Views sought on landmark accounting for social benefits standard
Alice Telfer, Assistant Director, Public Sector and Business Policy, outlines the new approaches to accounting for social benefits, which are part of an International Public Sector Accounting Standards Board (IPSASB) consultation to create a new standard.
IPSASB issued a consultation paper, Recognition and Measurement of Social Benefits, at the end of July to create a new standard for accounting for social benefits.
This paper highlights the complexities involved in seeking to account for social benefits. Its importance cannot be underestimated as the delivery of such benefits is normally a key objective of any government and usually forms a substantial part of their expenditure.
Generally, there are no requirements and guidance on accounting for social benefits within existing International Public Sector Accounting Standards (IPSAS).
As is recognised by IPSASB, now is an opportune time for it to seek to improve its suite of standards by developing a new standard on how to account for social benefits.
As IPSASB states, the aim of such a standard has to be to enhance accountability and transparency, thereby improving decision making.
The consultation paper defines social benefits as "benefits payable to individuals and households, in cash or in kind, to mitigate the effect of social risks." Social risks are defined as "events or circumstances that may adversely affect the welfare of individuals and households either by imposing additional demands on their resources or by reducing their income".
Three approaches to accounting for social benefits
The consultation paper identifies the following three broad approaches to accounting for social benefits:
Option 1: The obligating event approach
This considers social benefits by reference to the definition of a liability in the Conceptual Framework and obligations to pay social benefits are seen as no different (in principle) than other obligations. The key issue therefore, is when a present obligation arises. IPSASB has identified five distinct points at which a case can be made for recognising an obligation in the financial statements.
Option 2: Social contract approach
This acknowledges, as commitments, both: (a) Public sector obligations to provide goods, services and cash transfers to individuals or households; and (b) The rights of individuals or households to receive those benefits. It also acknowledges that the ongoing duty of individuals or households to contribute taxes and other sources of finance effectively offsets such obligations. There is a social contract between the state and the citizens under which citizens agree to pay taxes to enable the state to provide social benefits. This is analogous to an executory contract, where an entity would not recognise a liability until the counterparty to a contract had performed their obligations and hence present obligations only arise once claims for social benefits become enforceable (or, under an alternative approach, claims for social benefits are approved).
Option 3: Insurance approach
This approach considers that at least some social benefits are similar in practice to insurance contracts. It is only suited to contributory schemes, where future contributions are compared to future payments to recipients and the net present value of the scheme is shown in the statement of financial position. It recognises a present obligation to pay benefits at the point that coverage begins and also recognises a right to future receipts resulting from the provision of that coverage. Complex issues arise under the insurance approach in respect of partially subsidised schemes and significant changes to the terms of schemes. Unlike the first two options, the insurance approach implicitly reflects the view that a combination of approaches may be required to reflect the different economic circumstances arising in respect of social benefits.
IPSASB has preliminary concluded that a combination of option 1 (obligating event approach) and (for some or all contributory schemes) option 3 (insurance approach) may be required to reflect the different economic circumstances arising in respect of social benefits and that option 2 (social contract approach) is unlikely to meet the objectives of financial reporting.
