Posted by Paul Mason[1]
Accounting for social benefits has been the International Public Sector Accounting Standards Board’s (IPSAS) longest running and most controversial topic to date. With some gaps, the Board has been working towards a social benefits standard for almost sixteen years. It was therefore a cause for celebration when the IPSASB approved IPSAS 42, Social Benefits, at its December 2018 meeting in Kuala Lumpur, Malaysia.
IPSAS 42 fills a glaring gap in public sector financial reporting. For the first time, governments will be required to present information about the financial performance and financial position of their social benefit schemes.
However, IPSAS 42 is not a panacea. No accounting standard would be capable of providing all the information that users need to evaluate the viability of social benefit programs. IPSAS 42 therefore recommends (but does not require) that governments prepare reports on the long-term sustainability of their finances. The IPSASB’s Recommended Practice Guideline (RPG) 1, Reporting on the Long-Term Sustainability of an Entity’s Finances, provides guidance on preparing such sustainability reports.
Let’s look at some key features of IPSAS 42. First, what transactions are covered by the new standard?
IPSAS 42 includes the following definition of social benefits:
Social benefits are cash transfers provided to: (a) Specific individuals and/or households who meet eligibility criteria; (b) Mitigate the effect of social risks; and (c) Address the needs of society as a whole. |
With its focus on cash transfers, the IPSASB’s definition of social benefits is narrower than that in statistical reporting frameworks such as the IMF’s Government Finance Statistics Manual (GFSM). For example, in-kind benefits which are considered as social benefits under the statistical reporting frameworks will instead be accounted for under other IPSASs.
The IPSASB was aware that stakeholders would need to understand the intended accounting requirements for all the transactions that the statistical reporting frameworks classify as social benefits. The IPSASB has been working to provide such guidance, and approved Exposure Draft (ED) 67, Collective and Individual Services and Emergency Relief, at its December 2018 meeting. Once approved and incorporated into IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets, ED 67 will provide guidance on accounting for in-kind benefits and wider government services. Taken together, IPSAS 42 and ED 67 will provide guidance on all those transactions that are classified as social benefits under the statistical reporting frameworks (and some that aren’t).
Second, what does IPSAS 42 require a government to report?
Under IPSAS 42, an entity recognizes a liability for the next social benefit payment. This means that IPSAS 42 will require governments to report liabilities for social benefits, in some cases for the first time. This recognition point was the most controversial aspect of the IPSASB’s social benefits project. A significant number of stakeholders—and some IPSASB members—disagreed with the chosen approach. In terms of the recognition point, there were broadly two camps. One camp supported recognition when the eligibility criteria for the next benefit had been satisfied (the approach in IPSAS 42), while the other supported an earlier recognition point for some benefits such as contributory pensions.
It is likely that the IPSASB will undertake a post-implementation review of IPSAS 42. This will allow the Board to consider preparers’ experience of using the standard, and to receive feedback on whether the reporting of social benefits meets users’ needs. It is possible that such evidence will lead to some people to change their views and permit greater consensus to be reached.
The IPSASB also agreed to include the “Insurance Approach” in IPSAS 42. This approach permits a government to use insurance accounting for social benefit schemes that operate in a similar manner to an insurance portfolio. While the IPSASB does not expect this approach to be used often, it will be an important option in some jurisdictions. For example, the approach could be used in New Zealand to account for their accident compensation schemes. This is a further difference between IPSAS 42 and the statistical reporting frameworks.
IPSAS 42 was published on January 31, 2019 and will have an effective date of January 1, 2022. While it may not please everyone, governments will, for the first time, have clear guidance on accounting for social benefits.
[1] Principal, International Public Sector Accounting Standards Board, Toronto, Canada.
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