have committed to funding arrangements that cover multiple accounting periods, for which there is currently no guidance in PBE Standards in relation to recognition and measurement approaches for these often-significant transactions. This could lead to ambiguity and inconsistency of accounting policies in the highly significant area of expenditure.

The IPSASB has thus drafted this consultation paper to address these issues by:

  • Proposing to replace current standards IPSAS 9 Revenue from Exchange Transactions and IPSAS 11 Construction Contracts with a new IPSAS standard based on IFRS 15 Revenue from Contracts with Customers – i.e. implementation of a 5-step model to revenue recognition;
  • Proposing to update IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers) to address issues identified by users;
  • Proposing two potential revenue recognition approaches;
  • Proposing two potential non-exchange expenses recognition approaches;
  • Highlighting implementation issues with revenue recognition from capital grants and services in-kind; and
  • Exploring approaches for the initial and subsequent measurement of non-contractual receivables (such as tax receivables, fines and penalties) and non-contractual payables (such as tax payables, appropriations and grants).

Comments are due in to the XRB by 22 November 2017 and the IASB by 15 January 2018. The XRB welcomes both formal and informal comments.

ED 62 Financial Instruments 

The New Zealand Accounting Standards Board (NZASB) has already issued PBE IFRS 9 Financial Instruments with for annual periods beginning on or after 1 January 2021 (with early adoption permissible) for all Tier 1 and Tier 2 PBEs, which is based on the for-profit equivalent standard, NZ IFRS 9, which is effective for Tier 1 and Tier 2 for-profit entities for annual periods beginning on or after 1 January 2018.

PBE IFRS 9 was introduced as an interim standard to address concerns that an international public sector standard (IPSAS) based on IFRS 9 would not be issued before NZ IFRS 9 Financial Instruments became effective, which would result in groups with both for-profit entities and public benefit entities having different accounting requirements for financial instruments. The NZASB thus issued PBE IFRS 9 to assist mixed groups in the short-term in accounting for financial assets. The intention has always been that PBE IFRS 9 will be superseded by the finalised IPSASB standard, once issued. (For more on this please refer to our September 2016 edition of Accounting Alert.)

The IPSASB has now finalised and issued its exposure draft on financial instruments – ED 62 Financial Instruments based on IFRS 9 Financial Instruments, with public sector-specific modifications and guidance.

The new standard will replace IPSAS 29 Financial Instruments: Recognition and Measurement.

The IPSASB considers that it will improve the requirements in IPSAS 29 by introducing:

  • simplified classification and measurement requirements for financial assets;
  • a forward-looking impairment model; and
  • a flexible hedge accounting model.

In addition, ED 62 includes public sector-specific guidance on financial guarantees issued through non‑exchange transactions and concessionary loans and examples illustrating how to apply those principles in ED 62 to transactions that are unique to the public sector.

Comments are due in to the XRB by 13 November 2017 and the IASB by 31 December 2017. The XRB welcomes both formal and informal comments.


For more on the above, please contact your local BDO representative.